Background
Under the Monetary Authority of Singapore Act, the MAS presently has supervisory powers over anti-money laundering and countering the financing of terrorism (AML/CFT), control of financial institutions (FIs), and oversight of financial sector dispute resolution schemes.
In recognition of the increasing need for a financial sector-wide regulatory approach, the FSM Bill was introduced to enhance the MAS’ agility and effectiveness in addressing financial sector-wide risks in our ever-changing and increasingly integrated world.
Key aspects of the FSM Bill
(A) Harmonised and expanded powers to issue prohibition orders
The MAS currently has the power to issue prohibition orders (POs) to bar certain persons specified under the Securities and Futures Act 2001, the Financial Advisors Act 2001, and the Insurance Act 1966 from conducting certain activities or from holding key roles in FIs. Such POs serve as a deterrent against serious misconduct, to preserve trust in Singapore’s financial sector.
However, the MAS’ current power to issue POs has its limitations. While POs may be issued to relevant persons specified in the relevant acts, the MAS is unable to issue POs to persons who are regulated under other MAS-administered acts. Furthermore, the existing grounds for issuing POs are limited to a list of specific criteria under the relevant acts, and the prohibitions relate mainly to taking up specified positions, such as a directorship, and conducting the relevant regulated activity, such as providing a financial advisory service.
Under the FSM Bill, the MAS will introduce a more harmonised and expanded power to prohibit any person who is not fit and proper from engaging in any activity regulated by the MAS. The fit and proper criterion will be the sole ground on which a PO can be issued. This will provide the MAS with more discretionary powers in issuing POs, and potentially widen the scope of activities to which POs may apply. The MAS will also have the power to prohibit persons from performing a wider range of specified functions, which include the handling of funds, the safeguarding or administration of digital payment tokens (DPTs), risk-taking, risk management and critical system administration.
Despite the wider reach of the MAS’ power to issue POs, POs will generally only be issued to persons with a nexus to the financial sector. Further, the MAS will exercise such powers commensurate to the risk, nature, and severity of the misconduct, and the potential or actual impact of the misconduct on the financial sector. Persons informed of the MAS’ intention or those issued POs will also be given the opportunity to defend themselves before the MAS or an appeal right to the minister.
(B) Enhanced regulation of virtual asset service providers for money laundering and terrorist financing risks
Virtual asset service providers
Under the enhanced Financial Action Task Force (FATF) standards adopted in June 2019, virtual asset service providers (VASPs) must be licensed or registered in the jurisdictions where they are created.
In alignment with the enhanced FATF standards, 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)1 services outside of Singapore will be regulated as a new class of FIs, and will be subject to licensing and ongoing requirements. This serves to mitigate the reputational risks of money laundering and terrorist financing (ML/TF), and ensures that the MAS has adequate supervisory oversight over such VASPs.
Scope of DT services
The FSM Bill will align the scope of DT services with the enhanced FATF standards. DT services, which incorporate and extend beyond the current scope of ‘DPT services’ under the Payment Services Act 2019, include:
(a) Dealing in DTs. This would capture the buying and selling of DTs, e.g., where incidental to brokering, fund management or underwriting activities.
(b) Facilitating the exchange of DTs. Exchanges which list DTs are an example of entities falling into this category.
(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). Arranging brokers may fall within this category, even where they do not take possession of the DT.
(d) Arranging for the transmission of DTs from one DT address or account to another, or accepting DTs for the purposes of transferring, or arranging for the transfer of, the DTs. Persons providing remittance or digital asset transfer services may fall within this category, even where they do not take possession of the DT.
(e) Safeguarding of a DT or DT instrument (such as a key to the wallet of the DT), where the service provider has control over the DT or over one or more DTs associated with the DT instrument. This category is likely to affect entities providing custodial services in relation to digital assets. What it means to have control will likely come to bear on custodial solutions with sophisticated systems of control such as key sharding and multi-signature wallets. For some software providers, relying on the exclusion for technical service providers may be necessary.
