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29 December, 2018
The Monetary Authority of Singapore (“MAS”) has on 4 December 2018, published a consultation paper, inviting comments 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 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”).
The current approval regime
Currently, the SFA and FAA regulatory regimes provide for MAS to have the power to approve such collaborative cross-border business arrangements between a local FI and its FRC. The effect of such approval is that the FRC will be able to serve persons who are in Singapore, without the need for the FRC itself to hold a licence under the relevant licensing rules of the SFA or the FAA. In the SFA context, such an arrangement is commonly referred to as a “paragraph 9 arrangement” (the numeric reference being the relevant paragraph in the Third Schedule of the SFA) and in the FAA context, it is commonly referred as a “paragraph 11 arrangement” (the numeric reference being the relevant paragraph in the First Schedule of the FAA).
The exemption regimes under the SFA and the FAA for paragraph 9 arrangements and paragraph 11 arrangements respectively, are necessary because an FRC that serves persons in Singapore will otherwise risk breaching licensing rules in Part IV of the SFA, or in the FAA (as the case may be), when it deliberately or actively targets or promotes its overseas service offerings (which if conducted from Singapore would have required licensing), at persons who are in Singapore. This in turn arises from the fact that both the SFA and the FAA contain provisions that enable the respective licensing requirements of Part IV of the SFA and of the FAA, to be extended extra-territorially to a foreign person where that foreign person carries on, outside of Singapore, an activity which has a substantial and reasonably foreseeable effect in Singapore.
Currently, paragraph 9 and paragraph 11 arrangements have to be approved by MAS upon a joint application by the local FI and its FRC.
Proposal for a new notification regime
MAS is now proposing to streamline this exemption regime by dispensing with the need for MAS to give case-by- case approval of such cross-border business arrangements, and switching instead to a post-fact notification approach.
Under the proposed revised framework, the local FI and its FRC would be able to carry out the collaborative cross- border business arrangement, without first having to seek prior written approval from MAS, provided that MAS is notified within 14 days of the commencement of the arrangement and a pre-defined set of boundary conditions are observed.
Proposed boundary conditions
The boundary conditions proposed by MAS broadly cover the following aspects:
(a) notification to MAS of the arrangement within 14 days of commencement, and notification within 14 days of any material change;
(b) the local FI and the FRC having the requisite licences or authorisations to conduct the relevant activity under the arrangement;
(c) the clientele served under the arrangement should be non-retail customers;
(d) there being appropriate internal controls through which the local FI is able to oversee the conduct of the FRC and staff of the FRC;
(e) annual certifications by external auditors that the boundary conditions are observed; and
(f) annual data reporting requirements to MAS to enable MAS to carry out effective, risk-based oversight of all such arrangements.
Changes to the scope of the regime
MAS is also proposing to vary the classes of local FIs who would be able to avail themselves of the revised exemption regime. At present, the FRC exemption regime is available to the FRCs of the following classes of local FIs:
(a) all capital markets intermediaries licensed under section 82 of the SFA;
(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; and
(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.
With the recent amendments to the SFA that took effect on 8 October 2018, and which conferred on MAS the jurisdiction to licence and regulate OTC derivatives brokers, certain types of derivatives brokers and futures brokers have been given the benefit of licensing exemptions, so that they do not need to hold capital markets services licences under section 82 of the SFA. MAS is thus proposing to extend the new FRC exemption regime to this group of exempt brokers and their FRCs.
Additionally, MAS is proposing to exclude from the scope of the new FRC exemption regime, arrangements involving only the issuance or promulgation of research reports, this being a class of financial advisory services regulated under the FAA. This proposal stems from the fact that there already exists a wider basis of exemption available under regulation 32C of the Financial Advisers Regulations. An exemption under regulation 32C, 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.
Finally, MAS is also proposing to exclude venture capital fund managers and their FRCs from the scope of the FRC exemption regime. MAS considers the FRC exemption regime ought not to be applicable to the business model of venture capital fund managers. While venture capital fund managers do hold capital markets service licences issued by MAS, they are not required to observe many of the ongoing business conduct rules applicable to other classes of capital markets services licensees. They are also only permitted to manage venture capital funds (as defined in the Securities and Futures (Licensing and Conduct of Business) Regulations) and cannot offer managed account services.
Impact assessment
This effort by MAS to simplify regulatory processes should be very much welcomed by the financial industry as a whole. It reflects a recognition by the financial regulator that regulatory regimes have become increasingly complex over the years, and it bodes well that the regulator is willing to consider ways and means to simplify things for the industry, whenever it is possible to do so.
It remains to be seen what the new notification regime will involve specifically. But one does hope that MAS will make a conscious effort to keep the notification regime as simple and as fuss-free as possible.
The consultation period closes on 31 January 2019.
A copy of the consultation paper may be obtained here.
