An alarmist approach on the Financial Services Act 2013

Three months down the road, the situation hasn’t changed much. I was told me a few days ago that the life insurance companies in Malaysia are still taking it easy with regards to the Financial Services Act 2013 which had come into effect on the 30th of June this year. One fellow in the industry told me that very few insurance companies have yet to inform their policy owners about the implications of this FSA2013, which is very true because, as fair as I am aware, only MCIS Zurich has bothered to send letters out.

To compound the lackadaisical attitude, some insurance agents have been going around to tell their clients and prospects that the FSA2013 would affect only new policies and not the old ones which were purchased while the Insurance Act 1996 was still valid.

(A more preposterous story heard earlier what that an agent claimed that the FSA2013 would not affect him because his insurance company had not informed him about it. This is just like the three monkeys who see no evil, hear no evil or speak no evil, but the evil is there all the same.)

The problem with this misinformation or half-truth is that their clients are deceived into believing that nothing had changed and everything was still all right with their policies when in fact, they will hit certain obstacles later when they try to do a few things with their policies.

I have written about this earlier that one of the effects of the new Act would mean that a policy owner is no longer the trustee of his own policy, assuming that he had bought the policy before 30 June 2013 when the IA1996 was still in force. Of course, if you buy a policy now with the FSA2013, you simply cannot be your own trustee. At the risk of repeating myself, let me expand on this.

If the policy owner had bought a policy then, and nominated his spouse, child or parents (if there was no spouse or child at the time of purchase) as the nominee or nominees under Section 166 of this IA1996, he would have created an insurance trust with himself normally appointed as the trustee of his policy.

Under Schedule 10, paragraph 5(3) of the FSA2013, this trustee appointment is now invalidated. If he was the trustee then, he cannot remain as the trustee now. So who can be the new trustee of his old policy (or trustee of his new policy under the FSA2013)?

The FSA2013 lists down three classes of persons who can be the new trustees of an insurance policy, in order of priority.

  1. The first class are the competent nominees in the policy. For example, the spouse and the adult children would be considered as competent nominees. Children below 18 years old would be incompetent nominees.
  2. The second class are the parent of incompetent nominees. For example, if the only nominees in an insurance policy are all minors, then the other parent of these children will be next in line to be the trustee of the policy.
  3. And the third class is the Amanah Raya Berhad or an appointed trust company such as Rockwills Trustee Berhad. It used to be that Amanah Raya Berhad was the sole choice if there are no parents and the children are minors, but with the FSA2013, well, there is now a choice.

I’m not going to say much about what paragraph 5(3) of Schedule 10 of the FSA2013 means to our insurance policies but I believe all of us who have bought insurance before 30 June 2013 must ask ourselves these questions and have them answered satisfactorily:

  • Does the policy owner know who is the new trustee of his insurance policy?
  • Does the policy owner trust this new trustee enough to use the money for his beneficiaries?
  • Does the policy owner have control of the appointment of the new trustee?

I am saying this because the policy owner have to understand when consent is needed from the new trustee and when consent is not needed. For example, there are certain circumstances which still do not require the new trustee’s consent when a nomination is changed. I shall talk about this in tomorrow’s post. However, his new trustee’s approval is clearly needed if the policy owner wants to vary the terms of his policy; if the policy owner wants to surrender his policy, he will also need his new trustee’s consent; and if the policy owner wants to assign his policy, he too must seek his new trustee’s consent.

Normally I would assume that there should be no problem but if the new trustee (spouse or adult children) happens to be away for a considerable period – on holiday perhaps, or is now working overseas, or cannot be contacted, or senile or even dead – how long is the policy owner prepared to wait for resolution?

You may say that I am an alarmist but the fact remains that all of us should be well wary of Murphy’s Law which suggests that “if anything can possibly go wrong, it jolly well will go wrong.” Yes, we may get caught up in it one day, and then it will be too late for regrets.

