Opening Address by Mr Lim Cheng Khai at the Investment Management Association of Singapore’s 6th Regulatory / Legal Roundup Forum on 15 February 2019
Mr Rodney Lim, IMAS Regulatory Committee Chairman,
Ms Carmen Wee, IMAS CEO
Ladies and gentlemen,
1 Good afternoon, and thank you for inviting me back to the IMAS Regulatory Forum. This forum is in its sixth year, and IMAS has grown it into an annual highlight for its members to keep up to date with regulatory developments in the asset management sector globally. I am honoured to be here again to share MAS’ perspectives.
2 Looking back at the past year, the asset management industry continued to go through a period of rapid change. This was driven by regulatory developments, pressures on margins, changing investor preferences and increasing use of technology. The ongoing push for more transparency and disclosures across fund managers and funds have exerted a downward pressure on fees, especially in the US and Europe. Regulators have also begun to focus on the delivery of value to investors. These have in turn directed more interest to passive funds, and self-directed channels. The industry also had to contend with a volatile market in the second half of 2018, and some ensuing withdrawals as a result. These global trends have spurred cost-cutting and consolidation in the global asset management industry. But not all is gloom and doom. Fund houses are not sitting still. Many are repositioning themselves to leverage on technology, reduce inefficiencies, and deliver better value for money to investors.
Asia and Singapore Forging Ahead
3 Against this global backdrop, Asia Pacific and Singapore remain the bright spots for global investors and funds. Assets under management in Asia Pacific is projected to grow faster than any other region globally, from USD15 trillion in 2017 to almost USD30 trillion in 20251. Sitting in the heart of Asia Pacific, Singapore’s prospects as a leading pan-Asian fund management and domiciliation hub looks stronger than ever. In 2017, Singapore’s asset management industry continued to grow strongly year-on-year, at 19%, to reach SGD3.3 trillion assets under management2. This was on the back of strong net inflows and valuation gains. The number of fund management companies in Singapore have correspondingly increased from 715 in 2017 to over 800 in 2018, and we continue to see a healthy pipeline of new applicants. Looking forward, we expect the growth trajectory to continue, driven by increasing wealth pools in Asia from a growing middle class, pension reforms, and the expansion of public institutional investors such as sovereign wealth funds and pension funds3.
4 Singapore’s growth as a key asset management hub can be attributed to three key factors:
• Strong rule of law and political stability
• Robust regulatory and supervisory regime, and
• Pro-business and pro-innovation government policies
Today, I will focus on our regulatory and supervisory regime, which are directly within MAS’ remit. Indeed, many new applicants and existing managers in Singapore often cite the regulatory status by MAS as the hallmark of credibility. Our supervisory regime, which is rigorous yet facilitative of enterprise and innovation, underpins the growth of our asset management industry. And even as we ride on this growth story, we cannot slip up on our supervisory effectiveness, for the long term sustainability of the industry. With the increasing number of fund managers and assets under management, we have to constantly be at the top of our game to keep pace with the industry growth, and maintain our standing as a key asset management hub.
MAS’ Supervisory Approach for Fund Managers
5 With new entrants and business models, MAS’ supervision needs to be responsive to new or emerging risks. Furthermore, asset management is increasingly a globalised business. New rules and regulatory developments elsewhere will impact fund managers here, and shape the way they operate. All these demand that MAS regularly review and enhance our supervisory toolkit to cope with the expanding breadth and depth of our asset management industry, and monitor fund managers’ conduct and compliance with evolving rules and regulations.
6 Let me explain how MAS seeks to achieve this.
• Structure – First, we have organised ourselves to deepen our understanding of the sub-sectors in the asset management industry.
• Risk-based approach – Second, we have refined our risk-based approach, to shine the light on more corners of the industry.
• Supervisory tools – Next, we are leveraging on technology and data analytics to assist us in identifying trends, outliers and emerging risks.
• Industry engagement – Fourth, we aim to broaden and deepen our dialogue and engagement with the industry, and explain MAS’ regulatory expectations in a clear manner.
• Investor education – Last but not least, we are ramping up our investor education efforts to empower customers to make informed investment decisions.
I will elaborate on them in turn.
7 Today, we have supervision teams focusing on the various sub-sectors in the industry. This means that managers with similar focus or strategies, such as traditional, alternative or real estate, are grouped under the same team of supervisors. We also have a dedicated authorisation unit that reviews and processes applications for new fund management licence and registration. This has enabled us to build up a centre of excellence in understanding new business models and evaluating attendant risks, and to provide better stakeholder experience.
