22 February 2022
On 14 February 2022, the Financial Services and Markets Bill 2022 (“FSM Bill”) was tabled for first reading in Parliament. The Monetary Authority of Singapore (“MAS”) also issued an explanatory brief for the FSM Bill and its response to feedback received on the consultation on the new omnibus act for the financial sector (“Response to Feedback”). Key details of the FSM Bill are set out below.
Presently, MAS regulates the financial sector by entity and activity through various MAS-administered legislation. The Monetary Authority of Singapore Act 1970 (“MAS Act”) imposes requirements on different classes of financial institutions (“FIs”) across the financial sector in specific areas (“FI Related Provisions”), including provisions relating to anti-money laundering and countering the financing of terrorism, resolution of FIs in distress, and financial industry dispute resolution schemes.
MAS recognises the increasing need for a financial sector-wide regulatory approach to complement its existing entity and activity based regulation and has introduced the FSM Bill to enhance its agility and effectiveness in addressing financial sector-wide risks in a rapidly changing and increasingly integrated environment. The FSM Bill contains FI Related Provisions moved from the MAS Act and new provisions empowering MAS to address emerging risks and challenges that impact institutions across the financial sector.
MAS conducted a public consultation on the proposed FSM Bill in 2020. Respondents were generally supportive of the proposals, and MAS has incorporated the feedback into the FSM Bill where appropriate.
Key aspects of FSM Bill
The following are the key aspects of the FSM Bill:
- Harmonised and expanded power to issue prohibition orders: MAS issues prohibition orders (“POs”) to bar persons from conducting certain activities or from holding key roles in FIs for a period of time. POs are issued in cases of serious misconduct, to deter misconduct, and preserve trust in Singapore’s financial sector. MAS determines the duration and scope of each PO based on the facts of each case.
The FSM Bill introduces a harmonised and expanded power to prohibit any person who is not fit and proper from engaging in any activity regulated by MAS and performing a prescribed list of key roles and functions in the financial sector. MAS’ powers to issue POs are consolidated under the FSM Bill, enabling a consistent sector-wide approach when taking enforcement action against misconduct. This broadens the categories of persons who may be subject to POs, rationalises the grounds for issuing POs (from a list of specific criteria into a single fit and proper test), and widens the scope of prohibition to cover functions that are critical to the integrity and functioning of FIs. These functions include handling of funds and assets, risk-taking, risk management and control, and critical systems administration.
Currently, MAS’ PO powers reside only in certain MAS-administered Acts, and can only be issued against certain persons specified under those Acts. MAS cannot issue POs to persons outside the scope of the PO powers in these Acts even if they have committed serious misconduct in the financial sector. For example, it would not be possible issue a PO under the Banking Act 1970 against a bank compliance officer who commits misconduct in the course of his work as there is no such power under the Act. Existing PO powers also do not effectively protect an FI’s customers, investors, and the financial sector from such persons as the prohibitions only extend to a limited scope of regulated activities.
It remains an offence for a prohibited person to breach the PO, or for a FI to hire a prohibited person to carry out any activity, business, service or function which the person is prohibited from doing under the PO.
MAS states that its power to issue POs will be exercised in a risk-proportionate manner that considers the nature and severity of the misconduct, and its potential and actual impact on the financial sector. A PO would generally be issued only if the person has a nexus to the financial sector. The PO power will also continue to be subject to existing checks and balances, including the following:
1. Persons are informed of MAS’ intention to issue POs against them and are given the opportunity to make representations to MAS before the POs may be issued; and
2. Persons have the right to appeal to the Minister against MAS’ decision to issue POs against them.
Further, MAS states in its Response to Feedback that guidelines will be issued to provide clarity on how it will issue POs.
- Enhanced regulation of virtual asset service providers (“VASPs”) for money laundering and terrorist financing risks: The Financial Action Task Force (“FATF”) adopted enhanced standards for VASPs in June 2019 and requires countries to regulate VASPs for money laundering and terrorist financing (“ML/TF”) risks.
