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Singapore – MAS Proposals For Further Investor Protection In The Capital Markets.

28 July, 2014


Legal News & Analysis – Asia Pacific – Singapore  Capital Markets



On 21 July 2014, the Monetary Authority of Singapore (“MAS”) released a consultation paper in which it had proposed to introduce additional regulatory safeguards to protect investors in the capital markets.

These new proposals cover three broad areas:


  • extension of the capital markets regulatory framework to certain types of non-conventional investment arrangements that have hitherto been unregulated;
  • implementing a complexity-risk rating for investment products;
  • refining the rules concerning investor classification under the Securities and Futures Act (“SFA”) and the Financial Advisers Act (“FAA”).

Given that the MAS consultation paper covers a lot of ground, this update will only highlight salient features of the MAS proposals.

Extension Of The Regulatory Regime To Certain Non-Conventional Investments

Being conscious of its role as a regulator only for financial services, MAS has for many years resisted extending its regulatory reach to cover investments into non-financial assets or assets that were not by nature financial products. However, it would appear that the recent spate of negative news concerning alternative investments that have left many retail investors to suffer substantial losses have finally prompted the MAS to act, and to extend the existing regulatory regime to certain nonconventional investment products the existing regulatory provisions aimed at safeguarding the interest of investors.

The new proposals remain relatively incremental. MAS will be extending its regulatory oversight only to two types of investment arrangements:


  • buy-back arrangements involving precious metals, which henceforth would come under the SFA regulatory regime for debentures; and 
  • collectively-managed investment schemes, which are similar to collective investment schemes, save that they do not feature the element of pooling of investors’ contributions, and which would henceforth come under the SFA regulatory regime for collective investment schemes.

Buy-Back Arrangements

MAS defines buy-back arrangements as those which involve an initial sale of an asset that is coupled with a buy-back guarantee in which the original seller promises to buy back the same asset in the future.

The new rules will only cover buy-back arrangements involving precious metals as many consumers consider precious metals to be comparable to financial assets in terms of their inter-changeability, transferability and the liquidity of the markets in which they may be traded. The buy-back arrangements must also involve the investor receiving a financial benefit of some form that is agreed upon at the point of investment. This element will serve to rule out commercial arrangements where the benefit to the investor is the use or consumption of the subject of the arrangement. In particular, MAS proposes that a financial benefit will be considered to exist if the effective repurchase price is higher than the initial purchase price.

Such arrangements will be considered to be debentures under the SFA regulatory regime, so that the following regulatory requirements will become applicable:


  • prospectus disclosure requirements;
  • requirement for an MAS-approved trustee for offer of unlisted debentures;
  • MAS licensing of intermediaries who deal in or advise others concerning such arrangements.


Collectively-Managed Investment Schemes

Presently, collective investment schemes (“CIS”) are regulated under the SFA. A CIS however is defined very specifically and one key element of a CIS is that the contributions of the investors (who are referred to in the legal definition as participants) must be pooled together for the purpose of generating profits through investment.

In recent times, alternative investment arrangements have emerged (which MAS has in the consultation paper called collectively-managed investment schemes) where there isn’t a pooling of investors’ contributions. As illustration, MAS gave three examples:


  • In land investment or land banking schemes, investors are typically offered a fractional interest in a piece of undeveloped land, which they would hold in common with other investors, but the land itself being managed by the operator of the scheme who would be responsible for obtaining planning permission or for disposing of the land at a profit. Such a scheme carries all the hallmarks of a CIS except that each investor puts in money to acquire and hold his or her own discrete fractional interest in the land. 
  • Another example would be an investment into land for forestry or harvesting purposes, where investors might similarly acquire fractional interest in a plantation or even individual plants grown in a plantation, but with the plantation left in the general management of the scheme operator or delegated manager.
  • In a buy-to-let scheme, investors might acquire a fractional interest in or a unit within a residential building on terms that the investor will receive proportionate income from the leasing of units in the building, which will be handled by the scheme operator. So long as the predominant purpose of such an arrangement is to derive pooled profits, the investors have no day-to-day control over their units and their rights are not to specific property but to a share of the pooled income derived from the building, this will be a collectively managed investment scheme that MAS is proposing to bring under SFA regulation.

