Published Date: 23 May 2018

"Regulator's Perspective - The Evolving Landscape" - Speech by Ms Koh Hong Eng, Executive Director, Monetary Authority of Singapore, at Singapore Exchange Regulation's Regulatory Symposium on 23 May 2018

Professor Tan, ladies and gentlemen,

1   Good morning. It is my pleasure to join you today. The theme of this symposium is germane as technological innovations and new business models continue to transform the financial industry.

2   I would like to share some thoughts in two areas – implications of the digital age for the industry, and our approach to regulation in the fast evolving landscape. 

Implications of the digital age

3   A common refrain we hear is that the broking industry is no longer what it used to be. It is sometimes described as a race to the bottom with margins continually shaved in this borderless world. What is clear, in my view, is that the industry is on the cusp of change – change which is driven by rapid advances in technology, and a more discerning and demanding investing public.  Against this backdrop, I would like to share some thoughts on how industry players can stay relevant and thrive.

Embracing technology

4   Investors’ expectations of how they interact with financial institutions, and the type of financial products and services offered, have changed considerably in recent years. Much of this change is driven by new digital technologies. It suffices to say that investors are expecting and demanding more. They are seeking a customised, interactive and seamless user experience, including in the manner in which they trade. For instance, investors are probably expecting any digital interface offered by their financial institution or broker to be streamlined, fast and intuitive to use, and compatible on different digital or mobile devices. Investors are also more likely to distinguish one financial firm from another based on the value-added services provided by the different firms. 

5   On their end, financial institutions, especially incumbent players, must be able to adapt and meet investors’ changing needs and expectations. This applies equally to the broking sector. Broking firms need to embrace and consider how to deploy technology more effectively, such as through the use of data analytics, to understand their customers, offer more targeted solutions and build longer-term relationships. One may posit that if the broking industry is able to transcend the transactional nature of the execution business, it may be in a much better position to ride out the current or any future wave of changes. 

6   Technology should also be harnessed to reap greater efficiencies and manage costs, and for smarter risk monitoring and management within the firm. Being more efficient and smarter may allow the firm to distinguish itself in areas where others have not. Digitisation should thus be accompanied by a review and streamlining of existing processes and procedures. The full benefits of technology will not be realised by automating an inefficient or ineffective process or control.    

Reinforcing innovation

7   Technology has brought about change. However, I think it is important to remember that technology is at best an enabler of change. The kind of changes which emerge in practice depends on the decisions made by different firms and by each and every one of you.     

8   We have seen new business models emerge as new players decide to fulfil existing investor needs in a different way or attempt to meet underserved or unarticulated investor needs. For instance, securities-based crowdfunding has allowed retail investors to gain direct exposure to the private fundraising market for small and medium enterprises, while digital advisory services have the potential to improve investors’ access to low-cost financial advice. How might these affect the traditional securities broking firm offering access only to the public markets on the one hand, and financial advice on the other?         

9   In the derivatives market, there was rapid futurisation of OTC swaps in response to regulatory changes in the US a few years ago. Entities such as inter-dealer brokers which were used to operating in the OTC space had to react quickly and be accustomed to the futures market to continue serving their customers. More recently, the effects of implementing MIFID II in Europe are also felt in Asia. Some of the MIFID II changes have particular implications for the provision and pricing of research by Asian brokers to their European customers.   

10   The ability to adapt and innovate is becoming a necessity. It is therefore critical that broking firms develop and continuously reinforce a culture of innovation, so that they can anticipate and respond to externalities more proactively and effectively. A mindset of innovation and inquiry should pervade across the organisation, starting from the board and senior management setting a clear direction from the top. Innovation, whether in respect of products, services or processes, will enable broking firms to remain a relevant part of the financial services landscape.      

Strengthening trust

11   The use of new technologies or offering of new products, services and processes is not without risks to investors. As firms introduce new technologies and solutions, they should devote commensurate efforts to address any emerging issues and risks. For instance, firms should educate investors on the use of the new platform, or the features and limitations of the new product, or institute controls to safeguard confidential customer information. The provision of financial services, including broking, is premised on trust between financial institutions and investors. This is all the more so whenever something new is offered to investors. 

