New Financial Services and Markets Bill to Enhance Monetary Authority of Singapore’s Powers

The Financial Services and Markets Bill 2022, the goal of which is to address risks and challenges that impact institutions across the financial sector, was recently moved for first reading in the Parliament of Singapore on 14 February. The bill will grant the Monetary Authority of Singapore additional regulatory powers to address misconduct, cryptoassets, and technology risks and to deal with various financial institutions, including banks, insurers, financial advisers, virtual asset service providers, trustees for collective investment schemes, trustee-managers of business trusts, licensed trust companies, and operators of payment services.

FSM Bill

The Financial Services and Markets Bill 2022 (FSM Bill) contains new provisions relating to the following areas:

• A harmonized and expanded power to issue prohibition orders
• Regulating virtual asset service providers (VASPs) created in Singapore for anti-money laundering and countering of financing of terrorism (AML/CFT) purposes
• A harmonized power to impose requirements on technology risk management
• Providing mediators, adjudicators, and employees of an operator of an approved dispute resolution scheme with statutory protection from liability

Provisions that impose requirements on different classes of financial institutions (FIs) across the financial sector in specific areas are also shifted from the Monetary Authority of Singapore Act 1970 to the FSM Bill.

A Harmonized and Expanded Power to Issue Prohibition Orders

Under the existing regime, the Monetary Authority of Singapore (MAS) issues prohibition orders (PO) to bar persons from conducting certain activities or from holding key roles in FIs for a period of time in cases of serious misconduct, and such powers reside on the Securities and Futures Act 2001 (SFA), the Financial Advisers Act 2001 (FAA), and the Insurance Act 1966 (IA). The unintended consequence is that MAS cannot issue POs to persons regulated under other acts administered by MAS even if such persons committed serious misconduct in the financial industry. The existing PO powers also do not effectively protect an FI’s customers, investors, or the financial sector from such persons as the prohibitions only extend to a limited scope of regulated activities.

Under the FSM Bill, MAS may issue a PO against 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.

Under the existing regime, the effect of POs is that a person who has been issued a PO is prohibited from taking up specified positions (i.e., directorship, substantial shareholding, or management) and conducting certain activities that are regulated under the SFA, FAA, and IA. 

The FSM Bill also widens the scope of prohibition under the POs to cover functions which are deemed critical to the integrity and functioning of FIs, namely:

• handling of funds, including safeguarding or administration of a digital payment token (DPT) or digital payment token instrument;
• risk-taking;
• risk management and control; and
• critical system administration.

In addition, the FSM Bill empowers MAS to (among other things):

• disqualify or remove directors or executive officers of relevant financial institutions;
• effect compulsory transfer of business of a pertinent financial institution;
• effect compulsory transfer of shares held by a transfer in a pertinent financial institution; and
• suspend termination right for contracts.

The FSM Bill also includes an additional power to prescribe further specific functions in subsidiary legislation, which would allow MAS to respond swiftly to include new functions as the financial industry develops and new risks emerge.

It remains an offence for a prohibited person to breach the PO, or for an 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.

Regulating Virtual Asset Service Providers Created in Singapore for AML/CFT Purposes

The Financial Action Task Force (FATF) recently revised the FATF Standards (Standards) in June 2019 to require countries to regulate VASPs to mitigate AML/CFT risks. FATF terms virtual assets as a “digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.”

To fully align with the enhanced FATF Standards and mitigate the reputational and AML/CFT risks, the FSM Bill will regulate all VASPs created in Singapore which are carrying on a business of providing virtual asset activities outside of Singapore.

DT Service Providers

Under the FSM Bill, the regulated activity for a VASP is the provision of digital token (DT) services. DT is defined to mean:

• a digital payment token as defined in the Payment Services Act; or
• a digital representation of a capital market product as defined in the SFA which (1) can be transferred, stored, or traded electronically, and (2) satisfies such other characteristics as MAS may prescribe.