To mitigate the risk of regulatory arbitrage (where no single jurisdiction has sufficient regulatory hold over a specific VASP due to the internet and digital nature of its business), the enhanced FATF standards require VASPs to be at least licensed or registered in the jurisdictions(s) where they are created. Most entities that carry on the business of providing virtual asset (“VA”) services in Singapore are subject to current legislation, where the VAs involved constitute digital payment tokens (“DPTs”) or capital markets products.
In order to fully align with the enhanced FATF standards and mitigate the reputational and ML/TF risks, the FSM Bill will regulate all VASPs created in Singapore that provide VA services outside of Singapore. Such VASPs which provide digital token (“DT”) services outside of Singapore will be regulated as a new class of FIs, with licensing and ongoing requirements to ensure that MAS has adequate supervisory oversight over them.
The scope of DT services will align with the enhanced FATF standards. The scope of DT services includes:
1. dealing in DTs;
2. facilitating exchange of DTs;
3. inducing or attempting to induce any person to enter into or offer to enter into any agreement for or with a view to buying or selling any DTs in exchange for any money or any other DTs (whether of the same or a different type);
4. accepting DTs for the purposes of transmitting, or arranging for the transmission of, the DTs;
5. safeguarding of a DT or DT instrument, where the service provider has control over the DT or over one or more DTs associated with the DT instrument; and
6. financial advice relating to the offer or sale of DTs.
All transactions relating to DT services are considered by MAS to carry higher inherent ML/TF risks due to their anonymity and speed, and the FSM Bill will regulate VASPs primarily for ML/TF risks. The FSM Bill will introduce general powers over VASPs, including licensing requirements and powers to conduct anti-money laundering / counter terrorism financing (“AML/CFT”) inspections and render assistance to domestic authorities and MAS’ foreign AML/CFT supervisory counterparts.
VASPs will be subject to licensing and ongoing requirements to ensure that they have a meaningful presence in Singapore and that MAS has adequate supervisory oversight over them. These requirements include:
1. having a permanent place of business in Singapore;
2. appointing at least one person to be present, as MAS may specify by notice in writing, to address any AML/CFT related queries or complaints from any person that uses any DT service provided by the licensee or is a customer of the licensee;
3. keeping and making available the licensee’s transactions in relation to any DT service provided to authorities in Singapore in a timely manner upon request; and
4. satisfying financial requirements that may be prescribed or specified by MAS by notice in writing.
AML/CFT requirements imposed on VASPs will be aligned with the requirements imposed on DPT service providers regulated under the Payment Services Act 2019.
In its Response to Feedback, MAS also states that it has taken steps to address the risks posed by crypto-derivatives and will continue to study and assess ML/TF risks posed by crypto-derivatives and take necessary steps to mitigate these risks.
- Harmonised power to impose requirements on technology risk management: MAS will consolidate powers to impose requirements on technology risk management (“TRM”) by introducing powers centralised within the FSM Bill that apply to any FI or class of FIs. This is to ensure the safety and soundness of FIs’ IT systems which are used to deliver financial services.
MAS proposes that the sum of S$1 million be the maximum penalty for breaches of its Regulations and Notices to ensure that the maximum penalty for any breaches of TRM requirements is commensurate with the most serious types of breaches that can be committed by FIs. MAS explains that this quantum was derived after considering comparable existing penalty regimes of other Singapore government agencies and the need to signal the importance of technology risk management.
- Statutory protection from liability for mediators, adjudicators, and employees of operator of approved dispute resolution scheme: Currently, an adjudicator, employee, officer or representative of the Financial Industry Disputes Resolution Centre Ltd (“FIDReC”) is contractually conferred certain protection from claims by a complainant or FI.
The FSM Bill will provide statutory protection from liability for such mediators, adjudicators, and employees of an operator of an approved dispute resolution scheme (currently, FIDReC is the only approved dispute resolution scheme). This will strengthen the confidence and autonomy of these individuals when they carry out their duties where they act with reasonable care and in good faith. The statutory protection does not extend to acts involving wilful misconduct, negligence, fraud or corruption.
The FSM Bill will also align the level of protection with other public dispute resolution bodies in Singapore and internationally.