Financial Services Law and Regulation
Financial Services Law and Regulation
by Dora Neo, Hans Tjio, Lan Luh Luh
Singapore is widely regarded as a thriving financial centre and regional hub, supported by a pro-business environment and stable legal system. Financial services are regulated under different legislative frameworks in the key areas of banking, insurance, securities and derivatives, financial advisory and payment services. In recent years, a slew of wide-ranging regulatory changes and initiatives has been introduced in response to new business models and attendant risks brought about by technological change. These changes were also spurred by a broader move towards integrated regulation and regulatory harmonisation in accordance with international standards. As the first consolidated text on financial regulation in Singapore, the book comes at an opportune time.
The book explores common themes such as striking a desirable balance between appropriate regulation and facilitation of innovation, and the issues that arise therefrom. Limits on natural resources and manpower necessitate that Singapore exploit new growth opportunities to maintain competitiveness in the global financial market. This requires a robust regulatory regime that both provides adequate consumer and investor protection and fosters innovation. As the general editors observe, “the underlying forces of globalisation and technological change mean that regulators are always playing catch-up with reactive regulation”.1Dora Neo, Hans Tjio & Lan Luh Luh, Financial Services Law and Regulation (Academy Publishing, 2019) at p xii.
In general, technical concepts are presented in a clear and understandable way that is accessible to a range of readers possessing little or no expert knowledge in finance or law. Material pieces of legislation and regulatory instruments are explained and analysed. The authors often discuss the historical developments, policy rationale and implications of such regulatory instruments. Comparative analyses to other relevant jurisdictions are also undertaken, providing useful insight into how certain laws have been shaped. In particular, the authors are alert to recent developments in the financial services industry – several key regulatory updates that are discussed in the book will be highlighted below.
Part I provides a colourful setting for the historical development of financial services in Singapore. From an unassuming fishing island to a major financial centre, the chapter walks us through key aspects of such autochthonous development, driven by colonial influence and the practical needs of a rapidly growing independent nation. It also offers interesting segments on early credit and finance provided by Chettiars, the regulation of money supply and the development of financial institutions.
Part II focuses on banking regulation and comprises chapters on the prudential regulation of banks, corporate governance, banking secrecy, deposit insurance and payment systems.
In December 2017, the Basel III standards were finalised. This engendered a prompt response from the Monetary Authority of Singapore (MAS) in the form of changes to banking regulations and notices. Chapter 2 provides a thorough analysis of Singapore’s prudential bank regulation and the extent to which Singapore has aligned its regulatory regime with the Basel III standards. Although banks in Singapore must comply with many of the requirements, domestic systemically important banks must comply with stricter requirements. Key reforms include changes to minimum capital adequacy and leverage ratio requirements, liquidity coverage ratio requirements, net stable funding ratio requirements and the recovery and resolution planning regime.2MAS has issued the MAS Notice 654 Recovery and Resolution Planning and Guidelines to MAS Notice 654 on Recovery and Resolution Planning on 30 January 2019.
Chapter 3 discusses the Singapore corporate governance regime for banks in the post-Asian financial crisis milieu, compared with its counterparts in the European Union and the United Kingdom. The author of the chapter questions the desirability of overly centralising compliance responsibility at board level. These conclusions are not unfounded and recent initiatives may demonstrate a shift in such responsibilities to senior managers and the imposition of higher conduct standards at employee level.3Monetary Authority of Singapore, Proposed Guidelines on Individual Accountability and Conduct (Consultation Paper P009-2018, 26 April 2018).
The insertion of Chapter 6 at the end of Part II reflects the wave of disruption that has affected traditional financial services. The chapter discusses the payment systems ecosystem in Singapore and the legal and regulatory framework applicable to bank and non-bank providers of payment services. Section D provides a useful assessment of recent legislative reforms – the most important of which being the Payment Services Bill (which has since been gazetted on 20 February 2019). The Payment Services Act4The Act will take effect on a date to be appointed. (the PSA) provides for the licensing and regulation of payment services, which include activities previously regulated under the Payment Systems (Oversight) Act5Payment Systems (Oversight) Act, Chapter 222A of Singapore. and the Money-Changing and Remittance Businesses Act6Money-Changing and Remittance Businesses Act, Chapter 187 of Singapore. and new regulated activities. The PSA is currently complemented by the E-Payments User Protection Guidelines,7The Guidelines are scheduled to come into effect on 30 June 2019. which sets out standards and duties for financial institutions and users to ensure that e-payment transactions are made securely and to prevent unauthorised or mistaken transactions. There will no doubt be further subsidiary legislation rolled out to support the PSA in due course.
