Developments in Singapore Financial Services Regulation in H1 2016


Financier Worldwide Magazine

September 2016 Issue

September 2016 Issue

The first half of 2016 has featured a number of regulatory developments in Singapore. This article summarises two of particular significance.


The term ‘crowdfunding’ describes an approach to capital fundraising whereby funds are sought, typically through the facilitation of an online platform, from a large number of contributors (the crowd), each of whom would normally contribute a relatively modest amount. With the advent of social media, crowdfunding platforms have in recent years been looked upon as an alternative to the traditional capital markets for the offering of debt or equity securities.

In June 2016, some 15 months after MAS first issued a consultation paper setting out its initial thoughts on what regulatory requirements ought to be applied to securities-based crowdfunding platforms, MAS finalised and announced its confirmed policy posture.

One key point canvassed in the February 2015 consultation was whether such platforms should be regulated as capital markets intermediaries under Part IV of the Securities and Futures Act (SFA). MAS has now decided that they should. However, to the extent that the platform limits participation to only non-retail investors (i.e., institutional investors or accredited investors, as defined under the SFA), there would be a slight relaxation of certain existing regulatory criteria. Notably, MAS has said it would lower the minimum capital requirements in relation to a crowdfunding platform that: (i) only allows participation by institutional investors and accredited investors; (ii) does not carry customer positions; and (iii) does not deal with customers as principal.

Apart from the issue of licensing the platform as a capital markets intermediary, currently any offering of equity and debt securities must also comply with the investment offering rules in Part XIII of the SFA. These rules provide that the offering must be accompanied by a prospectus that meets prescribed requirements and is duly registered with MAS. There are exemptions from the prospectus requirements in certain circumstances, largely dependent on factors such as the number of persons to whom the offer is made, the amount to be raised, and the type of investors the offer is be made to. MAS has now decided that the prospectus rules and exemptions should continue to apply but it would modify the terms of certain exemptions to take into account the manner in which debt and equity securities are typically offered through a crowdfunding platform.

New guidelines have been issued on the advertising restrictions associated with the prospectus exemptions for small offers, private placement and non-retail offerings. If a crowdfunding platform wishes to rely on these exemptions, there must be controls over who could access the offerings available on the platform. Furthermore, communications in relation to the offerings can only be made to persons who are qualified to receive the offer in accordance with the conditions associated with the particular prospectus exemption, and the communications must in any case be confined to factual information.

MAS would also ease certain conditions applicable to the prospectus exemption for small offers (where less than $5m is raised over any period of 12 months). Currently, an offeror relying on this particular exemption must ensure both of the following: (i) that the potential investor has sufficient knowledge or experience to invest (Knowledge/Experience Test); and (ii) that the investment is suitable for the investor in the light of his investment objectives and risk tolerance (Suitability Assessment Test).

Moving forward, the crowdfunding platform as well as the offeror would only be required to ensure that either one of the Knowledge/Experience Test or the Suitability Assessment Test is satisfied. However, each investor must be given a risk disclosure statement in a prescribed format which he would have to acknowledge having read and understood.

Significantly, MAS has also announced that it would close existing loopholes relating to promissory notes. Currently, for the purposes of intermediary licensing under Part IV of the SFA, promissory notes are not considered as securities, and consequently a crowdfunding platform that deals solely in promissory notes would not be dealing in securities and thus not require a capital markets services licence. This definitional exclusion would be removed so that a crowdfunding platform that deals only in promissory notes would require a capital markets services licence for dealing in securities. Currently, the prospectus requirements in Part XIII of the SFA also do not apply to an offering of promissory notes that have a face value of at least S$100,000 and a maturity period of 12 months or less. This exclusion would likewise be removed so that the offering of promissory notes of all values and maturities would be subject to the same prospectus requirements as the offering of other types of equity and debt securities.

Regulatory sandbox for FinTech solutions

In June 2016, MAS also issued a consultation paper inviting comments on a new regulatory process for approving a regulatory sandbox, which is aimed at encouraging the development and implementation of new technology solutions for financial services (FinTech).

The term sandbox was chosen because it seemed apt to use that term to describe the conducive but safe environment within which MAS envisages allowing experimentation and testing. The target audience for the regulatory sandbox would be financial institutions and their collaborative partners – which could be technology firms and professional services firms.