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Elements of a valid Will

If you don’t already know, Downton Abbey is a critically acclaimed British period drama television series. This series, set in the Yorkshire country estate of fictional Downton Abbey, depicts the lives of an aristocratic family, the Crawleys and their servants in the post-Edwardian era with great events in history having an effect on their lives and on the British social hierarchy.

I must admit that I’ve only managed to watch two or three episodes of this television series but I have friends who watched the shows diligently to follow the complicated lives of the Crawley family.

Just today, an article in the Moneywise website caught my eye:

Luckily, this was only a make-believe situation that you would normally find in a television show, because according to the same news article, Coulson explained that a valid Will must comply with Section 9 of the Wills Act (we are talking about the British Wills Act here) which stipulates that a will must be in writing, signed by the testator who should intend by his signature to give effect to the document, and witnessed and signed by two witnesses.

In Malaysia, we have our own Wills Act 1959 which is modelled after the British Wills Act 1837. As far as the validity of a Malaysian Will is concerned, the document must still be in writing, signed by the testator to give it effect, and witnessed and signed by two witnesses.

The Moneywise website had also revealed on 7 Oct 2013 that more than half of UK adults don’t have a will. The percentage in this part of the world would definitely be even higher. As far back as 1996, Rockwills Corporation and other smaller will-writing companies that emerged later had always suggested that the percentage in Malaysia could be as high as 90 percent.

Although the awareness for estate planning in this country has grown by leaps and bounds in the 16-plus years since then, I would surmise that the percentage of people without a Will would not have dropped much at all.

Without a Will of their own, the assets of the non-Muslims in this country will be subjected to the Distribution Act 1958 (amended 2006), which would mean that when a non-Muslim dies without making a will, his assets will be distributed under rules laid down by the government in this Distribution Act.

If you die intestate, the distribution would very much depend on how much assets you own, how they are held (movable or immovable) and the make up of your family. While you are alive, it is easy to believe that your family would not dispute their portion of the assets but really, the only way to make sure that your assets go the way you intend the family members to inherit is by making a Will. As simple as that.

Rockwills Corporation has a solution for everybody that wants to make a Will. As a Rockwills estate planner myself, I can be contacted at ssquah-@-yahoo.com (but please remove the two hyphens from my email address before you email me. Thank you.)

Finally, I just want to quote two further pieces of advice from Coulson which are also applicable here in Malaysia:

“A will not only ensures your wishes are followed but also provides clarity to those left behind, and reduces the possibility of family arguments. There is a real misunderstanding, particularly among married couples or those in a civil partnership, that everything will pass to a partner or spouse. That is not necessarily correct and can leave all sorts of difficulty for the survivor.”

“Making a will can be very emotive. It can be thought-provoking but it doesn’t have to be difficult. As long as the document complies with the formal requirements of making a valid will it could be written on a scrap of paper. However, it is very easy to make mistakes or to inadvertently write something that might cause real trouble.”

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Should you sell off your family home?

I met up with a client about a week ago. Owing to some developments in her family, she had some doubts about re-writing her Will. Originally, she had included two of her children as beneficiaries but now, she wanted to include her eldest child too. However, her husband wasn’t keen on doing that. I won’t go into the details on this matter.

But what I want to say is, my client and her husband had thought about liquidating all their assets. That would include their family home which was solely in her husband’s name. And the money from the liquidation would be placed in a joint bank account.

I came home from the meeting somewhat troubled and thinking about their plans. By and large, I came to the conclusion that it would be a very bad idea. I’ll tell you why.

First, as the children all leave the coup and carry on with their separate lives, it is important that the husband and wife have a place of their own to stay independently. Especially, if the housing loan or mortgage is already paid up, the unencumbered house will provide the couple with security in their remaining years.

