Singapore
General financial regulatory regime
General
Singapore has recently announced plans to become a 'Smart Nation' and it has recognized that the financial sector is ideally placed to play a leading role since the financial services industry offers vast scope for innovation and the application of technology. The government aims to work towards a 'Smart Financial Centre' where technological innovation is pervasive.
The Securities and Futures Act (SFA) is the main legislation regulating capital markets and the financial investments sector. Section 82 of the SFA provides that no person shall, whether as principal or agent, carry on business in any prescribed regulated activity or hold himself out as carrying on such business unless it holds a capital markets services license (CMSL) issued by the Monetary Authority of Singapore (MAS) in respect of that prescribed regulated activity. Regulated activities include dealing in securities, fund management, advising on corporate finance, providing custodial services for securities and securities financing, amongst others. Therefore, generally, unless a licensing exemption is invoked, all financial institutions would be required to obtain a CMSL. In some instances, the Financial Advisers Act may also be applicable.
The MAS is the main financial services regulator in Singapore. Generally, the MAS's regulatory approach towards FinTech can be described as activity-based regulation to keep pace with innovations. MAS believes that regulation must not front-run innovation since this may stifle or potentially derail innovation or the adoption of useful technology. However, it puts equal emphasis on keeping pace with innovation in order to assess what the risks might be and continually evaluates whether it is necessary to regulate or leave technologies and industries to evolve further. The MAS will only bring regulation in when the risk posed by new technology becomes material or crosses a threshold. Any regulation ought to be proportionate to the risk posed.
In order to provide a safer, less expensive and more controlled environment within which FinTechs can innovate, the MAS has set up a regulatory sandbox framework for financial institutions to test their innovations. This will provide FinTech firms with a space within which to experiment with their technology, even if they are not able to anticipate every risk or meet every regulatory requirement.
To enter the regulatory sandbox, the relevant FinTech must apply to the MAS. The MAS and the applicant will then define the boundaries within which the experiment will take place. The MAS will also determine the specific legal and regulatory requirements, which it is prepared to relax for the duration of the experiment within these boundaries. The sandbox has been a huge success, attracting proposals that leverage on a range of technologies, including blockchain, machine learning and big data analytics. PolicyPal, an insurance technology startup which allows customers to buy and manage insurance policies through a mobile application, is the first 'graduate' of the sandbox.
Regulation of peer-to-peer funding and marketplace lending
The MAS announced initiatives in June 2016 to improve small and medium-sized enterprises' access to equity and lending-based crowdfunding from accredited and institutional investors by relaxing certain financial requirements for capital markets intermediaries that deal in securities and clarifying the application of certain exemptions from prospectus requirements. Its approach is to regulate equity and lending-based crowdfunding platforms within the existing regulatory framework and accept lower regulatory requirements in accordance with the risks and characteristics of the business model (eg serving only accredited investors and institutional investors, and not handling clients’ monies) of the relevant entity. The MAS does not see a need to create a new investor class for equity or lending based crowdfunding since the framework is already calibrated to treat retail and non-retail investors differently. As at June 2016, in light of the high risks inherent in equity crowdfunding, the MAS does not intend to remove the regulatory safeguards such as prospectuses that apply where securities are offered to retail investors but is working to refine its guidelines to facilitate the intermediation of offers to investors (including retail investors) under the existing framework and continues to monitor developments and may make adjustments to the approach in the future, if warranted.
CMSL requirement
Generally, an equity and lending based crowdfunding platform operator will require a CMSL since it will be dealing in securities (ie by facilitating the offer of debentures even if the platform operator does not itself offer the debentures) or advising on corporate finance (as defined in the Securities and Futures Act) unless it qualifies under one of the prescribed exemptions from the requirement to hold a CMSL. Requirements under the Financial Advisers Act may also apply where financial advisory services are provided by the platform operator to investors who wish to invest in the securities.
Following a public consultation held in 2015, the MAS has simplified the financial pre-qualifications to be met by platform operators to allow them to obtain a CMSL for dealing in securities. Therefore, if the platform operators only serve accredited and institutional investors, do not hold or handle customer money, assets or positions and do not act as principal against customers, the base capital requirement for dealing licensees will be reduced from S$250,000 to S$50,000 and the requirement to maintain a security deposit of S$100,000 with the MAS will be removed.
In assessing corporate license applications, where an applicant platform operator does not possess the requisite five years' corporate track record (as set out in the Guidelines on Criteria for the Grant of a CMSL other than for Fund Management), the MAS will consider other factors in place of the corporate track record, such as the experience and track record of the shareholders and the key officers of the applicant.
Offer of securities
In addition to the requirement to have the appropriate CMSL, under section 239(3) of the SFA, any invitation to lend money to an entity (eg a company) is deemed to be an offer of debentures, which is a type of security. The entity offering debentures is required to prepare and register a prospectus with the MAS in accordance with the SFA unless it falls within one of the several prospectus exemptions. Currently, securities-based crowdfunding (SCF) can be carried out, albeit in a limited way, without the need to register a prospectus if it is done in reliance on existing prospectus exemptions, such as the small offer exemption under the SFA.