Part III offers two excellent chapters on the regulation of insurance business and capital requirements for insurers. Chapter 7 contains close analyses of the ambit of regulations, factors that MAS will consider in a licensing application and issues surrounding peer-to-peer insurance platforms. Chapter 8 discusses the three consultations launched in relation to risk-based capital requirements for insurance companies and steps taken by MAS to improve insurers’ enterprise risk management practices. The author of the chapter expects the culmination of the former (the implementation of the “RBC2” requirements)8Monetary Authority of Singapore, RBC 2 Review – Third Consultation (Consultation Paper P007-2016, 15 July 2016). to be carried out after 2021, in line with a new international insurance accounting standard.
Part IV provides a comprehensive examination of financial regulation in the area of securities and derivatives, and comprises chapters on bond finance, over-the-counter derivatives (OTC) regulation, securitisation and market misconduct. This area has undergone substantial developments, mainly as a result of key changes to the Securities and Futures Act9Securities and Futures Act, Chapter 289 of Singapore. (the SFA) effected by the Securities and Futures (Amendment) Act 2017 (the Amendment Act).
MAS has changed the definitions of various financial instruments/investment products and such changes have necessitated corresponding changes in the definitions of various regulated activities. The scope of regulation of “dealing in securities” will be changed to “dealing in capital markets products”, which includes dealing in securities, units in a collective investment scheme (CIS), derivatives contracts and spot foreign exchange contracts for the purposes of leveraged foreign exchange trading. Regulatory frameworks have been amended accordingly by prescribed regulations, notices and other MAS regulatory instruments.
In particular, the classification of institutional and accredited investors has been refined. The definition of “institutional investor” has been expanded to include financial institutions regulated by foreign regulators, sovereign wealth funds and other persons professionally active in the capital markets. With regards to accredited investors, the Amendment Act changes the way net personal assets and financial assets are calculated in order for an individual to qualify as an accredited investor. In addition, the Amendment Act introduced an opt-in regime, where accredited investors will have the option of electing whether to be treated as an accredited investor and counterparties will be required to obtain such consent.10Since the publication of the book, MAS has issued updated Frequently Asked Questions on the Definition of Accredited Investor and the Opt-in Process on 4 February 2019.
These changes have (in certain cases) significant implications on licensing, prospectus and conduct of business requirements pertaining to the dealing of various capital markets products, and such requirements imposed on the offers of such capital markets products. These are discussed in relation to; inter alia, securities and bond offerings (Chapter 9), offers of security-based derivatives contracts (Chapter 10), and fund management and offers of units in a CIS (Chapters 14 and 15).
Notably, a person who carries on business in dealing in OTC derivatives contracts would be required to hold a capital markets services licence unless a licensing exemption applies. A new Part VIC of the SFA sets out requirements for the mandatory trading of certain derivatives contracts on organised markets.11Since the publication of the book, MAS has issued the Securities and Futures (Trading of Derivatives Contracts) Regulations 2019 and the Securities and Futures (Trading Venues for Derivatives Contracts in the United States of America) Regulations 2019, which came into force on 14 March 2019, to operationalise the mandatory trading requirements of Part VIC of the SFA. Market participants, market operators, intermediaries, trade repositories and clearing facilities for OTC derivatives will thus be regulated accordingly, and may be subject to reporting and clearing requirements. Separately, financial institutions will be required to notify MAS when they intend to appoint a representative in respect of dealing in OTC derivatives contracts, who will need to satisfy certain requirements.