Second, not owning a house means that the couple will have to either stay with one of the children or look into renting a smaller house to stay. However, relocating oneself from one rented premises to another can be such a big hassle. Trust me; shifting or moving is no easy task or laughing matter. It can be problematic and consumes a lot of your time to look after the nitty gritty of the move.

Thirdly, having liquid assets about you means that you are always susceptible to your children touching you for money. Parents tend to be very forgiving and accede to their children’s request. Therein lies the danger. If the problem is not nipped early, very soon the well will be milked dry.

Fourthly, the old adage that property is the best hedge against inflation is still true. In the long term, there are more chances for capital gains from property than interest earnings from cash in the bank. Moreover, as one grows older, it is best to curb whatever appetite for stock investments or mutual fund/unit trust investments. It is a matter of stretching your dollar as far as possible, and no longer the time to gamble away your savings.

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A warning about plastic

Reproducing here part of an article that appeared on Rodale News.

5. Eating and drinking plastic
Toss your plastic water bottles into a recycling bin. According to a University of Cincinnati study, the chemical bisphenol A (BPA) found in hard plastic food and beverage containers can produce an estrogenlike molecule that mimics estrogen’s effects, creating a heightened risk for heart disease in women. Dr. Alvarez says BPA “could create too much estrogen or block the effects of its benefits.”

Do this. Replace # 7 plastic food containers and water bottles—that’s the type likely to contain BPA—with stainless steel, glass, or ceramic ones. If you’re not ready to banish other types of plastic containers, be sure you never heat them up, since this can cause other chemicals to leach into their contents.

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New EPF rule to impact on unit trust investment

From The Malaysia Insider today, a news report about an impending change to the EPF’s rule regarding regarding a contributor’s use of his EPF savings for investments in Unit Trusts:

“The EPF will revise upwards the basic savings quantum of its members to RM196,800 by the age of 55 effective January 2014, to ensure enough savings to finance members’ retirement needs,” EPF general manager, Nik Affendi Jaafar told The Malaysian Insider in Kuala Lumpur over the weekend.

He revealed that under the old scheme, which was launched in 2008, members’ targeted savings of RM120,000 at the age of 55 was not sufficient for them to maintain their lifestyle during retirement.

But the new amount will be equal to RM820 a month for 20 years from age 55 to 75.

The new rates are said to be benchmarked against the minimum pension for public sector employees, which is currently at RM820 a month, so that the monthly retirement income does not fall below the poverty level.

Following the revision, members need to have more in their Account 1 to be eligible for the EPF Members Investment Scheme, under which savings are invested in unit trusts. Currently members can use 20% of their balance in Account 1 to invest in approved unit trust schemes.

To illustrate the change, if a member is 40 years or older and has basic savings of RM80,000 in Account 1 at present (2013), his excess will be RM36,000 (derived from RM80,000 – RM44,000). He can then use only RM7,200 (20% of RM36,000) to invest in any approved unit trust. To further protect EPF contributors, withdrawals for unit trust investments are only permitted once every 3 months.

With the new EPF rules in 2014, at RM80,000, the excess will only be RM11,000 (RM80,000 – RM69,000). One can then only use RM2,200 (20% of RM11,000) to invest in any approved unit trust.

An official from the Federation of Investment Managers (FIMM) who spoke on the condition of anonymity said that the unit trust industry would be severely affected by the new ruling.

The RM326 billion unit trust industry comprises some 50,000 consultants who earn commissions ranging from 1% to 3% from unit trust investments.

The new ruling would also result in many EPF members, who were previously eligible to invest in unit trusts, no longer being qualified.

One of the leading Unit Trust Management Companies, Public Mutual (a subsidiary of Public Bank), derived one-third of its non-interest income from its unit trust operation. In 2012, less than 10% of its net profit was from its unit trust business. – September 9, 2013

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Snippet: Love what you do

We often say to “do what you love” but recently, a very wise person told me that it was sometimes equally important to “love what you do.” There is a lot of wisdom in that statement as there are times when we have to learn to “love what we do” in order for us to grow as well.