Each of the following is a DT service for the purposes of the FSM Bill:

• Dealing in DTs
• Facilitating the exchange of DTs
• Accepting DTs for the purposes of transferring, or arranging for the transfer of, the DTs or arranging for the transmission of DTs
• Arranging for the transmission of DTs from one DT account to another DT account
• 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
• Safeguarding a DT, where the service provider has control over the DT
• Carrying out for a customer an instruction relating to a DT, where the service provider has control over the DT
• Safeguarding a DT instrument, where the service provider has control over one or more DT associated with the DT instrument
• Carrying out for a customer an instruction relating to one or more DTs associated with a DT instrument, where the service provider has control over the DT instrument
• Advisory services relating to the offer or sale of DTs

The FSM Bill puts in place licensing and ongoing requirements on DT service providers to ensure that such entities have a meaningful presence in Singapore so that MAS has adequate supervisory oversight over them, even if they provide DT services outside of Singapore. The FSM Bill also introduces powers to conduct AML/CFT inspections and render assistance to domestic authorities and MAS’ foreign AML/CFT supervisory counterparts.

A DT service provider is required to meet the following requirements (among others) at the point of admission:

• The applicant must have a permanent place of business in Singapore.
• The applicant must appoint at least one executive director who is a resident in Singapore.
• The applicant must be incorporated as a company in Singapore.
• The applicant must satisfy such financial requirements as may be prescribed by MAS.
• Each of the directors and chief executive officers, or equivalent persons, of the applicant is a fit and proper person.

Once a DT service provider is licensed (i.e., a licensee), the following ongoing requirements are applicable:

• The licensee must have a permanent place of business in Singapore.
• The licensee must appoint at least one person to be present, on such day 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 DT user that uses any DT service provided by the licensee or is a customer of the licensee.
• The licensee must notify the MAS of the occurrence of certain specified events.
• The licensee must satisfy such financial requirements as may be prescribed by MAS by notice in writing.
• The licensee must submit to MAS such reports or returns relating to the licensee’s business in such form, manner, and frequency as MAS may specify by notice in writing.
• Each of the directors and chief executive officers, or equivalent persons of the licensee is a fit and proper person.

Existing MAS-regulated FIs that carry on a business of providing DT services outside of Singapore will also need to be licensed under the FSM Bill. A licensee is also prohibited from carrying on a business of granting any credit facility to any individual in Singapore.

A Harmonized Power to Impose Requirements on Technology Risk Management

To ensure safety and soundness of the IT systems used by FIs in Singapore, under the FSM Bill, MAS has the powers to issue directions or make regulations on Technology Risk Management and Notices on Cyber Hygiene (Tech-Risk Notices) to any FI or class of FIs.

Additionally, as MAS views that the current maximum penalties that can be imposed for breaches of Tech-Risk Notices are not commensurate with the potential severity of a disruption to essential financial services and the potential impact on an FI’s customers, under the FSM Bill, MAS is empowered to issue directions to or make regulations concerning any FI or class of FIs as MAS considers necessary for:

• the management of technology risks, including cybersecurity risks;
• the safe and sound use of technology to deliver financial services; and
• the safe and sound use of technology to protect data.

The maximum penalty for breaches of regulations and Tech-Risk Notices issued is to be S$1 million and, in the case of a continuing offence, a further fine of S$100,000 for every day or part of a day during which the offence continues after conviction.

Statutory Protection for Mediators, Adjudicators, and Employees of Operators of Approved Dispute Resolution Schemes from Liability

Currently, an adjudicator, employee, officer, or representative of the Financial Industry Disputes Resolution Centre Ltd (FIDReC) is contractually conferred certain protection from claims by a complainant or FI.

To strengthen the confidence and autonomy of an approved dispute resolution operator’s mediators, adjudicators, and employees in carrying out their duties, the FSM Bill will provide them with statutory protection from liability. The position adopted under the FSM Bill will align the level of protection for employees, adjudicators, and mediators of an approved dispute resolution scheme operator more in line with that of other public dispute resolution bodies.

Under the FSM Bill, a mediator, adjudicator, or employee of an operator of an approved dispute resolution scheme will not be liable for an act or omission done with reasonable care and in good faith in the course of or in connection with any mediation or adjudication of a dispute under the approved dispute resolution scheme. Mediators, adjudicators, and employees will, however, continue to be liable for acts involving willful misconduct, negligence, fraud, or corruption.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers, who are solicitors of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated ‎with Morgan, Lewis & Bockius LLP:

Singapore
Wai Ming Yap