Significant Changes to the Capital Markets Regulatory Framework in Singapore: Pointers for the AMIF Sector

The capital markets regulatory framework in Singapore (including the Securities and Futures Act (SFA) and Financial Advisers Act (FAA)) was extensively updated on 08 October 2018, and there are further changes that will come into force on 08 January 2019.

The capital markets regulatory framework in Singapore (including the Securities and Futures Act (SFA) and Financial Advisers Act (FAA)) was extensively updated on 08 October 2018, and there are further changes that will come into force on 08 January 2019. Broadly, the changes provide greater regulatory safeguards to investors (including high-net-worth individuals), implement certain outstanding OTC derivatives global reforms, and introduce a new oversight regime over key financial benchmarks. This note focuses on certain of these changes pertinent to the asset management and investment funds sector, serving retail or non-retail clients.

1. Revised definition of Accredited Investors (AIs)

The definition of AIs who are individuals (effective 08 October 2018) reflects the following income and wealth criteria

a. The previous net personal assets test has been tightened such that the net equity of an individual’s primary residence can only contribute up to SGD 1m of the SGD 2m threshold.

b. A new financial assets test has been introduced such that an individual with net financial assets (generally deposits and investment products) exceeding SGD 1m will be an AI.

c. There is no change to the income test and as such it remains the position that an individual whose income in the preceding 12 months is not less than SGD 300,000 is an AI.

There will also be new categories of AI investors introduced with effect from 08 January 2019 (eg joint account holders, corporations wholly owned by AI investors, trustees of any trust in which all beneficiaries are AIs).

2. Choice for AI-eligible Investors to be treated as Retail Investors (effective 08 January 2019)

Investors who meet the AI definition will soon have the option to choose between AI or retail status. This will afford Singapore investors similar safeguards to those already prevalent in other jurisdictions such as Hong Kong.

Investors will have the flexibility to choose AI-status on a per-financial institution basis and can change their classification at any time.

An opt-in approach will apply in relation to new clients onboarded from 08 January 2019 (ie in the absence of opting in AI eligible clients will remain retail investors). An opt-out approach will be permitted for existing clients (ie clients onboarded before 08 January 2018 will remain AIs in the absence of opting out). The opt-out approach will only be effective until 08 July 2020 after which specific opt-in is required for prescribed clients (eg individuals). Under both the opt-in and opt-out approaches, certain procedural notification steps must be taken by financial institutions to clearly explain to investors the implications of their choice (eg regulatory safeguards afforded to retail investors that will be waived).

3. Revised definition of Institutional Investors (IIs)

There are revisions to the definition of IIs effective 08 October 2018. The definition of II has been widened to include new categories of investors such as sovereign wealth funds, certain foreign-regulated financial institutions, foreign central governments and central government agencies, supranational governmental organisations, corporations wholly owned by IIs, and partnerships (other than Singapore limited liability partnerships) in which each partner is an II. However, in relation to Singapore statutory bodies the II definition is now narrowed to a prescribed list of local statutory bodies (essentially, akin to professional investor classifications in Europe, where municipalities and local public authorities are no longer considered professional investors per se but can opt up).

Entities that meet the II definition will continue to automatically be treated as IIs.

4. “Marketing Collective Investment Schemes” is now regulated as “Dealing in Capital Markets Products” under the SFA

The activity of “marketing CIS” has been removed from the FAA and is now (effective 08 October 2018) shifted to the SFA under the regulated activity of “dealing in capital markets products” that are CIS. The activity of “advising on CIS” remains regulated under the FAA.

Exemptions to the SFA licensing requirement for dealing in capital markets products that are CIS (CIS Dealing) are available to the following persons.

a. A person carrying on business in CIS dealing for a customer who is (i) an II, (ii) a related corporation of the person, or ii) a connected person of the person.

b. A corporation carrying on business in CIS dealing solely incidental to the corporation carrying on business in “fund management”.

c. A corporation carrying on business in “fund management” when carrying on dealing in CIS that are managed by the corporation or any of its related corporations.

5. Additional Factors to Recognise Foreign CIS to be Offered to Retail Investors

Previously, MAS may only recognise foreign CIS for offer to retail investors if the laws and practices of the jurisdiction that the CIS is constituted and regulated under provide retail investors with a level of protection that is equivalent to locally constituted CIS. However, where a jurisdiction’s laws and practices do not impose certain investor safeguards, such safeguards could nevertheless be provided for in the CIS’ legally constitutive documents or investment mandate. The MAS may now consider such wider range of factors when deciding whether to recognise a new foreign CIS for offer to the retail public on a case-by-case basis.

The amendments will not affect the existing foreign CIS that have been recognised by MAS, and positively provide greater flexibility to the MAS to recognise more new foreign funds. The MAS may issue guidelines in the future after it has assessed sufficient additional cases of such nature.

6. Regulating non-conventional investment products (collectively-managed investment schemes and physical assets funds)

Previously, the CIS definition covered arrangements in respect of property that satisfied the following elements:

a. Participants have no day-to-day control over management of the property (control limb).

b. Property is managed as a whole by or on behalf of the scheme operator (management limb).

c. Participants’ contributions and profits or income of the scheme from which payments are to be made to the participants are pooled (pooling limb).

d. Purpose or effect (or purported purpose or effect) of the arrangement is to enable participants to participate in profits arising from the scheme property (purpose limb).

A number of schemes which were in substance investments made and managed on a collective basis and hence posed similar risks to investors as traditional CIS circumvented regulation by offering investors direct legal title to individual assets (ie no pooling of investors’ contributions) even though investors’ assets were effectively managed collectively by a third party such that their payoff was the same as the payoff that they would have obtained had their contributions been pooled. The expanded definition of CIS now captures collectively-managed investment schemes, even if there is no pooling of investors’ contributions or profits of a scheme.

Separately, the manager of a physical assets fund (ie CIS that does not invest in capital markets products) is now considered to be carrying on the SFA regulated activity of fund management. However, the manager is exempt from holding a fund management licence if all participants of the CIS are qualified investors.

7. New licensing requirement for dealing in OTC derivatives contracts

Previously, derivatives which were not securities, exchange traded futures contracts, leveraged FX contracts or commodity contracts, or that do not have securities, exchange traded futures contracts, FX contracts or commodities as the underlying were not subject to regulation (eg OTC interest rate swaps). The SFA revisions introduce a new licensing requirement for “dealing in capital markets products” that are OTC derivative contracts.

Exemptions to the SFA licensing requirement for dealing in capital markets products that are OTC derivative contracts include a corporation carrying on such dealing solely incidental to the corporation carrying on business in “fund management”.

An entity which prior to commencement of the revised SFA, deals solely in OTC derivative contracts referencing the new asset classes which are brought into the scope of the revised SFA will be given a two-year transitional period (until 08 October 2020) to apply for a licence in respect of the new regulated activity (if no licensing exemption is available). The transition period applies only to dealing in previously unregulated OTC derivative contracts.

8. Enhanced Conduct of Business Requirements

The amendments mainly introduce business conduct requirements for dealing in newly-regulated OTC derivatives contracts (subject to a transition period), and the requirements relating to protection of customers’ moneys and assets held by capital markets intermediaries have been enhanced.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.