Chapter 10 helps the reader to navigate the new OTC derivatives and organised markets regulatory regime. The author of the chapter methodically sets out relevant technical concepts, financial market infrastructures and various licensing and conduct of business obligations.
As discussed in Chapter 12, the enforcement regime against market misconduct has been fortified. The SFA was amended to clarify the scope of prohibition against false or misleading disclosures and introduce a new statutory definition of “persons who commonly invest” to strengthen MAS’ ability to pursue insider trading cases. The amendments also raise the maximum civil penalty that may be imposed in contravention of market misconduct provisions.
Part V focuses on the conduct of business regulation of financial advisers. The author of the chapter views the current legal framework as disparate and challenging, but observes that its robustness has been greatly bolstered by the changes made after the Lehman crisis. The chapter includes detailed discussion on the principles of material disclosure, non-deception, reasonable basis for recommendation and fair dealing, as they relate to appropriate investor protection.
It should be noted that Section J mentions an exemption from compliance with certain conduct of business requirements under the Financial Advisers Act12Financial Advisers Act, Chapter 110 of Singapore. (the FAA) when financial advisory services are provided to an overseas investor. In line with broader efforts to strengthen investor protection, the overseas investor exemption has been removed with effect from 10 December 2018.
Part VI is structured as a miscellaneous segment and comprises chapters on private equity, hedge funds (regulation and structuring), Fintech developments, anti-money laundering and countering financing of terrorism (AML/CFT) and the liberalisation of financial services in the Association of Southeast Asian Nations (the ASEAN).
The extensive changes to the SFA are also applicable to alternative investment structures, as discussed in Chapters 14 and 15. Following the Amendment Act, the regulated activity of fund management is no longer limited to portfolio management of certain financial products, but has been expanded to include managing the property of, or operating, a CIS. Separately, in connection with the introduction of the licensing requirement for “dealing in capital markets products” that are units in a CIS, the marketing of CISs is no longer regulated as a “financial advisory service” under the FAA.
Notably, venture capital fund managers were subject to a simplified authorisation process and regulatory regime since 20 October 2017. Qualifying venture capital fund managers are exempt from certain capital requirements and business conduct rules, and undergo an expeditious authorisation process.
Chapters 14 and 15 also discuss the features of the Singapore Variable Capital Company (the S-VCC), which is a new specialised corporate structure for investment funds under the Variable Capital Companies Act.13The Variable Capital Companies Act has been passed by the Singapore Parliament on 1 October 2018. Further, the Ministry of Finance released a consultation paper on 6 March 2019 that sets out the proposed corporate income tax treatment of S-VCCs. The Income Tax Act, Chapter 134 of Singapore will be amended to implement the proposed tax policy. The introduction of the S-VCC follows the trend of other leading fund jurisdictions that are establishing specialised corporate structures, and will further develop Singapore as a centre for both asset management activities and investment fund domiciliation.
In contrast to the relatively quiet optimism with which the new S-VCC was received, regulatory attitudes towards the dynamic sector of financial technology reflect enthusiasm tempered by caution. This is where the theme of reactive regulation is incredibly stark. Given recent efforts to foster a thriving Fintech hub (set against a broader Smart Nation policy agenda),14Mr Ravi Menon, “Singapore FinTech Journey 2.0”, http://www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2017/Singapore-FinTech-Journey-2.aspx (accessed 19 March 2019). a chapter on Fintech developments is pertinent.
Chapter 16 sets out regulatory responses to technology, cybersecurity and outsourcing risks, such as the Technology Risk Management Guidelines,15Since the publication of the book, MAS released a consultation paper on 7 March 2019 that proposes amendments to the Technology Risk Management Guidelines. Guidelines on Outsourcing and the Cybersecurity Act.16It should be noted that, with effect from 31 August 2018, most sections of the Cybersecurity Act 2018 have come into force. Other measures to encourage innovation and address new risks were discussed, including the MAS FinTech Regulatory Sandbox, Consultation Paper on the Provision of Digital Advisory Services17Monetary Authority of Singapore, Provision of Digital Advisory Services (Consultation Paper P011-2017, June 2017). (pertaining to robo-advisers) and Payment Services Bill18As mentioned above, the Payment Services Bill has been gazetted since the publication of the book and will take effect on a date to be appointed. in relation to the buying and selling of virtual currencies.