The underlying regulatory policy here is that certain admission criteria or ongoing regulatory standards would be relaxed within the sandbox. The environment of the sandbox would involve the real provision of products or services to customers, but appropriate safeguards must be in place to contain the impact of any failure and to insulate the broader market from any fallout.

The extent to which regulatory requirements would be relaxed would depend on the nature of the FinTech solution being proposed and be decided on a case-by-case basis. In the consultation paper, MAS has indicated that it would be open to relax existing rules on asset maintenance, composition of the board of directors, financial requirements, fund solvency and capital adequacy, licence fees, management experience, liquidity, as well as reputation and track record. However, MAS has also indicated that it would likely insist on continued adherence to existing rules on protecting the confidentiality of customer information, observance of the fit and proper criteria, proper handling of customer’s moneys and assets, and undertaking measures to prevent money laundering and financing of terrorism.

The present proposals for a regulatory sandbox would suggest a substantial and progressive shift in MAS regulatory policy, and this is to be applauded. In the past, Singapore’s financial regulator would commonly expect a new entrant seeking a licence to first meet all prescribed baseline admission criteria before it would even begin considering the licence application on its merits. Furthermore, an applicant with a novel or unconventional operating model would tend to face more obstacles in its quest for a licence.

However, there are also signs that the regulator might not be as open and flexible as one might hope.

The consultation paper has set out a proposed procedure for obtaining MAS approval of the regulatory sandbox, which on careful consideration might appear overly rigid.

First of all, a formal submission must be made and the criteria for evaluation is proposed to be as follows. The FinTech solution should be technologically innovative or applied in an innovative way. It should also address a significant problem or issue or bring benefits to consumers. The applicant should intend and be able to deploy the FinTech solution in Singapore on a broader scale after exiting the sandbox. The test scenarios and outcomes of the sandbox should be clearly defined, and progress reports must be made to MAS on an agreed basis. The sandbox should have appropriately defined boundaries so that it can be meaningfully executed while sufficiently protecting the interests of consumers and maintaining the safety and soundness of the industry. Major foreseeable risks arising from the FinTech solution should be assessed and mitigated. There should be an exit and transition strategy in the event the FinTech solution has to be discontinued and when the solution is ready for wider deployment after the sandbox is exited. While each of these conditions taken on its own are understandable, cumulatively they do appear to set a relatively high bar for applicants to clear.

Secondly, the regulatory sandbox is only operative for a defined period of time, at the end of which the regulatory rules relaxed by MAS would be restored to their full effect. The relaxation of regulatory rules is thus only temporary. At the end of the sandbox period, the FinTech solution would be permitted to be deployed on a wider basis only if MAS is satisfied that the applicant would henceforth be able to fully observe all of the normal regulatory rules. It has not suggested within the consultation paper that MAS would be open to consider permanently waiving or relaxing some of the regulatory rules.

Thirdly, the application process still involves a considerable amount of red tape. At least as presently proposed, MAS would have up to 21 working days to respond to an application with a provisional indication as to whether the solution would or would not qualify to be considered for a sandbox. And after a provisionally favourable indication is given, MAS has not set for itself a specific timetable within which it must make the final yes or no decision. In this day and age, such a timetable seems extraordinarily generous. While one could understand the need for MAS to preserve for itself some degree of flexibility, one cannot help but feel that this posture is slightly incongruous with the pro-innovation signals that have emanated from MAS in recent months. If innovative FinTech solutions are indeed to be encouraged, perhaps the regulator should be more suitably configured and resourced to receive, process and decide upon sandbox applications at a more rapid pace.

Of course, the regulatory sandbox proposals are presently only at the consultation stage. As it is, MAS should be commended for being willing to take the initial step. Hopefully, public feedback on the consultation would go some way to assist MAS in refining and firming up its overall policy posture. In particular, it would exceedingly helpful if MAS were prepared to assure the financial and technology communities that it would approach sandbox applications with a pro-innovation mindset, and respond to sandbox applications expeditiously within a matter of weeks rather than of months.


Eric Chan is a partner at Shook Lin & Bok LLP. He can be contacted on +65 6439 0788 or by email:

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Eric Chan

Shook Lin & Bok LLP

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