“Responding to Global Trends, Returning to Fundamentals” – Keynote Address by Mr Tan Keng Heng, Executive Director, Monetary Authority of Singapore, at the Investment Management Association of Singapore’s 8th Regulatory Forum on 28 January 2022
Ms Fann Teh, IMAS Regulatory Committee Chair,
Members of IMAS,
Ladies and gentlemen
Good afternoon and thank you for having me back at this annual Regulatory Forum as IMAS turns 25 this year.
When we last met, I noted that the asset management industry was in a strong position to build back better despite the challenges posed by the COVID-19 pandemic. Let us look at where things stand this time round:
• Globally, asset under management (AUM) grew by 11% to reach US$103 trillion in 2020.
• By 2025, global AUM is projected to grow to around US$140 trillion.
In Singapore, our asset managers have also weathered the challenges well, with AUM growth exceeding that of their global counterparts.
• Our overall AUM grew by 17% in 2020, with the traditional sector achieving a sustained growth of 15%.
• Singapore continues to serve as the Global-Asia Pacific gateway for asset managers and investors, with 78% of AUM sourced from outside Singapore, and 68% of AUM invested in Asia Pacific in 2020.
• Beyond headline numbers, we also saw encouraging signs for continued growth in 2021, with global and regional managers anchoring their investment teams in Singapore and existing players expanding their capabilities here.
I had also shared previously that the ongoing pandemic was not the only global challenge that would have a profound impact on the industry. As we look into the future for the new year, I would like to speak about two global trends that are reshaping our asset management landscape of tomorrow.
Advancing Green Finance, Managing Environmental Risk
First, as the transition to a greener and more sustainable future continues to gain in momentum, I am heartened by the industry’s positive efforts toward sustainable investment.
Let me highlight some key developments in three areas:
One, asset managers have increasingly embraced the vital role that they play in facilitating green finance and sustainable investing.
• We are seeing more and more managers stepping up to meet their clients’ needs for ‘green’ investment and channel capital toward sustainable businesses. For instance:
Several managers have set up or announced to set up sustainability hubs in Singapore to accelerate their green finance agenda in Asia-Pacific.
o More have made public commitments toward building a greener economy, such as signing the UN Principles for Responsible Investing, with some setting measurable milestones to verify their progress toward meeting those commitments.
o Many more have also participated in collaborative platforms such as the Climate Action 100+ and the Institutional Investors Group on Climate Change, to spur investees toward reducing their environmental footprint in the real economy.
Two, asset managers are making inroads in building up their sustainable investing capabilities and environmental risk management practices.
• As the industry gears up for the implementation of MAS’ Guidelines on Environmental Risk Management (EnRM) in June this year, we have engaged and found our managers making tangible progress in their EnRM practices, which include for instance:
o Developing internal risk assessment methodology to quantitatively rate the environmental risks posed by investee companies;
o Incorporating environmental risk management-related key performance indicators in the remuneration structures of senior management; and
o Conducting scenario analysis to enhance portfolio resilience to environmental risks, and applying the results to prioritise the engagement of investee companies.
• Many asset managers have also shared that they are making sustainability-related disclosures, ranging from standalone corporate sustainability reports to bilateral client reporting. This will benefit investors by enhancing market discipline and addressing climate-related risks and opportunities.
Three, IMAS remains an important partner and enabler in the industry’s journey to support sustainable investment and to mainstream environmental risk management.
• The green agenda requires an industry-wide effort and IMAS has been and will need to continue playing an integral role to that effect.
o Of note is IMAS’ contributions in co-creating the EnRM Guidelines and educating managers on sustainable investment best practices.
o Another recent example is the roll-out of IMAS’ FundSingapore.com Sustainability Profiler, launched in conjunction with Amundi, which aims to bridge the gap of investors’ knowledge on ESG investing and allows investors to explore their ESG and sustainability preferences.
As I commend the industry for advancing sustainability considerations in your investment processes, let me caution that greenwashing poses a real and present danger to our collective efforts to date and ambitions in the long run.
• There is no room for complacency as further progress will be difficult without investor trust and market credibility.
• This has to be earned through concrete actions by asset managers:
o Backing up your green credentials with meaningful changes to investment strategies and risk management practices; and
o Meeting or demonstrating progress in honouring your sustainability commitments to investors.
On our part, MAS is fully committed to working with the industry to combat greenwashing, at both the fund and firm level.
