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1 Minister of State, Ministry of Culture, Community and Youth and Ministry of Trade and Industry, Mr Alvin Tan, on behalf of Senior Minister and Minister-in-charge of the Monetary Authority of Singapore (“MAS”), Mr Tharman Shanmugaratnam, today moved the Financial Services and Markets Bill 2022 (“FSM Bill”) for First Reading in Parliament.
BACKGROUND
2 Presently, MAS regulates the financial sector by entity1 and activity2 through various MAS-administered legislation. The Monetary Authority of Singapore Act (“MAS Act”) also contains provisions that impose requirements on different classes of financial institutions (“FIs”) across the financial sector in specific areas (“FI Related Provisions”)3.
3 Recognising the increasing need for a financial sector-wide regulatory approach to complement MAS’ existing entity and activity based regulation, MAS is introducing the FSM Bill to enhance MAS’ agility and effectiveness in addressing financial sector-wide risks in a rapidly changing and increasingly integrated environment. FI Related Provisions will be moved from the MAS Act to the FSM Bill. New powers to address emerging risks and challenges that impact institutions across the financial sector will also be introduced in the FSM Bill.
4 MAS conducted a public consultation on the proposed FSM Bill in January 2020. Respondents were generally supportive of the proposals, and MAS has incorporated the feedback into the FSM Bill where appropriate.
KEY ASPECTS OF THE FSM BILL
(A) Harmonised and Expanded Power to Issue Prohibition Orders
5 MAS issues prohibition orders (“POs”) to bar persons from conducting certain activities or from holding key roles in FIs for a period of time. POs are issued in cases of serious misconduct, to deter misconduct and preserve trust in Singapore’s financial sector. MAS determines the duration and scope of each PO based on the facts of each case.
6 MAS’ current PO powers reside only in certain MAS-administered Acts4, and can only be issued against certain persons specified under those Acts5. This means that MAS cannot issue POs to persons outside the scope of the PO powers in these Acts even if they have committed serious misconduct in the financial sector6. The existing PO powers also do not effectively protect an FI’s customers, investors and the financial sector from such persons as the prohibitions only extend to a limited scope of regulated activities.
7 MAS will therefore introduce a harmonised and expanded power to prohibit any person who is not fit and proper from engaging in any activity regulated by MAS and performing a prescribed list of key roles and functions in the financial sector. This will consolidate MAS’ powers to issue POs under the FSM Bill, and enable a consistent sector-wide approach when taking enforcement action against misconduct. Compared to the current state, this broadens the categories of persons who may be subject to POs, rationalises the grounds for issuing POs (from a list of specific criteria into a single fit and proper test) and widens the scope of prohibition to cover functions that are critical to the integrity and functioning of FIs7. It remains an offence for a prohibited person to breach the PO, or for a FI to hire a prohibited person to carry out any activity, business, service or function which the person is prohibited from doing under the PO.
8 The power will be exercised in a risk-proportionate manner that considers the nature and severity of the misconduct, and its potential and actual impact on the financial sector. A PO would generally be issued only if the person has a nexus to the financial sector. The PO power will also continue to be subject to existing checks and balances, including the following:
a) Persons are informed of MAS’ intention to issue POs against them and are given the opportunity to make representations to MAS before the POs may be issued; and
b) Persons have the right to appeal to the Minister against MAS’ decision to issue POs against them.
(B) Enhanced Regulation of Virtual Asset Service Providers for Money Laundering and Terrorist Financing Risks
Virtual Asset Service Providers
9 The Financial Action Task Force (“FATF”) adopted enhanced standards for virtual asset service providers (“VASPs”)8 in June 2019 and requires countries to regulate VASPs for money laundering and terrorist financing (“ML/TF”) risks. To mitigate the risk of regulatory arbitrage (where no single jurisdiction has sufficient regulatory hold over a specific VASP due to the internet and digital nature of its business), the enhanced FATF standards require VASPs to be at least licensed or registered in the jurisdictions(s) where they are created9. Most entities that carry on the business of providing VA services in Singapore are subject to current legislation, where the VA involved constitute digital payment tokens (“DPTs”10) or capital markets products11. To fully align with the enhanced FATF standards and mitigate the reputational and ML/TF risks, the FSM Bill will regulate all VASPs created in Singapore that provide virtual asset services outside of Singapore. Such VASPs which provide digital token (“DT”)12 services outside of Singapore, will be regulated as a new class of FIs, with licensing and ongoing requirements to ensure that MAS has adequate supervisory oversight over them.
Scope of DT Services
10 The FSM Bill will align the scope of DT services to the enhanced FATF standards. DT services include:
a) dealing in DTs;
b) facilitating the exchange of DTs;
c) inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any DTs in exchange for any money or any other DTs (whether of the same or a different type);
d) accepting DTs for the purposes of transmitting, or arranging for the transmission of, the DTs;
e) safeguarding of a DT or DT instrument, where the service provider has control over the DT or over one or more DTs associated with the DT instrument; and
(f) financial advice relating to the offer or sale of DTs.