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Trustee for life insurance policies

I see that the Financial Services Act 2013 is starting to garnish comments from players in the financial services industry. This one below is from Rockwills Corporation, the leading company in estate planning. What Saw Leong Aun is stating in this newspaper report is that the Rockwills Group of Companies, in particular, Rockwills Trustee Berhad, is best placed to provide life policy owners with a completely viable and safe alternative to appointing a third party as the trustee of the policy owners’ insurance policies. do contact me for further details. Meanwhile, here’s the story:

“So, if the policy owner dies and his children are still minors, the policy moneys would automatically be held by Amanah Raya Bhd (as the country’s public trustee) until the children reach 18 years of age or unless there is a competent trustee available to take over.

“Also, when there is no proper appointment made, the risk is that the new trustee who takes over is not the one the policy owner preferred or trusted,” he added.

Nevertheless, Saw believes that the new rule makes good sense.

“The new rule is good because how can you name yourself as trustee to manage the policy moneys when you are no longer around and before the (life insurance) claims can be effective? Thus in a way, the change in the law is correct but is a small inconvenient (to existing policy owners),” said Saw.

“And at least the objective of buying an insurance, that is, to ensure your insured moneys reach the hands of your children and family is met with a trusted or licensed trustee appointed.”

Still, the new rule is relatively unknown to most policyholders as insurance companies and their agents are only beginning to communicate this with their customers.

An insurance agent, who only wants to be known as Anthony, said so far no timeline has been set for insurance companies to comply with the new rule.

“So, the onus is on the respective insurance agents to contact their customers to notify them of the change in the law,” he told SunBiz.

Meanwhile, Saw sees a business opportunity for Rockwills Trustee Bhd to become a trustee to policy owners’ life policies by setting up insurance trusts.

“Licensed trust companies like Rockwills Trustee will follow instructions as instructed by the person who created the insurance trust. This way, the beneficiaries won’t be able to squander the policy moneys or be cheated of their inheritance.

“We also have full-time in-house legal advisers to support and check all trusts,” said Saw, adding that the awareness on insurance trust among Malaysian policyholders is still low.

What is the fee? Saw said Rockwills Trustee charges a once off fee of average RM1,500 to RM2,000 to set up an insurance trust, which may include as many life policies as you wish.

“And where the policy owner dies and we act as trustee, our fee is 0.75% of the total insurance moneys or a minimum fee of RM2,000 a year during the holding years. We normally put the balance policy moneys into fixed income investments such as fixed deposits and the money market, and any interest earned will go back to the trust fund and the beneficiaries,” he added.

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Financially, Malaysia’s debts are on shaky ground

I had attended this public talk by Cheah Cheng Hye of Value Partners yesterday at the Wawasan Open University in George Town. He sounded an ominous financial warning for Malaysia, saying that the Malaysian government debt against GDP is at an unacceptable high, well above the accepted level of 55 percent.

Here is the report that appeared in one of the national dailies today. It is only a gist of what Cheng Hye covered in his talk. You had to be there to listen to him, and understand the gravity of the situation.

GEORGE TOWN: A global financial crisis bigger than the one in 2008 is conceivable in five to 10 years.

Value Partners Group chairman and co-investment officer Cheah Cheng Hye said the crisis, which would not be V-shaped in nature, would bring about capital flights, volatile markets, rising inflation and social unrest.

“The global financial crisis would have to do with the very serious deficits that cannot be financed. Developed and developing countries have over the years accumulated such deficits by making promises that cannot be realised in order to get re-elected.

“These deficits would sow the seeds of future social and political unrest,” he said at a public lecture entitled From Journalist to Fund Manager, which was officiated by Penang Chief Minister Lim Guan Eng.

Also present was Penang Institute chief executive officer Zairil Khir Johari.