In each of the above cases, MAS considers the collectively-managed investment scheme to present risks similar to that of a conventional CIS. Hence, the proposal is to include such schemes with the CIS regulatory regime. This will be done by removing the requirement for a CIS to necessarily involve a pooling of investors’ contributions. Without such a requirement, each of the above listed collectively managed investment schemes would fall within the definition of a CIS and be subject to the CIS regulatory regime.

The CIS regulatory regime mirrors that for debentures but has an added requirement that the CIS must be authorised (if formed in Singapore) or recognised (if formed overseas) by MAS. Where the scheme is to be offered to retail investors, then the CISmust also comply with the Code on Collective Investment Schemes (with regard to investments undertaken by the scheme) and be managed by a licensed manager.

With the inclusion of these alternative investment schemes as CIS, where necessary, MAS will consider developing new rules in the Code on Collective Investment Schemes to govern investments undertaken by these schemes.

MAS will also look at making changes to the fund management regulatory regime to cater to the regulation of managers of such schemes.

Complexity-Risk Rating Framework For Investment Products

Since 2012, MAS has implemented an enhanced regulatory regime for offering to retail investors of investment products that are considered to be complex by virtue of their being based on a derivative or having an embedded derivative. At the same time, MAS also recognised that the mere usage of a derivative does not necessarily make a product more complex than others, and the presence or absence of derivatives may not adequately distinguish between products of different levels of complexity.

MAS is now resurrecting a proposal first mooted in 2009, and this is to establish a complexity-risk rating framework, under which investment products would be rated, by reference to two factors – (i) the complexity of the product and (ii) the risk of loss.

The framework will apply only to products which are for investment purposes only (omitting those which are acquired for savings or for protection purposes, such as term life insurance policies, non-participating whole life policies and endowment policies and annuities) and only where they are made available to retail investors.

With regard to the complexity rating, the MAS proposal is for a complexity-risk rating framework derived from a conjunction of four factors:


  • the number of structural layers which the investment product has;
  • the expansiveness in the use of derivatives;
  • the availability and usage of known valuation models; and
  • the number of scenarios determining return outcomes.

On top of the complexity rating, each investment product will further be subject to a risk of loss bucketing, based on a simple assessment as to the likelihood of the investor losing some of the principal sum invested, all of it or more than all of it.

MAS is also seeking feedback for a proposal to require a historical price volatility indicator to be also provided alongside the rating that is derived based on the aforesaid framework.

If implemented, the obligation to disclose such ratings would be the responsibility of the product issuer, and the disclosure is to be made in the product offering documents for each class of investment product.

In proposing these measures, MAS has also made clear that it recognises that many financial institutions already have their own internal risk-rating frameworks which are used to match products with a client’s risk profile. Accordingly, MAS has also invited feedback from financial institutions as to whether the MAS proposals might conflict with any financial institution’s own internal risk rating systems.

The existing regulatory classification between excluded and specified investment products (as set out in MAS Notice SFA04-N12 and MAS Notice FAA-N16 ) would also be rationalised and re-aligned with the new rating framework – excluded investment products will be those with a low or medium rating under the new complexity risk rating framework, and all others will be specified investment products. In the consultation paper, MAS has said that it expected a large number of funds currently classified as specified investment products would thereafter qualify as excluded investment products and become more widely available.

Refining The Rules On Investor Classification Under The SFA And FAA

MAS has undertaken a review of the existing rules on classification of investors and has announced proposals to refine the rules as follows:

Opt In Process For Accredited Investors (“AIs”)

Currently, when a financial institution classifies a client as an AI, the client himself might not necessarily be aware of his status as an AI. Classification as an AI carries certain legal and regulatory consequences. Notably, financial institutions are exempt from various regulatory requirements when dealing with a client who is classified as an AI. The AI client in turn may be deprived of certain regulatory protection which he would otherwise enjoy if he had been a retail client and not an AI. Accordingly, in alignment with the approach adopted in the EU and in Hong Kong, MAS is now proposing that the classification of a client as an AI should not be automatic. Instead, a client who is eligible to be an AI must opt in to be an AI. This has the advantage of ensuring that the client becomes aware of his status as a retail investor or an AI, and the implications of being a retail investor or an AI, so that the client can determine the level of regulatory protection he would want.