12   We do not have to look too far back for cases where institutions have lost investors’ confidence due to glitches in the roll-out of new products or systems, or other bad behaviour. Maintaining and strengthening trust with investors is thus pivotal. Firms should treat this as an organisational priority. The board and senior management should set the right tone, and establish a proper governance and controls arrangement. They should also “walk the talk” to show the rest of the organisation that they are serious about dealing fairly and ethically with customers. The 2008 financial crisis and other major events in recent years, have shown that a firm’s reputation and investors’ trust in it, once dented is difficult to rebuild.                   

Regulatory approach

13   I have shared my thoughts on the state of the industry. Let me now turn to how we as regulators can navigate the new landscape. 

14   As a regulator, MAS has a role to play in building an environment which supports innovation, yet taking care to ensure that investors’ interests are protected. MAS has and will continue to take a risk-proportionate approach to regulation. We will continue to calibrate regulatory requirements which are commensurate with the risks to be addressed.    
Allowing experimentation in a safe way

15   MAS’ risk-proportionate approach can be seen in the regulatory sandbox, where firms can experiment their innovation within a confined environment. Within the sandbox, firms are able to experiment with new or untested business models and financial solutions in a real world context. The potential risks and consequences of failure are limited through parameters such as a restriction on the number of customers that the firm may serve during the period of the sandbox. Considering the limited risk and impact of failure, MAS is prepared to relax certain regulatory requirements which the firm would otherwise be subject to.

16   There are however some requirements which will likely be maintained. Examples are the requirements on preventing money laundering and, closer to the capital markets, on segregation of customers’ moneys and assets. The requirements relaxed or imposed will depend on the risks posed by the proposed innovation in each case.      

17   At this time, I would like to pause and make an observation. None of the entities which are operating or have graduated from the sandbox is a broking firm. To be clear, you do not have to be in the sandbox to be considered innovative, and not all innovations warrant the sandbox treatment. Still, it cannot be that the broking business as it exists today is perfect. Allow me to leave you with this question – aren’t there any areas where the industry can innovate and do better in?           
Keeping regulations risk-proportionate and forward-looking

18   Other than supporting experimentation, MAS strives to keep pace with market developments and ensure that regulatory requirements remain facilitative while addressing key risks. Let me provide some illustrations. For example, when allowing retail investors to participate in securities-based crowdfunding, MAS also strengthened the risk disclosure requirements to warn investors that crowdfunding investments are high-risk and investors should not invest unless they can afford to lose all their investments. Hearteningly, the industry was supportive of the move.    

19   We are also strengthening the requirements for the offer of margined OTC derivatives to retail investors. This takes into account that OTC derivatives are more complex and difficult for retail investors to understand. Trading on margin also amplifies the magnitude of losses which may be suffered by investors during adverse market movements. There will thus be higher margin requirements for trading in CFDs on foreign exchange and leveraged foreign exchange. The margin requirements for OTC derivatives based on other underlying assets will remain unchanged. We are also modifying the rules for protection of customers’ moneys and assets to ring-fence retail customers’ moneys and assets in respect of OTC margined derivatives from those customers’ moneys and assets for other products. The revised requirements are targeted to come into effect in the later part of the year.  

20   We have also reviewed some of the existing requirements and made adjustments, where appropriate, in response to feedback from industry. A case in point, which may be close to some of your hearts, is that we eased the requirements under the Financial Advisers Act to enable trading representatives of broking firms to provide general financial advice on simple listed products (also known as listed Excluded Investment Products) without taking into account the specific circumstances of the investor, subject to some safeguards. Feedback from respondents showed that the change was a significant step in addressing their concerns as such products account for about 98% of the securities traded on SGX.

21   We will continue to work in tandem with the industry as we fine-tune and right-size regulations to be fit for purpose, for traditional as well as new business models.                  


22   The themes that I have touched on – harnessing technology, reinforcing innovation, strengthening trust with investors and risk-proportionate regulation are not foreign to you. However, I believe that they deserve our renewed attention and have given you some food for thought.

23   Charles Dickens began A Tale of Two Cities with “It was the best of times, it was the worst of times”. I would like end my remarks with this quote as I think that it is quite apt today. We can continue to reminisce about the past, or look forward, transform and emerge more resilient. I will go with the latter and I hope the industry will too. 

24   Thank you.