MAS has since, amongst other initiatives,19For example, MAS released the Principles to Promote Fairness, Ethics, Accountability and Transparency (FEAT) in the Use of Artificial Intelligence and Data Analytics in Singapore’s Financial Sector (12 November 2018) and an updated Guide to Digital Token Offerings (20 December 2018). proposed the creation of Sandbox Express20Monetary Authority of Singapore, Sandbox Express (Consultation Paper P015-2018, 14 November 2018). and issued the finalised Guidelines on Provision of Digital Advisory Services.21Monetary Authority of Singapore, Guidelines on Provision of Digital Advisory Services (Guideline CMG-G02, 8 October 2018). The PSA will have a significant impact on the FinTech ecosystem as it will regulate a wide range of Fintech payments activities. These include provision of services that were previously unregulated – namely, domestic money transfers, merchant acquisitions and the purchase and sale of digital payment tokens.22The term “virtual currency” was replaced with “digital payment token”.
The authors of the chapter also briefly discuss the nature of cryptocurrencies, Initial Coin Offerings and Bitcoin. From a legal perspective, it is critical to distinguish between the wide varieties of digital tokens, as the offering of different types of digital tokens may trigger different regulatory considerations.
Technological innovation has revolutionised the way in which financial services are delivered, which has improved access, efficiency and growth opportunities. However, it carries risks (as mentioned above) and may be misused as tools that enable money laundering and terrorist financing (ML/TF).
Chapter 17 usefully outlines Singapore’s AML/CFT regime for financial services and its commitment to the Financial Action Task Force’s (the FATF) Recommendations, amidst the tightening of AML/CFT rules and harmonisation of international standards. The author of the chapter discusses key offences and obligations, such as ongoing due diligence and the reporting of suspicious transactions. In relation to recent updates, the author of the chapter notes that the Serious Crimes and Counter-Terrorism (Miscellaneous Amendments) Act 2018 has been passed,23The Act has been gazetted on 2 January 2019 and will take effect on a date to be appointed. which will make amendments to the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act24Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, Chapter 65A of Singapore. and the Terrorism (Suppression of Financing) Act25Terrorism (Suppression of Financing) Act, Chapter 325 of Singapore. to enhance the AML/CFT framework by, inter alia, increasing penalties and introducing a new offence.
Since the publication of the book, two key developments should also be noted. Firstly, the Developers (Anti-Money Laundering and Terrorism Financing) Act 2018 has been gazetted on 7 January 2019,26The Act will take effect on a date to be appointed. which puts in place new requirements for developers to facilitate the detection of ML/TF, and bar persons from being involved in developer activities if they have been convicted for ML/TF offences. Secondly, the Precious Stones and Precious Metals (Prevention of Money Laundering and Terrorism Financing) Act 2019 has been gazetted on 13 March 2019,27The Act will take effect on a date to be appointed. which introduces a risk-based supervisory and regulatory regime for precious stones and precious metals dealers. These changes bring Singapore’s anti-money laundering and terrorism financing regime in line with the international standards and recommendations as set out by the FATF.
Finally, the book concludes with a panoramic perspective on current developments concerning the liberalisation of financial services in ASEAN. The chapter discusses both regional initiatives, such as the ASEAN Economic Community’s adoption of a new blueprint detailing plans to further enhance integration by 2025 (the 2025 Blueprint), and sector-specific developments. An awareness of regional developments and coordinated integration efforts is important, especially if Singapore wishes to maintain its position as a regional hub.
