Since 8 October 2018, many within the financial services industry have been struggling to understand the finer aspects of the new regime, recalibrate their client on-boarding policies and procedures to account for the new requirements, and hopefully have the entire effort completed on or before 8 January 2019...
The regulatory landscape in Singapore is undergoing a significant change in terms of the way sophisticated investors are being defined. This is happening in phases, with the key milestone dates being 8 October 2018 and 8 January 2019. While the changes were not in themselves unanticipated, nevertheless, some of the details did take many financial institutions by surprise.
The changes relate to the term "accredited investors" as used in Singapore's Securities and Futures Act ("SFA") and in the Financial Advisers Act ("FAA"). Together, these two laws establish the overall framework under which the Monetary Authority of Singapore ("MAS") regulates the capital markets industry in Singapore.
The term "accredited investor", together with the term "institutional investor", is employed largely within the SFA and FAA to refer to persons (corporate or individuals) of some degree of sophistication in matters of investments (as distinct from retail investors) and who thus require lesser protection from the regulatory regime. The term "institutional investor" refers largely to financial institutions and sophisticated investment organizations and will not be discussed in this article.
Under the SFA and FAA, a financial institution is generally subjected to a lighter regulatory burden when the person it is serving is an accredited investor. In return, such an investor generally gains access to a wider range of financial products or services, including more risky products that would be inappropriate for the risk profile of a retail investor.
Prior to 8 October 2018, the term "accredited investor" was defined purely in terms of how much net assets or net income a person had – the presumption being that wealth or income is a good proxy of one's level of investment sophistication. Thus, in the version of the SFA existing before 8 October 2018, an accredited investor was, in the main, either:
(a) an individual with net personal assets of more than SGD 2 million or an income over the preceding 12 months of not less than SGD 300,000; or
(b) a corporation with net assets of more than SGD 10 million.
By subsidiary legislation, several additional categories were added, although the approach remained the same. Thus, a person can be classified as an accredited investor simply by virtue of that person having the requisite level of asset or income. It was not necessary for the person to choose to be an accredited investor. Indeed, at many instances, such a person might not even be aware that his financial institution has categorized him as an accredited investor.
"From a policy point of view, the new regime plainly makes a lot of sense. It helps ensure that investors enter into investment transactions with a greater degree of informed consent. This in turn will reduce the risk of disputes arising, particularly where the client alleges that the financial institution had induced him to enter into transactions which were not suitable for him or which he did not fully understand. Unfortunately, the downside to the new regime is that it enormously complicates the client on-boarding process that financial institutions must undertake"
In the first phase of reforms, starting from 8 October 2018, the asset/income criteria in relation to individuals have been tightened in one respect and loosened in another. A new restriction has been added – the value of an individual's primary residence can count for only up to SGD 1 million, when determining whether he has the requisite SGD 2 million in net personal assets. This is intended to address a prevalent feature within Singapore society where individuals tend to concentrate their asset holdings into their personal residence. At the same time, there is liberalization in the form of a new alternative criterion for eligibility – an individual will qualify if he has more than SGD 1 million held (net of liabilities) within a bank deposit or an investment product. This new criterion makes things simpler for a financial institution which can more readily assess qualification by reference only to the net amount of investments that a client parks with it.
More significantly, in the second phase starting on 8 January 2019, in certain specified scenarios, a person who meets the revised asset/income criteria will not automatically become an accredited investor. Such a person must additionally give consent to be treated as an accredited investor. In other words, he must "opt-in". The process by which an eligible person opts-in to be an accredited investor is spelled out in a new set of regulations – the Securities and Futures (Classes of Investors) Regulations ("SFCOIR").
In summary, in those scenarios where opt-in is required (the scenarios themselves being itemized within the SFCOIR), the process is as follows:
(a) the party required to procure opt-in (which is referred to in the SFCOIR as a counterparty and which will typically be a financial institution) must inform the eligible person that he/it has been assessed to be eligible to be an accredited investor;
(b) the counterparty should invite the eligible person to give consent to be an accredited investor, and in so doing, the counterparty must highlight and explain (in simple language) certain provisions of the SFA and FAA (referred to in the SFCOIR as the consent provisions and which are itemized within the SFCOIR). These consent provisions are the provisions which will impact the eligible person as an accredited investor;
(c) the counterparty must administer a warning (in a format prescribed in the SFCOIR) to the eligible person; and
(d) the counterparty must also make clear to the eligible person that having consented to be an accredited investor for the purpose of the consent provisions, such consent can be withdrawn at any time.
