16 June 2020
The Monetary Authority of Singapore (“MAS”) has on 5 June 2020 published its responses to the feedback received on its consultation paper (“Consultation Paper”) dated 4 December 2018 relating to a proposal to effect changes to the current exemption framework under the Securities and Futures Act (“SFA”) and the Financial Advisers Act (“FAA”), for cross-border business arrangements (“FRC Arrangements”) between certain types of financial institutions in Singapore (each a “local FI”) and their foreign related corporations that conduct a similar activity on a regulated basis outside of Singapore (each an “FRC”).
We had previously published a client update on the Consultation Paper. A copy of the client update may be obtained here.
The new notification regime
As proposed in the Consultation Paper, MAS would be streamlining the existing exemption regime by dispensing with the need to seek prior approval from MAS for the FRC Arrangements, and switching instead to a post-fact notification approach. In particular, upon implementation of the new notification regime, a local FI and its FRC would be able to carry out FRC Arrangements, provided that MAS is notified within 14 days of the commencement of the arrangement and that a pre-defined set of boundary conditions are observed.
MAS has clarified that the information to be collected for the post-fact notification under the new notification regime will be broadly consistent with current requirements under the existing exemption regime, although this is subject to further study by MAS with the industry.
MAS also clarified that the 14-day timeline would apply equally to both the commencement of and material changes to the FRC Arrangements, and that the “commencement” of an arrangement refers to the date the FRC commences or intends to commence the conduct of the relevant regulated activity under the proposed arrangement.
Changes to the scope of the regime
MAS has confirmed that it will be varying the classes of local FIs who would be able to avail themselves of the new notification regime. The following classes of local FIs will be able to enter into FRC Arrangements with their FRCs:
(a) all capital markets intermediaries licensed under section 82 of the SFA, other than persons licensed to conduct the regulated activity of fund management solely in respect of the management of portfolios of specified products on behalf of venture capital funds;
(b) regulated banks, merchant banks, finance companies and insurance companies, which have claimed exempt status under the SFA licensing rules and are able to conduct the relevant capital markets activities in accordance with the SFA;
(c) all financial advisers licensed under section 6 of the FAA;
(d) regulated banks, merchant banks, finance companies, insurance companies and licensed capital market intermediaries, which have claimed exempt status under the FAA licensing rules and are able to provide financial advisory services in accordance with the FAA; and
(e) futures brokers and OTC derivatives brokers who have been exempted under paragraphs 3(1)(d) or 3A(1)(d) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations from the requirement of holding a capital markets services licence under section 82 of the SFA.MAS has also confirmed that it will exclude from the scope of the new notification regime, arrangements
involving only the issuance or promulgation of research reports, this being a class of financial advisory services regulated under the FAA. Foreign research houses can instead rely on the existing exemption available under regulation 32C of the Financial Advisers Regulations, which allows a foreign research house to distribute its research through a local financial adviser without the need for the foreign research house and the local financial adviser to be related to each other.
Regulatory status of the FI and the FRC
MAS has clarified that it intends to retain the existing requirement for a local FI to be appropriately licensed or authorised to conduct the corresponding regulated activities that its FRC intends to undertake in Singapore as part of the FRC Arrangement. This is to ensure that local FIs are not shell entities or have minimal business presence, or arrangements that could undermine regulatory integrity, or pose a risk to financial stability and market confidence.
For the FRCs, MAS intends to broadly retain the existing requirement for FRCs and representatives of the FRCs (“Foreign Representatives”) to be licensed or authorised in their own jurisdiction in respect of the activities to be performed under an FRC Arrangement. However, MAS recognises that in some jurisdictions, FRCs may not be “licensed” or “authorised” in respect of a particular activity, notwithstanding that the FRCs are subject to supervision by the regulatory authority in that jurisdiction. MAS also recognises that likewise in some jurisdictions, Foreign Representatives may not be subject to licensing or authorisation requirements, although the FRC itself is appropriately licensed or authorised.
Hence, MAS will be revising the requirement to instead require FRCs to be licensed, authorised, regulated or supervised by a regulatory body in the foreign jurisdiction where the FRC is operating from. Foreign Representatives from jurisdictions that do not license or authorise individuals would also be allowed to conduct activities as part of FRC Arrangements, as long as the FRC itself is licensed, authorised, regulated or supervised.
Permissible clientele under the FRC Arrangement
There is no change to the clientele restrictions for FRC Arrangements, and MAS will continue to restrict the clientele under FRC Arrangements to non-retail customers (namely accredited, expert and institutional investors). However, MAS has clarified that local FIs and FRCs may establish the status of customers at the point of onboarding, rather than at the marketing stage. If the customer at the point of onboarding, is assessed not to be an accredited investor, or does not opt-in to be treated as one, thereby falling out of the permissible clientele categories for FRC Arrangements, the customer cannot be onboarded.
Internal controls over the FRC Arrangement
MAS would continue to expect local FIs to have in place policies and procedures to oversee the conduct of FRCs and Foreign Representatives under the FRC Arrangements. In this regard, MAS has clarified that the applicable policies and procedures would include:
(a) Keeping records relating to the FRC Arrangement (including records of customers and customer due diligence, records of transactions, and copies of contracts entered with customers). These records may be maintained by the FRC but need to be readily available to the local FI.
(b) Maintaining a register of Foreign Representatives (containing the names of the Foreign Representatives, the dates of their visits to Singapore, and the purpose of their visits and details of regulated activities conducted during the visits). This register may be maintained by the FRC but the responsibility for ensuring that this information is maintained would still fall on the local FI.
(c) Conducting customer due diligence on the customers of the FRC. Where the FRC's customers are assessed to be also the local FI's customers, the local FI would need to perform customer due diligence in accordance with the relevant MAS Notices (i.e. MAS Notice SFA04-N02, FAA-N06, 314, 626, 824 or 1014, as applicable).
Where the FRC's customers are assessed not to be the local FI's customers, the local FI would still be required to ensure that the policies and procedures in place relating to the conduct of customer due diligence for FRC arrangements are at least as stringent as the requirements in the MAS Notices.
(d) Ensuring that records relating to the FRC Arrangement are readily accessible to MAS. MAS has clarified that there will be no waiver of the requirement to ensure access to records by MAS on the basis of legal or regulatory impediments in foreign jurisdictions. Where there are such legal or regulatory impediments in foreign jurisdictions, the local FI can consider alternative options, such as maintaining the records in Singapore, requiring the customers under the FRC Arrangement to waive their rights to confidentiality, or obtaining the necessary approval from the relevant foreign authority.
(e) Ensuring that Foreign Representatives only solicit clients in Singapore through or with appointed representatives of the local FI. The local FI will need to have a written policy governing the marketing and solicitation of customers by the FRC and Foreign Representatives. The local FI may rely on existing global/group-level policies and procedures in this regard but the responsibility would still fall on the local FI to identify the relevant conduct risks and to ensure that the policy is properly implemented.
(f)Implementing policies and procedures pertaining to complaints handling. Again, the local FI may rely on existing global/group-level policies and procedures with regard to the handling of complaints but the responsibility would still fall on the local FI to ensure that the policy is adequate for handling complaints.
Impact assessment
This effort by MAS to simplify the FRC exemption regime should be very much welcomed by the financial industry as a whole. Ideally, this new notification regime would simplify and speed up the process for local FIs to enter into FRC Arrangements with their respective FRCs.
The clarifications by MAS on the regulatory status of the FRC and the permissible clientele under an FRC Arrangement should also provide some helpful guidance to local FIs looking to structure and enter into FRC Arrangements.
A copy of the responses to feedback received on the consultation paper may be obtained here.
