Published Date: 30 August 2001

"Regulating a Progressive Capital Market"

Speech by Ms Yeo Lian Sim, Deputy Managing Director, Monetary Authority of Singapore, at the 9th Singapore Conference on International Business Law

Date: 30 Aug 2001

Good afternoon.  Thank you for inviting me to speak at your conference.  In addressing my subject, 'Regulating a Progressive Capital Market', I will focus on the principles that underpin Singapore's regulations and share some thoughts on how changing capital markets are affecting market regulation.

The changing environment

2   The fundamental objective of any capital market is to enable issuers to raise funds.  Regulation of the market has traditionally been to ensure fair play between issuers and investors, between intermediaries and principals, and to maintain systemic soundness.  But capital markets are changing...

3   Capital markets have become more and more sophisticated.  The intricacies of fundraising and fund structures have transcended 'the old school tie'.  Market demands go beyond a physical space to raise funds for an immediate hinterland.  National barriers are falling.  Institutions are no longer confined to domestic markets as international rating agencies facilitate access to funds abroad.  Intermediaries compete on the basis of similar global reach.  Investors compete for attractive investments and may reach around the world 'at the click of a mouse'.  Hitherto separate pools of liquidity have either merged or become intimately linked by cross-border transactions.  Increasingly, we operate in a single, almost homogenous, global market. 

4   Within the industry, competition escalates continually.  Cross selling has blurred sector boundaries, while financial innovation has blurred product lines.  In some countries, securities firms offer cash management services, traditionally a banking function.  Banks offer insurance in their product range.  Insurance companies cover financial risks, which were once hedged with investment banks.  Industry consolidation accelerates the whole process.

5   In this environment, financial centres will increasingly be distinguished by the value-added services they offer.  Ancillary services are moving from the periphery towards the core of the competitive armory.  Investment banking, corporate advisory, project finance and broking services form the building blocks of capital markets.  However, the overlay of legal, research, accounting and publication is becoming essential.  The defining factor which differentiates industry participants and geographical locations remains the quality of professional service.

6   The new environment is no less demanding for regulators.  Like industry players, regulators must consider developments taking place elsewhere.  In particular, regulations must be fair without being onerous or business will emigrate.  Increased emphasis on competitive costs, time to market and readiness to innovate compel regulators to reappraise their role and function.

7   The regulatory objective remains unchanged: to ensure systemic soundness and investor protection.  At the same time, capital market legislation must also be user friendly and flexible enough to accommodate new business models.  This requires clarity, transparency and a fine touch in calibrating regulatory requirements.  In certain circumstances, regulators may be required to foster market development and to serve as the catalyst for innovation, such as for infrastructure developments involving hefty investment and long gestation periods.

Shift in Singapore's regulatory approach

8   All this amounts to a shift in our regulatory approach.  We add economic efficiency and market development to the original objectives of investor protection and systemic stability.  Let me illustrate this with what is being done in Singapore.

9   In a few months, the proposed Securities and Futures Act ('SF Act') will become the cornerstone of Singapore's capital market architecture.  Complementing the SF Act, the Financial Advisors Act will cover the provision of investment advice and the sale of collective investment products across all financial institutions, from banks to life insurance brokers and agents to independent financial advisors.  In addition, a common code of conduct and business practices under the FA Act, will set minimum standards for investment advisers. 

10   The SF Act spells out the regulatory framework for the capital market in a single piece of legislation.  It replaces the existing Securities Industry Act, Futures Trading Act and provisions in the Companies Act relating to capital raising.  The SF Act seeks to cover, in a single rulebook, most of the capital market activities undertaken in Singapore for the convenience of market participants.

11   The SF Act introduces a single licensing regime covering the various activities in securities and futures, fund management and corporate finance advice.  Instead of trying to fit the range of capital market services into two basic classes of license, i.e. 'dealing' and 'investment advice', the new licensing framework is designed to accommodate individual slices of the capital market value chain.  This will enhance competition and reduce compliance cost.  

12  To complement modular licensing of intermediaries, MAS intends to introduce a risk based capital framework, beginning with SGX member firms.  Stockbrokers need only maintain capital sufficient to the business risks they undertake, scaled to their individual needs.

13   All this sounds well and good.  How will it work for industry participants?  A typical stockbroker intermediates for clients, provides margin financing and occasionally sub-underwrites an IPO.  To do business, he needs some capital to cover operating risk.  If clients are tardy with payments he adds capital to cover counterparty risk, not otherwise.  At IPO time, there's additional risk and capital for the duration.  If he decides to venture into M&A, a new license is not needed.  He only needs additional capital to cover the risk taken and compliance with regulations such as proper disclosure and segregation for conflict of interest situations.  In short, regulatory procedures are simplified.  Finance-wise, the upshot is 'to each his own business risk'.

14   As regulators, we recognize that to promote development and to allow selection of efficient business models, we need a framework of clear and transparent rules, implemented with flexibility.  There will be a trade-off between clarity and flexibility.  The obvious route is to articulate a higher level of principles, which are more generally applicable.  There is then risk that the devil will have escaped to the detail of the business plan.  Market participants and MAS may still engage in as many lively discussions as before, but we believe the supervision will become more appropriately customized to particular needs.  Where necessary, we will issue circulars or interpretation notes to lend greater certainty to the process.  Legal professionals will have a key role in rendering sound interpretations of the law and its application.