(f) Advice relating to the offer or sale of DTs. Such DTs are usually used for investment purposes. Professional legal or accounting-related advisory services are not included.
AML/CFT supervisory oversight
Given the higher inherent ML/TF risks of anonymous and fast-moving DT services, the FSM Bill will primarily regulate VASPs for ML/TF risks. The FSM Bill will introduce general powers over VASPs, including licensing requirements and powers to conduct AML/CFT inspections and render assistance to domestic authorities and the MAS’ foreign AML/CFT supervisory counterparts.
To ensure such VASPs have a meaningful presence in Singapore, and to provide the MAS adequate supervisory oversight over them, the following requirements may be imposed:
(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 the 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; and
(iv) satisfying financial requirements prescribed or specified by the MAS by notice in writing.
Such AML/CFT requirements imposed on VASPs will align with the requirements imposed on DPT service providers regulated under the Payment Services Act 2019.
(C) Harmonised power to impose requirements on technology risk management
To ensure the safety and soundness of the IT systems used by FIs to deliver financial services, the FSM Bill will consolidate the MAS’ power to impose requirements on technology risk management on any FI or class of FIs. The maximum penalty for breaches of any issued regulations and notices will be S$1 million, in line with the existing penalty regimes of other government agencies.
(D) Statutory protection from liability for mediators, adjudicators and employees of operator of approved dispute resolution scheme
The FSM Bill will provide statutory protection for mediators, adjudicators, and employees of an operator of an approved dispute resolution scheme, from liability or claims by a complainant or FI. This promotes the confidence and autonomy of these individuals to carry out their duties to the utmost of their ability.
The proposed amendment will align the level of protection with other public dispute resolution bodies in Singapore and internationally. Notably, the statutory protection from liability would only extend to acts of reasonable care and good faith, and would not extend to those involving wilful misconduct, negligence, fraud or corruption.
Commentary
The provisions in the FSM Bill serve to expand the MAS’ supervisory role in light of continued technological advances in financial services. These provisions allow Singapore, as an increasingly important global financial centre, to maintain its integrity and safeguard its reputation against ML/TF risks in particular.
As evidenced by the expansion of the MAS’ power to issue POs, Singapore continues to focus on individual responsibility in upholding financial-sector standards. Similarly, technology risk management remains a key regulatory focus, to ensure that FIs in Singapore are able to withstand cyberattacks and other forms of intrusion.
Nonetheless, certain questions remain about the FSM Bill:
- First, challenges may arise in ensuring consistent application of FATF-driven requirements across different types of DT service provider (i.e., payment firms, capital markets intermediaries, market infrastructure providers and financial advisers) and across those firms operating under the purview of the DT services framework under the FSM Bill, rather than those operating under other, preexisting frameworks like the Payment Services Act 2019 and Securities and Futures Act 2001. The fragmentation of these various regulatory regimes may give rise to interpretive issues around scope which will need to be resolved by the industry.
- Second, the introduction of the FSM Bill may increase the compliance burden on digital asset service providers in Singapore, which are already undergoing major regulatory calibration of their business models in light of the Payments Services Act 2019, and are preparing for the introduction of various changes to the latter, which are expected to take effect later this year. It remains to be seen to what extent the continued increase in regulation for actors in the digital assets sector affects their perception of Singapore as a choice of location.
On balance however, the FSM Bill should be expected to further enhance the standing of Singapore as a financial centre where FIs are required to meet robust compliance standards in order to operate. The effective date of the new framework remains to be determined, and will depend on the parliamentary timetable and announcement of the final commencement of the FSM Bill.
Should you wish to discuss any aspects of the FSM Bill, please reach out to any of the team below, or to your usual Reed Smith contact.
- A DT is defined under the FSM Bill to mean (a) a DPT as defined in the Payment Services Act 2019 or (b) a digital representation of a capital markets product as defined in the Securities and Futures Act 2001 which (i) can be transferred, stored or traded electronically and (ii) satisfies such other characteristics as the MAS may prescribe, but does not include an excluded DT.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2022-084