AML/CFT Supervisory Oversight
11 MAS considers all transactions relating to DT services to carry higher inherent ML/TF risks due to their anonymity and speed. The FSM Bill will regulate VASPs primarily for ML/TF risks. The FSM Bill will introduce general powers over VASPs, including licensing requirements, powers to conduct AML/CFT inspections and render assistance to domestic authorities and MAS’ foreign AML/CFT supervisory counterparts.
12 MAS will impose licensing and ongoing requirements on VASPs to ensure that such VASPs have a meaningful presence in Singapore and that MAS has adequate supervisory oversight over them13. AML/CFT requirements imposed on VASPs will be aligned with the requirements imposed on digital payment token service providers regulated under the PS Act.
(C) Harmonised Power to Impose Requirements on Technology Risk Management
13 To ensure safety and soundness of the IT systems used by FIs to deliver financial services, MAS will consolidate powers to impose requirements on technology risk management (“TRM”) by introducing powers centralised within the FSM Bill that apply to any FI or class of FIs.
14 Further, to ensure that the maximum penalty for any breaches of TRM requirements is commensurate with the most serious types of breaches that can be committed by FIs, MAS proposes that the maximum penalty for breaches of Regulations and Notices issued be S$1 million. The quantum was derived after considering comparable existing penalty regimes of other Singapore government agencies and the need to signal the importance of technology risk management.
(D) Statutory Protection from liability for Mediators, Adjudicators and Employees of Operator of Approved Dispute Resolution Scheme
15 Currently, an adjudicator, employee, officer or representative of the Financial Industry Disputes Resolution Centre Ltd (“FIDReC”)14 is contractually conferred certain protection from claims by a complainant or FI.
16 The FSM Bill will provide statutory protection from liability for such mediators, adjudicators, and employees of an operator of an approved dispute resolution scheme. This will strengthen the confidence and autonomy of these individuals when they carry out their duties. The proposed amendment will align the level of protection with other public dispute resolution bodies in Singapore and internationally.
17 With this protection, a mediator, adjudicator or employee of an operator of an approved dispute resolution scheme will be protected from liability where they act with reasonable care and in good faith. The statutory protection does not extend to acts involving wilful misconduct, negligence, fraud or corruption.
[1] For example, the Banking Act (“BA”).
[2] For example, the Financial Advisers Act (“FAA”) and Securities and Futures Act (“SFA”).
[3] These include provisions relating to anti-money laundering and countering the financing of terrorism, resolution of FIs in distress and financial industry dispute resolution schemes.
[4] The SFA, FAA and Insurance Act.
[5] For example, a prohibition order can only be issued under section 101A(1) of the SFA against persons who fall within the definition of “relevant person” under section 101A(2) of the SFA. These persons include holders of a capital markets services licence (or persons who were previously such holders), persons exempt from the requirement to hold a capital markets services licence (or persons who were previously so exempt), and their representatives and officers.
[6] For example, if a bank compliance officer commits misconduct, such as deliberate concealment of fraud, in the course of his work, it would not be possible to issue a PO against him with the existing PO powers because there is no power to issue POs under the BA.
[7] These include handling of funds and assets, risk-taking, risk management and control, and critical systems administration.
[8] FATF has defined VASPs to include persons carrying on a business of conducting one or more of the following five activities: (i) exchange between virtual assets (“VA”) and fiat currencies; (ii) exchange between one or more forms of VA; (iii) transfer of VA; (iv) safekeeping and/or administration of VA or instruments enabling control over VA; and (v) participation in and provision of financial services related to an issuer’s offer and/or sale of a VA. A VA is defined by FATF as a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.
[9] In FATF’s context, this refers to the incorporation of companies or any other mechanism that is used to create a legal person (including limited liability partnerships and partnerships). In cases where the VASP is a natural person, they should be licensed or registered in the jurisdiction where their place of business is located.
[10] Such persons may be considered to be carrying on business of providing digital payment token service in Singapore under the Payment Services Act 2019 (“PS Act”).
[11] Such persons may be considered to be carrying on business in a regulated activity in Singapore, or establishing or operating an organised market in Singapore under the SFA, or carrying on a business of providing financial advisory service in Singapore under the FAA.
[12] A DT is defined under the FSM Bill to mean (a) a DPT as defined in the PS Act or (b) a digital representation of a capital markets product as defined in the SFA which (i) can be transferred, stored or traded electronically; and (ii) satisfies such other characteristics as MAS may prescribe, but does not include an excluded DT.
[13] These requirements would include: (i) having a permanent place of business in Singapore; (ii) appointing at least one person to be present, on such days and at such hours as MAS may specify by notice in writing, at the licensee’s permanent place of business to address any AML/CFT related queries or complaints from any person that uses any DT service provided by the licensee or is a customer of the licensee; (iii) keeping and making available the licensee’s transactions in relation to any DT service provided to authorities in Singapore in a timely manner upon request; (iv) satisfying financial requirements that may be prescribed or specified by MAS by notice in writing.
[14] FIDREC currently operates the only approved dispute resolution scheme.