Under section 272A of the SFA, crowdfunding platform operators may make personal offers of securities, up to S$5 million within any 12 month period, without a prospectus (referred to as the small offers exemption), subject to certain conditions. As of June 2016, the MAS has amended the investor pre-qualification process found in the MAS’s Guidelines on Personal Offers made regarding the Exemption for Small Offers in order to make it easier for SCF platform operators to rely on the existing regulatory framework for small offers, to raise funds through SCF including from retail investors. However, to ensure investors (including retail) are fully aware of the risks and deterred from investing if they are unable to accept the potential losses, the MAS has concurrently strengthened the existing risk disclosures to require any licensed crowd-funding platform operator appointed by an offeror to intermediate the offeror’s small offers online; and such an offeror is to provide, at the minimum, a prescribed risk disclosure statement to each potential investor and obtain the investor’s acknowledgement that he is fully aware of and accepts the risks. The MAS has also advised however that in appointing a licensed SCF platform operator to intermediate the offeror’s small offers, the offeror should satisfy itself that the SCF platform operator has the necessary procedures to ensure that the revised pre-qualification process, as well as the revised risk disclosure and acknowledgement requirements, are complied with.
Offerors can also rely on prospectus exemptions under sections 274 and 275 of the SFA to make offers of securities to accredited investors and institutional investors through SCF without a prospectus. To ensure that offers made in reliance of the abovementioned prospectus exemptions are limited in scope and reach, and are not subject to mass solicitation, offers to accredited investors are subject to specified conditions, including a restriction on any advertisement on the offer (Advertising Restriction). Although the MAS has clarified the scope of the advertising restriction for offers made pursuant to the prospectus exemptions, the bottom line remains that as exempted offers are intended to be offers that are restricted in scope, these offers should not be subject to any mass solicitation, advertising or canvassing. If the platform operator of a ‘restricted access platform’ (as opposed to an ‘unrestricted access platform’) has conducted due diligence to confirm that investors who have access to the platform are within the scope of the prospectus exemption (eg accredited investors), the publication of statements containing information on the offeror and the terms of the offer on the platform would not be regarded as a breach of the Advertising Restriction.
Licensed platform operators may still offer equity securities to retail investors by registering and providing a prospectus or by utilizing some of the other statutory exemptions (such as the small offers exemption described above) to issuing a prospectus.
Regulation of payment services
Payment services are currently governed by two separate pieces of legislation: the Money Changing and Remittance Businesses Act (MCRBA) which governs stored value and the Payment Systems (Oversight) Act (PS(O)A) which governs remittance businesses. With the advent of FinTech, payments and remittances and the providers of these services can no longer be easily classified and differentiated.
In August 2016, the MAS released a consultation paper on the proposed changes to the payments regulatory framework and the establishment of a National Payments Council to drive innovation, as well as to create a more efficient and competitive business environment. The proposals bring payment services regulations under a single framework that will provide for the licensing, regulation and supervision of all payments services including stored value facility holders, remittance companies and virtual currency intermediaries. Regulation will be applied on the basis of the activity carried out by the service provider and entities will only be required to apply for a single license to undertake several payment activities. The proposed regulation also aims to strengthen standards of consumer protection, anti-money laundering and cybersecurity related to payment activities.
The consultation was the first in a series of consultations on the proposed governance model for Singapore. The proposals from these consultations do not yet appear to have been implemented.
Regulation of Initial Coin Offerings (ICOs), cryptocurrencies and token based products
In light of the booming ICO market in Singapore, the MAS clarified in August 2017 that the offer/issue of digital tokens which constitute 'products' regulated under the SFA will be regulated by the MAS. Where tokens fall within the definition of securities in the SFA, the issuer is subject to licensing requirements under the SFA (unless exempt) and is required to lodge and register a prospectus with the MAS prior to the offer of such tokens (unless exempted). Any platform facilitating the secondary trading of these tokens would also have to be approved or recognized as an approved exchange or recognized market operator under the SFA.
In line with other countries, the MAS has previously confirmed that virtual currencies are not specifically regulated but that intermediaries in virtual currencies would be regulated for money laundering/terrorist financing risks. It is considering introducing regulations to prevent money laundering/terrorist financing risks involving digital tokens which are not virtual currencies, in the near future.
Application of data protection and consumer laws
The increasing sophistication and use of technology within FinTech, data analysis tools and the applications of big data means that more data than ever is being collected and stored. Data protection in Singapore is governed by the Personal Data Protection Act 2012 which fully came into effect in 2014. It governs the collection, use, disclosure and care of personal data (whether electronic or non-electronic) and recognizes individuals' rights to protect their personal data and their rights of access and correction.
Money laundering regulations
In order to be compliant with anti-money laundering regulations, companies operating in the FinTech sector must collect the right information to conduct appropriate 'know your customer' procedures. This includes determining the business model's risk of money laundering and carrying out enhanced due diligence if the model is high risk. FinTech companies dealing with online payments and internet-based stored value facility holders are two sub-categories which have been identified as high risk. The MAS has issued guidance papers and 'Notices on the Prevention of Money Laundering and Countering the Financing of Terrorism' for different types of FinTech business models. These outline the specific requirements and standards to be met by each type of institution.
Vincent Seah
Partner
DLA Piper Singapore Pte. Ltd.
[email protected]
T +65 6512 9595
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