8 This structure, in place since 2017, has enabled MAS to hold deeper and more meaningful conversations with fund managers in the respective sub-sectors. It has also strengthened our ability to compare practices across managers with same or similar strategies, and identify trends or developments that could affect similar clusters of managers. With the set-up of the authorisation unit, MAS has improved the time-to-market for new entrants significantly, without compromising our admission standards and regulatory safeguards. As a result, MAS has averaged an end-to-end processing time of just over three months for new applications, and less for venture capital managers. At the same time, we have also turned away applications that do not meet our standards, to maintain the integrity of our financial system.
9 MAS adopts a risk-based approach to supervising the financial institutions that we regulate. In line with this, we have traditionally focused on larger financial institutions and those with retail reach. This is no different for the asset management sector. This risk-based approach has served us well, and remains sound. But what we have done is to redefine and sharpen what we mean by risk-based. Given the growing number of fund managers operating in Singapore, we need to be alert to potential risks or conduct issues that may not have a widespread impact if they had taken place in one or two small managers, but can cause significant investor harm if they occur across a large number of managers. And even if they are individually small, the numbers can add up in the 800-strong industry. Hence, MAS has complemented our risk-based assessment of individual fund managers with top-down identification of risk themes at the sector or industry level. This seeks to shine the spotlight on practices or managers that may have received less attention due to their smaller set-up in the past. And we do this through the aid of data analytics in our off-site supervision and on-site inspection.
10 As part of our off-site supervision, we have been applying data analytics to help us identify unusual trends or flag outliers in fund managers and funds, based on various metrics and risk measures. We also plan to use text analytics to help us analyse the financial statements and audit reports of fund managers more effectively and efficiently, and redirect supervisory resources to following up on unusual trends or anomalies.
11 The risk themes that we identify from the use of data analytics, and through our ongoing surveillance, also inform our inspection processes. In recent years, MAS has conducted more targeted thematic reviews, covering a larger number of fund managers that are selected based on the outcome of our analytics. And we draw from fund managers that might not have the largest assets under management, but nonetheless posed higher risks than other larger peers based on other risk metrics that we analysed. My colleagues also deploy data analytics tools to help us narrow down specific transactions for review, when they are on-site for inspections.
The Singapore Fund Ecosystem
12 Turning to the ecosystem, our effort to maintain our status as a sound and reputable asset management hub cannot succeed without the most important stakeholders – fund managers. You are the first line to maintain the integrity of the industry, for the continuing growth story. In line with this, MAS aims to foster a well-informed industry that understands the regulatory environment and expectations. But with over 800 managers and growing, it would be near impossible to do this one-to-one, through our usual supervisory touchpoints or inspections. We have hence organised industry-wide engagement sessions for fund managers for the first time last year, to share MAS’ perspectives on regulatory issues and feedback that we have regularly received in the course of our supervision. In turn, we found your perspectives useful and constructive. We were encouraged by the turnout, and the positive feedback after the sessions. We will continue with the outreach this year, and we look forward to another exchange of views with the industry soon.
13 Fund managers, on your part, can also contribute to an ecosystem that inspires confidence in consumers. Directors, senior executives and compliance personnel in fund managers have a key part to play in establishing and influencing desirable behaviour and conduct. There are statutory obligations for directors and senior management of fund managers to exercise effective oversight of the manager’s operations, and to ensure that the company remains compliant with rules and regulations. MAS has taken regulatory actions against financial institutions and fund managers which breached our rules or committed serious misconduct. In recent years, we have also placed more emphasis on individual accountability.
14 We have taken actions against directors or chief executive officers of fund managers, for failure to discharge their duties effectively – for repeated breaches of rules and regulations despite prior reminders and warnings, or furnishing materially incomplete or wrong information that could affect our regulatory decisions. We may also publish the enforcement actions, in order to deter other fund managers and financial institutions from committing similar transgressions. This serves to set signposts on MAS’ expectations, raise awareness in the industry on unacceptable behaviour, and signal to investors that MAS is serious about taking errant individuals to task. But rest assured that MAS exercises these powers fairly and judiciously. We do not mete out statutory punishments mechanically. We will do so only when we have assessed that the misconduct is serious, and the senior personnel in question is directly culpable. By and large, most fund managers that we interact with take their statutory obligations seriously, and these enforcement actions are thankfully far and few. Nonetheless, MAS will not permit a few bad apples to tar the entire barrel, and will continue to respond firmly against misconduct.
