Requirements for the Suitability Assessment in Wealth Management in Singapore

Financial advisers in Singapore are generally required to conduct a suitability assessment. A financial adviser, licensed or exempt, is required to have a reasonable basis when making a recommendation with respect to any investment product (sec. 27(1) FAA as well as sec. 23(4) FAA). In particular, (licensed) financial advisers shall give due consideration to their client’s investment objectives, financial situation and particular needs (para. 8 FAA-N16). When making recommendations on investment products, the financial adviser shall collect information on the financial objectives of the client, the risk tolerance of the client, the employment status of the client, the financial situation of the client, the source and amount of the client’s regular income, financial commitments of the client, the current investment portfolio of the client, whether the amount to be invested is a substantial portion of the client’s assets, and, for any recommendation made in respect of life policies, the number of dependants of the client and the extent and duration of financial support required for each of the dependants. (para. 11 FAA-N16). For the recommendation of a listed specified investment product, the financial adviser shall in addition conduct a customer account review[1] (para. 27E FAA-N16), and for the recommendation of an unlisted specified investment product, the financial adviser shall conduct a customer knowledge assessment[2] (para. 16 FAA-N16).

However, a number of exemptions from these suitability requirements exist.[3] Namely a licensed or exempt financial adviser is not required to have a reasonable basis for its recommendation of any investment product to an accredited investor (reg. 34(1)(a) FAR). In short, this means that high net worth individuals and their wealth management entities, i.e. accredited investors, could be recommended an investment product without regard to its suitability for them.

Guidance for Private Banking, Including Wealth Management

Instead of mandatory requirements, the Private Banking Code of Conduct (“PBCC”) provides guidance regarding the suitability assessment in private banking and similar services. (See Introduction and Application of Private Banking Code of Conduct.) Similar to services to retail investors, financial institutions should take the following information about the client’s profile into account when recommending products, including but not limited to (para. 6.2.5 PBCC):

1. Investment objectives;
2. Risk tolerance such as use of leverage;
3. Investment experience and knowledge;
4. Investment time horizon;
5. Financial situation; and
6. Constraints such as investment preference and liquidity needs.

In case of inconsistencies in the risk-reward characteristics between the product recommended and the client’s profile, the representative of the financial institution should explain these inconsistencies to the client to enable the client to make informed decisions. Hereby, the client’s overall investment portfolio should be taken into account (para. 6.2.7 PBCC).

Current Standards

In thematic inspections on selected private banks to assess their sales and advisory practices in 2018 and 2019, the findings of which MAS published in February 2020 in its information paper “Private Banking Sales and Advisory Practices – Observations and Supervisory Expectations From Thematic Inspections” (hereafter referred to as “Information Paper”), MAS confirmed that private banks require clients to complete a risk assessment questionnaire at time of on-boarding (para. 4.2 Information Paper). Factors considered in these risk questionnaires include investment objectives, investment horizon, loss and volatility tolerance, financial needs or constraints from liquidity requirements, investment experience and product knowledge, risk tolerance on the use of leverage (para. 4.2 Information Paper).

These risk questionnaires are commonly not only completed at on-boarding, but updated at least biennially, and whenever there are changes to the client’s circumstances (para. 4.2.2 Information Paper). Where the risk profiles are not updated, some private banks have implemented safeguards, such as lowering the risk classification or limiting transactions to “sell” transactions. MAS welcomes such safeguards (para. 4.2.2 Information Paper). In contrast, any overriding of client’s risk profiles, especially to more aggressive profiles, should be subject to justification and approval (para. 4.2.3 Information Paper), both of which should be documented.

Conclusion

Although suitability assessments are not mandatory in wealth management in Singapore, private banks have implemented respective risk profiling and additional controls to ensure the suitability assessment of their clients and thus securing their interests.

[1] Customer Account Review means a review of the client’s knowledge an experience in derivatives for the purpose of making a recommendation to the client on, or allowing the client to transact in, a Listed Specified Product (para. 6 FAA-N16); whereby Listed Specified Investment Product means a specified Investment Product which is listed for quotation or quoted, or approved in-principle for listing or quotation, on an organised market (para. 6 FAA-N16).

[2] Customer Knowledge Assessment means a review of a client’s knowledge and experience in any unlisted Specified Investment Product (para. 6 FAA-N16).

[3] Other exemptions include financial advisory services to institutional investors (reg. 32B(1) FAR), recommendations to the public that would not be regarded as taking specific investment objectives, financial situation or particular needs into consideration (reg. 18A FAR), introducer activities (reg. 31(4) FAR), dealers’ recommendations of listed excluded investment products without taking the client’s investment objectives, financial situation or particular needs into account (reg. 33A FAR), recommendations in respect of Singapore government securities (reg. 34(1)(c) FAR), recommendations of a capital markets product to an expert investor (reg. 34(1)(b) FAR).