Once all the above steps are taken and the consent is in place, the counterparty can then treat the eligible person as an accredited investor.
As mentioned, the requirement to procure opt-in is mandatory only in certain scenarios specified within the SFCOIR. These largely cover:
(a) investor compensation under a fidelity fund administered by an exchange;
(b) offering of securities and units in collective investment schemes without an accompanying prospectus;
(c) client money and client assets handling rules applicable to capital market intermediaries;
(d) staff supervision rules for capital market intermediaries; and
(e) certain business conduct requirements for capital market intermediaries.
The new opt-in requirement fundamentally changes the way financial institutions in Singapore on-board their clients.
While it was certainly possible in the past for a financial institution to document a client's qualification to be an accredited investor without interacting with or informing the client, under the new regime, the financial institution must not only inform the client that he is going to be treated as an accredited investor but also ensure that the client understands the implications of being an accredited investor and agrees to be so treated.
From a policy point of view, the new regime plainly makes a lot of sense. It helps ensure that investors enter into investment transactions with a greater degree of informed consent. This in turn will reduce the risk of disputes arising, particularly where the client alleges that the financial institution had induced him to enter into transactions which were not suitable for him or which he did not fully understand.
Unfortunately, the downside to the new regime is that it enormously complicates the client on-boarding process that financial institutions must undertake.
First of all, as mentioned, the opt-in process is not being instituted on an across-the-board basis under the SFA, but is instead required in certain specified SFA scenarios. In each SFA scenario where opt-in is required, the SFCOIR will specify the counterparty who must procure opt-in. Because opt-in is both scenario-specific and counterparty-specific, it is conceivable that in a particular context, there may be more than one counterparty required by law to procure opt-in from the same eligible person. This is so because the SFCOIR specifically says that an eligible person can opt to be treated as an accredited investor vis-à-vis one counterparty but not vis-à-vis another.
Let us take a common scenario – where shares in a company are offered to investors in Singapore without an accompanying prospectus, under Section 275 of the SFA. Under this provision, a prospectus is not required if the shares are only offered to accredited investors and certain similar categories of sophisticated persons. Under the SFCOIR, an offering under Section 275 is one of those scenarios where opt-in must be procured by the offeror of the shares. Thus, the company issuing the shares (who would typically be the offeror) must follow the opt-in process stipulated in the SFCOIR before it can issue shares to the offeree. However, it is possible that the investor in such a circumstance is acquiring shares from more than one source (for instance, by direct subscription application to the issuer and also from a placement agent). If so, there could be more than one offeror interacting with the same offeree. Yet it is also clear from the SFCOIR that each offeror has its own duty to procure opt-in from the offeree.
To take a slightly different scenario – in private banking, it is common for the bank to introduce its high net worth clients to opportunities to invest in non-retail funds (which would not be open to retail clients). However, the fact that the client has consented to be treated by his bank as an accredited investor does not exempt the fund manager of such a non-retail fund from having to procure opt-in from the bank's client before it is able to sell fund units to the bank's client.
The result is that there may be a flurry of notifications and consent forms flying about between the investor on one side and the issuer and financial intermediaries on the other side. This adds to the already heavy burden placed on issuers and financial intermediaries.
Another complication is that the set of SFA-regulated scenarios where opt-in must be procured is not identical to the set of so-called consent provisions that must be explained to the eligible person as part of the opt-in process. Presumably, this is because the SFA is a massively complex piece of legislation, and it did not follow that opting-in is required in all situations where the words "accredited investor" appear within the legislation.
By comparison, the opt-in regime as applied to financial advisory services (which MAS also regulates but under the FAA instead of the SFA) is simpler. Under the FAA framework, starting from 8 January 2019, all references to the term "accredited investor" are references to a person who is eligible and has opted in to be an accredited investor.
The overall result is that since 8 October 2018, many within the financial services industry have been struggling to understand the finer aspects of the new regime, recalibrate their client on-boarding policies and procedures to account for the new requirements, and hopefully have the entire effort completed on or before 8 January 2019.
Even after 8 January 2019, it remains to be seen what sorts of teething problems are going to arise, especially in financial institutions whose business models are geared towards serving the very large segment of non-retail clients in Singapore.
Interesting times are ahead for regulatory compliance professionals in Singapore.
Note - Since the time of writing, the MAS has indicated that it will consider pushing back the commencement of the second phase from 8 January 2019 to 8 April 2019. If implemented, this will give financial institutions a small albeit temporary reprieve.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.