• At the fund level, we intend to introduce ESG-specific requirements on fund naming, prospectus disclosures and periodic reporting disclosures.
o This will set out our supervisory expectations for retail ESG funds and help mitigate the risk of greenwashing in fund offer documents.
o We have earlier shared our proposals with IMAS for comment and we look forward to receiving the industry’s feedback.
• At the firm level, we expect asset managers to “walk the talk” and ensure that their sustainability commitments reflect actual capabilities and practices on the ground.
o Managers of ESG funds in particular should consider implementing mechanisms to monitor compliance with stated ESG investment objectives, including exposure limits for the funds sold.
We will be sharing more good practices in greater detail with the release of our EnRM Information Paper in the coming months to help asset managers deepen their EnRM capabilities, such as:
• Having clear quantitative targets to shape and steer the manager’s strategy and business plan; and
• Having a more consistent application of investee ESG risk assessments across the entire investment portfolio, and greater client engagement in the portfolio risk management process.
To promote greater accountability and meet investor needs, we also intend to mandate asset managers to make climate-related financial disclosures.
• We will balance the benefits of such disclosures and the associated compliance costs by considering applying the mandatory disclosure requirements to the larger discretionary asset managers.
• We will also help managers to meet globally accepted disclosure standards by aligning our requirements with those that are being developed by, for example, the International Sustainability Standards Board.
• The public consultation will be published in the upcoming period and I hope asset managers will continue to engage us and provide your valuable feedback.
Embracing Digitalisation, Harnessing Technology
Moving to the second global trend – while technological advances have often shaped financial services, the emergence of COVID-19 has provided fertile ground for the continuing growth of digitalisation and a technology-driven financial industry.
Financial institutions that embrace digital transformation and innovation will be better placed to capitalise on the gradual recovery and seize new opportunities in the post-pandemic world.
• When the world migrated its operations and workforce to a virtual environment due to the pandemic, those who had earlier invested in digitalising their business processes were able to pivot more quickly with minimal disruption.
• According to a global survey of C-suite executives and senior managers across industries:
o Companies have accelerated the digitalisation of their customer interactions and internal operations by three to four years due to the pandemic.
o The share of digital or digitally enabled products and services have also been accelerated by seven years.
• Technology is rapidly re-shaping the provision of financial services, with:
o Online securities crowdfunding platforms intermediating share placements and disintermediating stock exchanges and underwriters;
o Peer-to-peer lending platforms intermediating loans and disintermediating banks and lenders; and
o Robo advisers providing digital advice and disintermediating traditional brick and mortar investment advisers.
• These are just some examples of the potential of digital innovation to disrupt financial markets and meet the evolving needs of clients and investors.
New players are not the only ones making headway in harnessing new technologies – incumbents are rising to the digitalisation challenge to provide differentiated customer experience, increase operational efficiency and manage risk more effectively.
• Take for example the growing use of artificial intelligence and machine learning (AIML) in asset management globally, such as:
o AI-based trading algorithms to devise novel trading signals and execute trades with lower transaction costs; as well as
o AIML-augmented risk management and compliance processes in areas such as credit risk monitoring, fraud detection and management of risks related to money laundering and financing of terrorism.
In Singapore, the take-up of digital advisory services is fast gaining popularity among the growing segment of technology-savvy and self-directed investors as they seek lower cost investment options.
• This has resulted in a marked growth in the provision of digital advisory services in Singapore over recent years, with AUM tripling from slightly over S$0.5 billion in 2019 to more than S$2 billion in 2020.
• While AIML deployment is relatively nascent among asset managers here, we are seeing a growing application of AIML in the areas of asset allocation and portfolio construction, support services and customer engagement.
To stay ahead of the game, it is crucial for asset managers to keep a keen eye on these developments and innovate alongside the new technologies.
• On this note, I would like to applaud IMAS’ continuing efforts in fostering digital transformation in our asset management industry, through various initiatives such as the IMAS Digital Summit, the Digital Accelerator Programme, and the FinTech Jam series.
At the same time, I would add that the increasing use of innovative technology to digitalise and deliver financial services do not come without risks.
• It is important that asset managers recognise and mitigate the attendant risks such as those in the areas of cyber resilience and data security.
• Specifically, the misuse of AI and data analytics is an example of the new risks that may arise from the adoption of AI and data analytics on an increasing scale.
o MAS had previously collaborated with industry partners to develop a set of principles known as the FEAT Principles.
o Asset managers should take guidance from these principles on the responsible use of AI and data analytics in their business activities.
