Knowledge Highlights 18 April 2022
On 5 April 2022, the Financial Services and Markets Bill (“FSM Bill”) was passed in Parliament. The FSM Bill enhances the Monetary Authority of Singapore’s (“MAS”) regulatory and enforcement framework across the financial sector, besides rules designed for each segment of the sector.
The financial sector has transformed significantly in recent years, in terms of the types of transactions, and the persons, institutions and technology conducting these transactions. The FSM Bill would ensure that MAS keeps abreast of these developments and equip MAS with the tools to facilitate the development of these new products and services while managing the risks involved.
Some of MAS’ powers on similar issues which are currently spread across various Acts will be consolidated into one single Bill - for instance, the proper management of technology risk and measures to instil proper conduct among professionals in the financial sector. The FSM Bill also addresses regulatory challenges presented by the digitalisation and transformation of the financial market.
MAS consulted both the industry and the public, and received broad support for the FSM Bill. Where appropriate, MAS has incorporated the feedback received into the FSM Bill.
Details on key aspects of the FSM Bill outlined in the second reading speech are set out below.
Harmonised and expanded power to issue prohibition orders
The FSM Bill provides MAS with broader powers to impose prohibition orders (“POs”) against persons who have shown themselves to be unfit to perform key roles, activities and functions in the financial industry.
Limitations to MAS’ current PO powers
POs are issued in cases of serious misconduct, such as to individuals who have been convicted of fraud or dishonesty in respect of their dealings with customers. While the issuance of such POs can also deter others from committing similar lapses, there are limitations to MAS’ current PO powers:
- POs issued to certain specified persons only: MAS can only issue POs to certain specified persons under the Financial Advisers Act 2001, the Securities and Futures Act 2001 and the Insurance Act 1966 (“three Acts”), such as trading representatives and insurance agents. However, there are people who work in the financial industry who do not fall within the existing categories, e.g. a bank manager who is not a person whom POs may be issued to under any of the three Acts.
- POs extend to only key regulated activities: While MAS has been decisive in issuing POs to individuals who have committed serious misconduct, its powers have only enabled it to prohibit individuals from carrying out key regulated activities under the three Acts, such as providing financial advisory services. MAS’ existing powers do not extend to prohibiting persons from carrying out other activities, including providing payment services, or conducting other important functions in the financial industry, such as risk management or compliance, and the administration of critical systems.
Effect of FSM Bill on POs issuance
The FSM Bill broadens the categories of persons who may be subject to POs, rationalises the grounds for issuing POs (from a list of specific criteria to a single fit and proper test) and widens the scope of prohibition to cover functions critical to the integrity and functioning of financial institutions (“FIs”).
MAS will continue to exercise its PO powers judiciously, taking into account the nature and severity of each misconduct, and its actual and potential impact on trust in the financial sector. Existing checks and balances will continue to apply. Before MAS issues a PO to any person, the person would have the opportunity to make representations to MAS. If MAS proceeds with issuing a PO, the person would have the right to appeal to the Minister.
Enhanced regulation of DT service providers for money laundering and terrorist financing risks
Enhanced Financial Action Task Force standards for digital token service providers
The Financial Action Task Force (“FATF”) has strengthened international standards for virtual asset service providers (“VASPs”) in June 2019 to enhance the regulation of digital token (“DT”) service providers for money laundering and terrorist financing (“ML/TF”) risks. Amendments to existing legislation have already been made to implement these enhanced standards.
Entities that conduct the business of providing DT services in Singapore are subject to current legislation regardless of where they are established. However, DT service providers created in Singapore without providing any DT services in Singapore are currently unregulated for anti-money laundering and countering the financing of terrorism (“AML/CFT”). Further, these entities may claim to be headquartered here to take advantage of Singapore’s global reputation. This creates reputational risks for Singapore.
Where a DT service provider established in one jurisdiction does not provide services in that jurisdiction but offers its services digitally to other markets, the gap in the current global regulatory framework leads to no single jurisdiction having sufficient regulatory hold over the DT service provider for its ML/TF controls. To close this gap, the enhanced FATF standards require DT service providers to be at least licensed or registered in the jurisdictions(s) where they are created.
Effect of FSM Bill on regulation of DT service providers
VASPs are termed as DT service providers for the purposes of the FSM Bill. The FSM Bill will regulate all persons in Singapore who conduct a business of providing DT services purely outside Singapore if they are created in or operate their business from Singapore. The FSM Bill will regulate such DT service providers as a new class of FIs, primarily for ML/TF risks. The FSM Bill will introduce licensing requirements and general powers over DT services providers, including powers for MAS to conduct AML/CFT inspections, and render assistance to domestic authorities and MAS’ foreign AML/CFT supervisory counterparts.
MAS will also impose other requirements on DT service providers, such that they have a meaningful presence in Singapore and MAS has adequate supervisory oversight over them. The AML/CFT requirements imposed on DT service providers will be aligned with the requirements imposed on digital payment token service providers regulated under the Payment Services Act 2019. Persons that provide DT services in Singapore will continue to be regulated under existing MAS-administered Acts.
Harmonised power to impose requirements in technology risk management
The FSM Bill consolidates existing technology risk management (“TRM”) requirements made under various MAS-administered Acts by introducing powers within the FSM Bill that apply to any FI or class of FIs. The powers will enable MAS to impose requirements in TRM, as well as in the safe and sound use of technology to deliver financial services and protect data.
Under the FSM Bill, the maximum penalty for each breach of a TRM requirement will be raised to S$1 million per breach. Thus, where multiple breaches of TRM requirements are established, such as in the case of a serious cyberattack or disruption to essential financial services impacting an FI’s customers or other industry participants (e.g. an ATM network disruption or online trading disruption), an FI could face a financial penalty much higher than S$1 million. The quantum proposed is intended to underscore the critical importance of TRM to FIs’ operations and the sound functioning of the financial system.
In addition to the penalty imposed for a breach of TRM requirements, MAS is empowered to take other supervisory actions, such as requiring FIs to set aside additional regulatory capital until MAS is satisfied that adequate technology risk control measures have been put in place to address deficiencies.
Statutory protection from liability for mediators, adjudicators and employees of operator of approved dispute resolution scheme
Presently, an adjudicator, employee, officer or representative of the Financial Industry Disputes Resolution Centre Ltd (FIDREC), which operates an approved financial dispute resolution scheme, is contractually conferred certain protection from claims by a complainant or FI.
The FSM Bill will provide statutory protection for such persons. This will strengthen the confidence and autonomy of these individuals when they carry out their duties and align the level of protection for them more closely with that of other public dispute resolution bodies in Singapore and internationally. The FSM Bill provides such persons protection from liability if they acted with reasonable care and in good faith in the course of mediating or adjudicating a dispute. They will, however, continue to be liable for acts involving wilful misconduct, negligence, fraud or corruption.
- Financial Services and Markets Bill
- “Financial Services and Markets Bill” - Second Reading Speech by Alvin Tan, Minister of State, Ministry of Culture, Community and Youth and Ministry of Trade and Industry, and Board Member of MAS, on behalf of Tharman Shanmugaratnam, Senior Minister and Minister-in-charge of the Monetary Authority of Singapore, on 4 April 2022