Singapore, 21 July 2014… The Monetary Authority of Singapore (MAS) today released a consultation paper on proposals to enhance its regulatory framework for safeguarding investors’ interests. The key changes are as follows:
extend to investors in non-conventional investment products the current regulatory safeguards available to investors in capital markets;
require all investment products to be rated for complexity and risks, and for these ratings to be disclosed to investors; and
provide accredited investors (AI1) the option to benefit from the full range of capital markets regulatory safeguards that are applicable for retail investors.
Capital markets regulatory safeguards for investors in non-conventional investment products
2 In recent years, there has been an increase in the number of non-conventional products offered to retail investors as alternative investments. Many of these products have features that are similar to regulated capital markets products, but are structured to assign ownership of underlying physical assets to investors, thereby taking them outside the regulatory perimeter of the Securities and Futures Act (SFA2).
3 MAS proposes to extend to investors in these non-conventional products the current regulatory safeguards under the SFA for investors in capital markets. This is to ensure that structures which are in substance capital markets products are regulated as such. The two categories of non-conventional products that are the subject of this consultation are:
i. Buy-back arrangements involving the exchange of precious metals. In economic effect, such arrangements are equivalent to collateralised borrowing and will be regulated as “debentures” under the SFA.
ii. Schemes which have the elements of a regulated collective investment scheme but do not pool investors’ contributions. The proposal is to regulate such schemes as collective investment scheme under the SFA.
Complexity-risk ratings for investment products
4 An increasing number of investment products with more complex risk-return profiles are being offered to retail investors. Such products pose greater challenges to retail investors in deciding on investments that suit their level of understanding and risk appetite.
5 To help retail investors differentiate between simpler and more complex investment products, as well as gauge their riskiness, MAS proposes to introduce a complexity-risk framework for investment products. Under the proposed framework, all investment products sold to retail investors will be rated along two dimensions – complexity of structure and risk of loss of initial investment principal3. Product issuers will be required to disclose these ratings in product offering documents and marketing materials, along with information on the historical price volatility or credit rating of the product.
Option for accredited investors to benefit from full range of capital markets regulatory safeguards applicable to retail investors
6 MAS differentiates between retail and non-retail investors in its capital markets regulatory framework, with the full range of regulatory safeguards targeted at retail investors. Non-retail investors – accredited, institutional and expert investors – are considered to be better informed and/or better able to access resources to protect their interests, and hence require less regulatory protection. This approach is in line with the practice of other major financial centres.
7 The global financial crisis has led the international regulatory community to examine whether non-retail investors are necessarily better informed or require less regulatory protection than retail investors. In this respect, MAS proposes to provide AIs with a choice to benefit from the full range of capital markets regulatory safeguards that are applicable for retail investors. Under this proposal, AIs will by default be treated as retail investors unless they choose to “opt-in” to AI status. An AI who chooses to “opt-in” to AI status may be one who is willing to forgo the benefits of regulatory safeguards available to retail investors, in return for the ability to access a wider range of complex and risky investment products.
8 Mr Lee Boon Ngiap, Assistant Managing Director, Capital Markets, MAS, said, “Taken together, the three proposals will further safeguard investors’ interests and empower them to make better informed investment decisions.”
9 The public is invited to participate in the consultation exercise on the proposed changes over a six-week period from 21 July to 1 September 2014.
1 Under the SFA, an AI is defined to include the following persons:(a) an individual whose net personal assets exceed S$2 million, or whose income in the preceding 12 months is not less than S$300,000; (b) a corporation with net assets exceeding S$10 million, or whose sole business is to hold investments and the entire share capital of which is owned by one or more persons, each of whom is an accredited investor;(c) the trustee of a trust of which all property and rights of any kind whatsoever held on trust for the beneficiaries of the trust exceed S$10 million; (d) an entity (other than a corporation) with net assets exceeding S$10 million; or(e) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005 (Act 5 of 2005) in which each partner is an accredited investor.
2 Such products will consequently also fall outside the regulatory perimeter of the Financial Advisers Act.
3 The proposed framework leverages on a framework study report submitted to MAS by the Investment Management Association of Singapore (IMAS). IMAS had engaged and commissioned the Sim Kee Boon Institute for Financial Economics at Singapore Management University to develop a foundation framework to classify investment products according to their complexity and risk.