Fundamentals Remain Unchanged Amidst Global Trends
Before I end, as we look forward to the longstanding tradition of ushering in the Lunar New Year in Singapore, let me quickly look back to the time-tested tradition of maintaining sound fundamentals in governance and risk management.
I will touch briefly on three of such fundamentals that asset managers should not lose sight of even as the industry repositions itself in the wake of the global trends I just spoke about.
Board and Senior Management Oversight and Governance
Firstly, good governance and strong oversight by the board of directors and senior management are fundamental to responding to both existing and emerging risks, especially in a fast-changing environment.
• Regulation and supervision cannot replace the pivotal role of the board and senior management in ensuring asset managers do what is right and in the best interests of their investors, and not just what is legally required.
• We have found that managers who do so, would typically have boards and senior management who took full responsibility for putting in place strong risk culture and robust processes and controls as set out in MAS’ Guidelines on Risk Management Practices.
MAS will continue to support asset managers in uplifting governance, risk management and compliance standards in the industry.
• Since end 2020, we have published and updated several compliance toolkits for asset managers.
• We have also organised industry-wide engagement sessions over the years to clarify regulatory expectations and share good practices to the industry.
• We hope these initiatives have been useful, and we welcome feedback on how MAS can further collaborate with and support asset managers in ensuring that their business activities and risks are well managed.
Technology Risk Management
Secondly, to fully harness technological innovation in providing greater value to investors while maintaining confidence in the industry, asset managers must get the fundamentals of technology risk management right.
• According to a global survey among senior investment management executives, while 54% of the respondents indicated that their firms are accelerating digital transformation of their business, only 19% said that they have also updated their governance and reporting mechanisms.
• Given emerging technologies and shifts in the cyber threat landscape, it cannot be sufficiently emphasised that asset managers must get the basics right by putting in place appropriate governance structures and processes, effective technology risk practices, secure IT systems, and effective management of customer data.
In ensuring that technology and cyber security practices are in line with the revised Technology Risk Management Guidelines that MAS issued last year, asset managers should bear two things in mind:
• One, the board of directors and senior management should possess the relevant knowledge to understand and manage technology risks.
o This is especially crucial when asset managers seek to leverage on emerging technologies, where the associated risks may change as the technology matures.
• Two, cyber resilience is the shared responsibility of everyone, not just the board, senior management or IT specialists of the asset manager.
o MAS issued the Notice on Cyber Hygiene in 2019 to raise cyber security standards and I would strongly encourage all managers to make use of the Notice to implement cyber security best practices.
Liquidity Risk Management
Lastly, rapidly changing market conditions call for strong fundamentals in managing fund liquidity risks and meeting redemption requests in a fair, orderly and transparent manner.
• While asset managers have thus far met redemption requests in a timely manner, the incidence of significant redemptions reported to MAS has not abated even as we entered the second year of the pandemic in 2021.
• If past experience is any guide, managers need to remain ready to meet their obligations to investors under varying conditions so as to anchor market confidence in the industry during times of market stress.
Against this backdrop, I am pleased to note that asset managers have generally put in place appropriate liquidity risk management framework and practices relative to their fund risk and investor profiles.
• For instance, our liquidity risk management and valuation thematic inspection has found that:
o Relevant liquidity risk management tools were implemented by most managers who were inspected to better manage their funds’ liquidity risk.
o Some managers have also implemented supplemental measures, such as obtaining direct feedback from portfolio managers and traders on actual observed trading volume and transaction costs, so as to better assess fund liquidity profiles as their liquidity risk models may not have fully captured actual market conditions during periods of heightened market stress.
• We will share more with the industry in due course including the areas for improvement in, for example, the methodology for validating the liquidity risk models and the parameters used for liquidity risk monitoring and stress testing.
Let me conclude.
• One, the asset management industry needs to proactively respond and shift toward a more sustainable and technology-driven future, even as it goes back to basics and stays anchored to sound fundamentals in governance and risk management.
• Two, asset managers need to continue to level up their capabilities and practices to manage attendant risks and challenges, even as they remain resilient and adaptive through the ongoing pandemic.
• Three, there remains more that the industry, IMAS and MAS can do to cooperate and support Singapore-based asset managers in navigating the shifting landscape, even as private-public collaboration has come a long way in making asset management in Singapore more vibrant and robust.
That leaves me to congratulate IMAS on the occasion of your silver jubilee year for your valuable contributions to the development of our local asset management industry over the last twenty-five years.
On that note, it is my pleasure now to wish you all a very engaging session for the rest of the afternoon, and also a very happy and prosperous Lunar New Year!