As the general editors rightly note,28Dora Neo, Hans Tjio & Lan Luh Luh, Financial Services Law and Regulation (Academy Publishing, 2019) at p xiii. no book of this nature can claim to be completely comprehensive given that financial regulation is constantly in flux. The latter observation is none the better demonstrated than by the recent and ongoing changes to the Singapore capital markets and payment services regulatory regimes. The authors have accomplished a commendable feat in presenting a useful guide and consolidated understanding of the complex financial regulatory landscape in Singapore against the global canvas. The book will be of great assistance to financial regulatory lawyers, compliance officers and anyone interested in researching on the area in Singapore. However, for the book to have continuing value, it is crucial that the respective chapters need to be updated on a very regular basis.
|↑1||Dora Neo, Hans Tjio & Lan Luh Luh, Financial Services Law and Regulation (Academy Publishing, 2019) at p xii.|
|↑2||MAS has issued the MAS Notice 654 Recovery and Resolution Planning and Guidelines to MAS Notice 654 on Recovery and Resolution Planning on 30 January 2019.|
|↑3||Monetary Authority of Singapore, Proposed Guidelines on Individual Accountability and Conduct (Consultation Paper P009-2018, 26 April 2018).|
|↑4||The Act will take effect on a date to be appointed.|
|↑5||Payment Systems (Oversight) Act, Chapter 222A of Singapore.|
|↑6||Money-Changing and Remittance Businesses Act, Chapter 187 of Singapore.|
|↑7||The Guidelines are scheduled to come into effect on 30 June 2019.|
|↑8||Monetary Authority of Singapore, RBC 2 Review – Third Consultation (Consultation Paper P007-2016, 15 July 2016).|
|↑9||Securities and Futures Act, Chapter 289 of Singapore.|
|↑10||Since the publication of the book, MAS has issued updated Frequently Asked Questions on the Definition of Accredited Investor and the Opt-in Process on 4 February 2019.|
|↑11||Since the publication of the book, MAS has issued the Securities and Futures (Trading of Derivatives Contracts) Regulations 2019 and the Securities and Futures (Trading Venues for Derivatives Contracts in the United States of America) Regulations 2019, which came into force on 14 March 2019, to operationalise the mandatory trading requirements of Part VIC of the SFA.|
|↑12||Financial Advisers Act, Chapter 110 of Singapore.|
|↑13||The Variable Capital Companies Act has been passed by the Singapore Parliament on 1 October 2018. Further, the Ministry of Finance released a consultation paper on 6 March 2019 that sets out the proposed corporate income tax treatment of S-VCCs. The Income Tax Act, Chapter 134 of Singapore will be amended to implement the proposed tax policy.|
|↑14||Mr Ravi Menon, “Singapore FinTech Journey 2.0”, http://www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2017/Singapore-FinTech-Journey-2.aspx (accessed 19 March 2019).|
|↑15||Since the publication of the book, MAS released a consultation paper on 7 March 2019 that proposes amendments to the Technology Risk Management Guidelines.|
|↑16||It should be noted that, with effect from 31 August 2018, most sections of the Cybersecurity Act 2018 have come into force.|
|↑17||Monetary Authority of Singapore, Provision of Digital Advisory Services (Consultation Paper P011-2017, June 2017).|
|↑18||As mentioned above, the Payment Services Bill has been gazetted since the publication of the book and will take effect on a date to be appointed.|
|↑19||For example, MAS released the Principles to Promote Fairness, Ethics, Accountability and Transparency (FEAT) in the Use of Artificial Intelligence and Data Analytics in Singapore’s Financial Sector (12 November 2018) and an updated Guide to Digital Token Offerings (20 December 2018).|
|↑20||Monetary Authority of Singapore, Sandbox Express (Consultation Paper P015-2018, 14 November 2018).|
|↑21||Monetary Authority of Singapore, Guidelines on Provision of Digital Advisory Services (Guideline CMG-G02, 8 October 2018).|
|↑22||The term “virtual currency” was replaced with “digital payment token”.|
|↑23||The Act has been gazetted on 2 January 2019 and will take effect on a date to be appointed.|
|↑24||Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, Chapter 65A of Singapore.|
|↑25||Terrorism (Suppression of Financing) Act, Chapter 325 of Singapore.|
|↑26||The Act will take effect on a date to be appointed.|
|↑27||The Act will take effect on a date to be appointed.|
|↑28||Dora Neo, Hans Tjio & Lan Luh Luh, Financial Services Law and Regulation (Academy Publishing, 2019) at p xiii.|