The advent of cross-border markets

15   Connectivity to overseas markets no longer requires manual intervention by broker-dealers and can as easily be provided by passive electronic networks (ECNs).  Time honored regulatory concepts of 'operating a securities or futures market' and 'market intermediaries' have been blurred by Alternative Trading Systems.

16   We are responding to this phenomenon with the introduction of the framework for Recognised Trading System Providers ('ReTS') within the SF Act.  This regime allows overseas markets to place trading terminals in Singapore, widening investor choice with cost efficiency.  Exchanges offering trading access will put Singapore investors on an even footing with their local members.  Such ReTs will reach not just stockbrokers, but also other financial institutions licensed by MAS.  Individual investors will still have the protection of dealing with intermediaries licensed in Singapore.  With ReTs, the operating environment for fund management will improve and expertise will increase.

Newly empowered investors

17   Investors in Singapore's capital market have also been making the transition from a 'guaranteed sound investments' mindset to a disclosure-based regime.  To avoid imposing "the regulator's view", MAS has eased up on qualitative judgment of what was perceived to be riskier products.  This allows the investor or financial adviser to assess and recommend investments and credits.  Investment advisers versed in financial planning will increasingly assist investors on their portfolio needs.  Investors in turn, must now sift through the information, deduce what is relevant and make prudent investment decisions.

18   The Financial Advisers Act ('FA Act') will create a new class of licensed financial advisers.  These professionals will not only advise on investments, but also sell unit trusts and their close substitutes, such as investment linked life insurance.  The Code of Conduct, being developed to govern the business practice of licensees, will include such matters as the suitability of investment for each customer's risk profile and disclosure of commissions as well as total sales cost.  Other institutions who are licensed by MAS and also provide investment advice and sell unit trusts, such as banks, fund managers and prospectively, insurance companies, will be exempt from FA licensing under the FA Act but will have to observe the same code of best practices.  This, incidentally, represents a small but significant step towards integrated supervision of the financial sector as a whole.

The role of market professionals

19   Market professionals are important and will become more important in setting the standards for, and influencing the reputation of, particular capital markets.  A strong core of professionals with the requisite expertise, skills and integrity can do much to uphold sound practices and raise standards to 'global best'.  Investment bankers, accountants and lawyers, for example, will have the opportunity to show their skills under the new SF Act.

20   Let me elaborate.  The regime for prospectus registration in the SF Act provides a minimum period of 14 days between lodgement and registration.  During that period, the prospectus will be exposed for public scrutiny and comment, e.g. on the Internet.  Prospectuses will be registered on the basis of full disclosures.  Rejection will only be for non-compliance with statutory disclosure requirements or on public interest grounds.  The version, which is first lodged with MAS, must therefore be good enough to stand scrutiny.  It cannot be a mere draft but must form the basis on which the issue will be marketed.  The exposure period will allow professionals and investors alike to examine the document, with issuers and their advisers being accountable for ensuring the veracity of the disclosures.  New technologies, for example, must be carefully and accurately described.  Advisers, who deliver quality prospectuses requiring little amendment or supplementary information, will be valued and sought after.

21   In professional service, quality counts.  Providing objective advice, putting the clients' interests first and properly managing conflicts of interest are tests of quality more important than producing a good prospectus.  Conflict-of-interest situations have increased with professional service-entities integrating up and down-stream.  That professional entities should seek to offer a wider suite of services is neither undesirable nor unwelcome.  None is precluded from offering additional value-added.  Nevertheless, ethical best practice emphasizes establishing all necessary segregation measures and the proper discharge of fiduciary duties.

22   What is at stake is the integrity and ethical standard of the professional, and indirectly, of the financial centre.  This matter is not for legislation.  Rules of business conduct work best when administered by industry associations, who are best placed to assess compliance and to discipline.  MAS could be a facilitator such as in the formulation of the code of conduct for Financial Advisers, which I mentioned earlier.  Ultimately, industry must take ownership of the process and self-regulate.

The need for integrated world-class infrastructure

23   An important determinant of any financial centre's competitive edge is the sanctity and soundness of its infrastructure.  Infrastructure has come under increasing focus because financial centers compete through the use of the latest know-how from trading straight through to settlements, custody and performance reports.

24   Straight Through Processing ('STP') has been described as the 'Holy Grail' of capital market automation.  STP has the potential to accelerate the flow of cross-border trades, reduce the number of settlement fails and lower the risks and costs of trading and settlement.  Efforts-to-date in Europe and North America show that STP will affect custodians, investment managers and broker-dealers.  It is a significant next step in improving the trading, clearing and settlement infrastructure. 

25   This is an area where regulators can be useful as facilitator or catalyst.  They must of course be involved to keep regulations up to date.  Also, forging consensus over new system parameters may be easier when regulators play a part, as there is often little financial payback.  The Central Depository, CDP, is implementing a central pre-matching engine for settling trades, which will pave the way for STP in the back-office.  It is a significant re-engineering of the settlement infrastructure and will impact all market participants.


26   I've outlined how we read the environment and what we're doing.  However, the success of a capital market cannot be assured by clear and transparent regulations, responsive to the environment and flexibly implemented by an enlightened regulator.  Neither does success depend on world-class infrastructure and connectivity to other capital markets.  Nor does it hinge on excellent professional services? such as investment banking, broking and fund management together with so-called peripheral services like legal, accounting, research and publishing.  All these have to come together.  The success of Singapore's capital market, over the long term, depends on the interaction of all these factors and more.  I leave you to consider this. 

27   Thank you.