15 Another key stakeholder that contribute to the resilience and success of our asset management industry is the investors. Consumer confidence in the integrity of our market, and in understanding investment risks, is a key driver of maintaining our hub status. Investment products that are unregulated, or esoteric or complex for most retail investors to understand, such as those involving crypto assets, can result in expectation gaps and losses to many who simply follow the fad. This can in turn dent the overall investor confidence and the reputation that the industry has built up over the years. To foster a mature investor base that is discerning, MAS has been focusing on financial education efforts, to empower consumers to look after their own financial security and set sound investment goals.
16 In particular, we have ongoing efforts to encourage investors to deal only with regulated fund managers and financial institutions. Under MoneySense, which is the national financial education initiative, investors are taught the importance of understanding product risks, fees and charges that may be incurred, and considering maximum possible loss when making investment decisions. MoneySense also organises local events for the World Investor Week annually, in conjunction with the International Organisation of Securities Commissions’ World Investor Week. It comprises a series of interactive town hall sessions where industry professionals address investment-related questions from members of the public. In addition, MoneySense runs regular My Money Public Seminars and My Money @ Campus Seminars to reach out to students at the Institutes of Higher Learning. IMAS members have frequently supported MoneySense on these seminars, and my colleagues and I would like to thank IMAS for your support.
Staying Attuned to Global Developments
17 I have spoken a fair bit about MAS’ ongoing effort to maintain the integrity and confidence in our fund management industry. But in today’s context, fund managers also need to keep pace with overseas regulations and developments. And this is the reason why you are here today – to obtain deeper insights about regulatory developments elsewhere from the experts that IMAS has invited. Some of these directly affect the capital markets, like MiFID II4. Others are not limited to only the financial services sector, such as the General Data Protection Regulation (“GDPR”) in the EU. In response to MiFID II rules, many fund managers have absorbed investment research costs, adding further pressure to margins. The extraterritorial reach of the GDPR is also increasing compliance costs for Asian fund managers that serve EU citizens. And as post-crisis regulatory reforms continue on, financial firms have to come to terms next with the benchmark reforms, as the deadline draws nearer, and the challenges of the implementation loom larger.
18 In addition to regulations, efforts by central banks to encourage good market practices, such as those promulgated in the FX Global Code5 (“the Code”), has also received traction in Asia. MAS recognises the value and applicability of the Code to wholesale market participants in the FX market, and we have been working with the Singapore Foreign Exchange Market Committee to encourage market participants here – both buy-side and sell-side – to adopt the Code. The buy-side has a significant role to play in upholding the integrity of the FX market, and the Code helps in this regard. The Code provides participants with the knowledge of what is good practice. For example, there is guidance on what type of market colour can be provided and shared, and what type of disclosures should be provided to counterparties. We have received feedback from buy-side participants that have adopted the Code that it has provided them with a useful opportunity to benchmark their internal processes against global standards. We have already seen strong support from buy-side associations, including IMAS, and we hope to encourage broader adoption within the buy-side community in Singapore. MAS and our industry partners will step up efforts to actively engage the buy-side on the Code.
19 These global developments that I have covered are not exhaustive, and not intended to be. And you will surely hear more from the speakers after me, in a lot more relevance and depth from their practitioners’ perspective. In order not to stand between you and them, let me conclude.
• Asia and Singapore, with the growing wealth and demographic profiles, remain the bright spots for the asset management industry, even as we enter 2019 on an uncertain footing.
• We continue to see strong interest from applicants who are attracted to our value proposition to invest in the region through Singapore.
• Our growth as an asset management hub will continue to be underpinned by our progressive regulations, effective supervision, and open engagement with the industry.
• And with this constructive and collaborative relationship with the industry to maintain the soundness and integrity of our asset management sector, we are optimistic that you will weather the uncertainty and pressures with greater resilience than many of your peers in other parts of the world.
20 With that, I wish you a fruitful afternoon. Thank you.
4 MiFID II is the updated version of the Markets in Financial Instruments Directive (MiFID), the legislative framework instituted by the European Union to regulate financial markets and offer greater protection to investors. MiFID II seeks to increase transparency of markets, shift trading towards more structured market places, lower the cost of market data, improve best execution, promote orderly trading behaviour within markets and encourage more explicit costs of trading and investing.
5 The Code was launched in May 2017 by the Bank for International Settlements as a single, global code of conduct for the wholesale foreign exchange (FX) market. It was developed over two years through a public-private partnership between central banks and key FX market participants, across both buy-side and sell-side.
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