15 October, 2016
Background
On 19 July 2016, the Monetary Authority of Singapore (MAS) issued a consultation paper on Enhancements to Regulatory Requirements on Protection of Customer's Moneys and Assets (Consultation Paper).
Currently, capital markets services licence holders (CMS Licensees) are subject to rules under Part III of the Securities and Futures (Licensing and Conduct of Business) Regulations (SFR), to the extent that they receive or hold customers' moneys and assets. Among others, CMS Licensees are required to place customers' moneys and assets in trust or custody accounts maintained with regulated deposit-taking institutions or custodians, segregate their own moneys and assets from those of their customers, keep proper records of their customers' holdings and furnish periodic statements of accounts to their customers. These rules also apply to licensed banks, merchant banks and finance companies which conduct regulated activities under the Securities and Futures Act, Cap 289 (SFA).
MAS is proposing to enhance the rules relating to safeguarding, identification and use of customer's money and assets, and disclosures to customers, as detailed below.1
Proposed Enhanced Rules
- Expanding the scope of customers' moneys. Currently, "customers' moneys" covers only moneys received from or on account of the customer. MAS proposes to expand the definition of "customers' moneys" to cover contractual rights arising from transactions entered into by CMS Licensees on behalf of a customer (e.g., futures contracts) or with a customer (e.g., contract for differences). There will be no corresponding change to the definition of "customer's assets".
- Due diligence and ongoing monitoring on third-party deposit-taking institutions and custodians. Currently, CMS Licensees are required to conduct due diligence on the suitability of the custodian that will be appointed to hold customers' assets. MAS proposes to extend this to deposit-taking institutions with whom the CMS Licensees intend to open a trust account to hold customers' moneys. MAS further proposes to introduce a requirement for CMS Licensees to carry out periodic reviews on the suitability of deposit taking institutions and custodians with whom the CMS Licensees maintain trust and custody accounts to keep their customers' moneys and assets respectively. CMS Licensees will also be required to take into account a list of prescribed factors when assessing suitability.
- Acknowledgement from foreign custodians/trustees. Currently, CMS Licensees are required to obtain an acknowledgment from domestic financial institutions confirming that the accounts maintained by the financial institutions to keep the CMS Licensees' customers moneys and assets are designated as customers' trust accounts, the moneys and assets are held on trust for the customers and segregated from the CMS Licensees' own moneys and assets, and the domestic financial institution will not use the moneys and assets in those accounts to set off against any debt owed by the CMS Licensees to the domestic financial institutions. MAS proposes to extend the requirement to obtain acknowledgement from overseas financial institutions who are appointed by CMS Licensees to safe-keep the CMS Licensees' customers' moneys and assets.
- Enhancing information and record keeping requirements. In addition to the existing rules on maintaining sufficient and proper records on each customer's moneys and assets (including any transfers, deposits, withdrawals, hypothecations and balances), MAS is seeking to require CMS Licensees to maintain information systems and controls that can promptly produce information on: (a) the location of the moneys and assets, how they are held (i.e., by the CMS Licensee, affiliate or third party) and the identity of all relevant depositories; (b) the type of segregation (omnibus or individual) at all levels of a holding chain and the effects of the segregation on the customer's ownership rights; (c) the applicable customers' moneys and assets protection rules, and whether the protection rules, resolution and insolvency regime of any foreign jurisdiction would apply to the customers' moneys and assets; and (d) details of outstanding loans of customers' securities arranged by the CMS Licensee.
- Enhanced disclosures to customers. MAS intends to require CMS Licensees to disclose, in advance to customers in clear, simple and easy to understand language: (a) the manner in which the customers' moneys and assets are held, including the type of segregation (e.g., omnibus or individual segregation), the existence of any holding chain, and the risks associated with the arrangements adopted (such as the effect of the pooling of assets in the event of insolvency and how any short fall would be dealt with); and (b) if applicable, the material differences between the customers' moneys and asset protection regimes in Singapore and the relevant foreign jurisdiction, and potential consequences of such differences.
- Daily computation of trust and custody accounts. MAS proposes to extend the existing requirements for daily computation to all customers' moneys and assets (currently, this requirement applies only to CMS Licensees that trades in futures contracts or carries out leveraged foreign exchange trading).
- Risk disclosures on using customers' assets. MAS proposes to require CMS Licensees to provide risk disclosures to and obtain consents from customers prior to using the customers' assets, including mortgaging, charging, pledging or re-hypothecating. Currently, the disclosure and consent requirement only applies to the lending of customers' securities. Such agreement can be obtained through an agreement governing the customers' account.
- Responding promptly to customers' requests for statement of accounts and imposing reasonable fees. MAS proposes to require CMS Licensees to respond reasonably promptly to customers who request for their statement of accounts. Any fees imposed, while permitted, should be reasonable. However, no indication was given on what would be considered "reasonably promptly."
- Disapply current exemption to place customer's moneys and assets in any account directed by the customer. Currently, CMS Licensees are allowed to deposit customers' moneys and assets in: (a) a trust account; or (b) any other account directed by the customers. MAS is proposing to disapply the exemption under (b) to retail customers. MAS noted the practice of obtaining customers' consents via a clause in the account agreement to deposit customers' moneys and assets in any account as determined by the financial institutions in order to rely on exemption (b) and said this is not the policy intent of the regulations.
- Disapply customers' moneys rules for banks, merchant banks and finance companies. MAS proposes to disapply the rules pertaining to customers' moneys for banks, merchant banks and finance companies which conduct regulated activities under the SFA. This is in recognition of the fact that customers moneys will be held in a deposit account maintained under the customer's own name. The rules pertaining to customers' assets under Part III of the SFR (and as amended following the proposals) will continue to apply to banks, merchant banks and finance companies.
Further Comments
The MAS has invited interested persons to provide comments to the April 2016 Consultation Paper by 19 August 2016. If you have any feedback on the Consultation Paper or any queries as to how these proposals would apply to your business, please contact us.
Footnotes
1. However, these proposed rules would not apply to non-centrally cleared OTC derivatives, which would be covered under the MAS Consultation Paper on Margin Requirements for Non-Centrally Cleared OTC Derivatives issued in October 2015 (see our client alert on this here).
For further information, please contact:
Stephanie Magnus, Principal, Baker & McKenzie.Wong & Leow
stephanie.magnus@bakermckenzie.com