On Malaysia, Cheah said Value Partners was not bullish about the country.

“Malaysia’s Government and household debts are higher than those in Indonesia, China and Thailand. Half of the country’s government bonds are held by foreigners, who would be the first to run in a crisis.

“The Malaysian workforce is now less productive than the workforce in Thailand and the Philippines. Malaysia is also importing more oil than selling it,” he said.

On making investments, Cheah advised investors to have well-diversified portfolios.

“They should have investments in gold, real estate and a high level of cash of at least 25% of their savings to prepare for future uncertainties,” he said.

Cheah attributes his success to being at the right place at the right time more than the decisions he chose to undertake.

Born in Penang, Cheah, 59, has been dubbed the “Warren Buffett of the East” by the media in Hong Kong.

A Penang Free School boy, Cheah had worked as a journalist in The Star in the early 1970s.

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Merdeka open chess

Guess who I bumped into at this year’s Merdeka open team chess championship at the Cititel Midvalley over the weekend?

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Potential landmine in Financial Services Act 2013?

I’m just a lay person where insurance is concerned but I’d like to share here whatever little that I know about the newly introduced Financial Services Act 2013 vis-a-vis the insurance industry. If I am wrong, I am willing to be corrected within this blog.

The FSA 2013 by the Malaysian Parliament last year and came into effect on 30 Jun 2013. When it was implemented on this date, among the old laws that it repealed included the Insurance Act 1996.

The FSA 2013 is a very thick slab of legislation, numbering 272 pages in all. The important section that should be of interest to insurance policy owners is Schedule 10 that touches on payment of policy moneys under life policy and personal accident policy (starting from page 255).

But first, section 272(e) of the FSA 2013 has this to say:

“without limiting the generality of paragraph (d), all insurance policies issued, all transactions or dealings lawfully executed or entered into, and all business lawfully done under the repealed Insurance Act 1996 by a person who was licensed under that repealed Act and who is authorized or registered under this Act with any policy owner, customer, creditor, debtor or other person shall be deemed to have been lawfully and validly executed, entered into, or done, under and in accordance with this Act, and any right or liability under the transaction, dealing or business existing before the appointed date shall be deemed to continue to be lawful and valid under this Act;”

So all policies issued prior to the 30th of June would still continue to take effect, which should be a great relief to all policy holders. I know that I am, because it would now be too expensive for me to sign up for any new life policy. :-)

But back to Schedule 10. It is not for me to elucidate everything that is stated here but my reading and understanding of what’s documented in section 5(3) of this Schedule is that once a nomination is made to create a statutory insurance trust under this section of the FSA 2013 (or under the old section 166 of the repealed IA 1996 for existing policies), the policy owner basically loses a considerable amount of control of his policy because:

  1. The policy owner is no longer the Trustee of his policy money;
  2. In the event that a Trustee is not appointed, a competent nominee in the policy shall be automatically made the Trustee; and
  3. The policy owner cannot revoke a nomination or add a nominee (other than his spouse, child or parent) without the Trustee giving a written consent.

Thus, almost everything a policy owner does, he would need to go back to the Trustee of his policy to get the changes approved. So who controls the policy from now on? The one paying the money to keep the policy in force or the person standing to benefit from it? Of course, there are pros and cons: the new Act ensures that an existing nominee does not lose out should a policy owner quietly changes the nomination in his policy, but – call me pessimistic if you want – there are also potential slip-ups.

For instance, if a husband and wife are no longer on good terms with one another, do you think the spouse (who is now the Trustee of a policy) will agree to any change that reduces or removes her benefit?

It just makes me scratch my head whether this peculiar situation was what the people who drafted this new legislation wanted. It also makes me wonder who were our clever law makers in Parliament who allowed this new FSA 2013 to be passed. How much debate or deliberation actually went into discussing this new legislation? Did they cover all the bases adequately? And all this doubts coming from me, speaking as a lay person!

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