The opt in process involves the financial institution having to inform the client in writing that he has been assessed to be eligible to be an AI, and to provide a clear description and warning of what being an AI would entail. This would help the client to understand and decide whether he wants to be an AI (and have access to a broader range of investment products not otherwise available to a retail investor) and remain as a retail investor (with a broader level of regulatory protection accorded by law).


Changes To The Definition Of An AI

MAS is also proposing certain refinements to the existing definition of an AI, as set out in section 4A of the SFA and as further expanded by the Securities and Futures (Prescribed Classes of Investors) Regulations.

For individuals, MAS has decided to retain the existing net assets and income thresholds, but has proposed to add a further criteria – namely that when determining if the SGD 2m net asset threshold has been crossed, the net equity of the individual’s primary residence can only contribute up to SGD 1m.

For joint accounts, MAS reiterated that each joint account holder should be treated as befits his individual investor status. Thus, in relation to a joint account held by A and B, where account holder A qualifies as an AI but account holder B is not, when dealing with account holder A, the financial institution is able to offer to A a broader range of investment products that would not be available to retail investors, but when dealing with account holder B, the financial institution is still bound to treat him as a retail investor.

Such an approach would be sensible from a consumer protection perspective, and would effectively mean that the funds in such a joint account can only be used for investments suitable for retail investors. However, it can present practical difficulties for financial institutions in the very common situation where the account holder who is an AI makes all the investment decisions with respect to the joint account. The financial institution may find it difficult to explain why non-retail investment products cannot be made available. With the proposal for an AI opt-in regime, the difficulty is somewhat mitigated – MAS has indicated that it would allow an individual who holds a joint account with an AI to himself opt in to be an AI, in respect of transactions done through that joint account.

For corporations, for many years, a corporation qualifies as an AI only if it had net assets exceeding SGD 10m on its balance sheet, or if it was an investment holding corporation owned entirely by AIs. MAS has now accepted that it would be restrictive to insist that a corporation owned entirely by AIs be a pure investment holding company and cannot carry on any business. Accordingly, the proposal now is to do away with the investment holding company criterion, so that any corporation which is owned entirely by AIs would become eligible to be an AI.


For trusts, currently an individual qualifies as an AI if he had personal assets exceeding SGD 2m but a trustee qualifies as an AI only if the trust fund itself held assets exceeding SGD 10m in value. As a result, a high net worth individual might not qualify as an AI if his assets were held through a trust. MAS is now proposing to allow a trustee to qualify as an AI so long as all beneficiaries under the trust are AIs. This proposal is useful and helps to plug a long existing gap in the regulatory regime.

Changes To The Definition Of An Institutional Investor (“II”)

MAS is also proposing some very sensible changes to the definition of an II. For many years, an II has been very narrowly defined because the list of entities that qualify have primarily been financial institutions operating in Singapore. Foreign financial institutions that did not have a regulated presence in Singapore were left out, although most would separately have qualified as AIs and thus still be treated as non-retail clients. This is quite unlike vernacular usage of the term II, which has a much wider meaning. MAS will now amend the definition to allow foreign financial institutions, foreign central governments and foreign central government agencies to qualify as IIs.

At the same time, MAS is also proposing to narrow the list of statutory bodies that would qualify as an II. Recognising that not all statutory bodies should be assumed to have relevant investment expertise, henceforth only specifically listed statutory bodies would qualify.

Abolition Of The Definition Of Expert Investor (“EI”)

Under the SFA, an EI is a person whose business involves the acquisition and disposal, or the holding, of capital market products (whether as principal or agent). This term is used primarily in respect of the personal trading activities of individuals who work in financial institutions and whose jobs involve capital market transactions. The underlying policy behind treating such persons in a manner similar to AIs and IIs is that their personal experience is likely to arm them with sufficient knowledge and experience in matters of investment such that they should not require as much regulatory protection as retail investors.

However, the term EI is not as widely used within the SFA and FAA regulatory frameworks as the terms AI and II. Accordingly, to simplify the regime, MAS is now proposing to remove such a class of investors altogether.

Closing Date For The Public Consultation

The MAS consultation paper is available from the MAS website, and the closing date for public feedback is 1 September 2014.


Shook Lin Bok LLP


For further information, please contact:


Eric Chan, Partner, Shook Lin & Bok

Shook Lin & Bok Capital Markets Practice Profile in Singapore


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