The implementation of an Enhanced Regulatory Regime ("ERR") for fund management companies ("FMCs") was announced by the Monetary Authority of Singapore ("MAS") on 6 August 2012. This formalises discussions first initiated by MAS in its April 2010 consultation paper on the review of the current regime, and takes into account industry feedback and further responses from MAS.
MAS' Response to Feedback Received dated 28 September 2010 and the recent September 2011 Proposed Enhancements and Draft Legislative Amendments thus forms the substance of this ERR. The ERR is effective from 7 August 2012. The above affects the current exempt fund managers, which are now categorised as Registered FMCs ("RFMCs"). The major changes in criteria for licensing, registration and business conduct are summarised below.
Independent Annual Audit for RFMCs
An RFMC will be required to engage an auditor to opine on its annual financial statements as well as to issue a new auditor's report (Form 25B) on the RFMC's compliance with the Securities and Futures Act ("SFA"), in particular, on the restriction on the number and type of qualified investors, threshold on assets under management, compliance with base capital, independent valuation of customers' assets and reporting and proper maintenance of trust/custody accounts.
Risk Management Framework
A framework should be put in place for all FMCs to identify, address and monitor the risks associated with customers' assets managed. It should address minimally:
- Documentation of risk management policies, procedures and reports;
- Governance, independence and competency of risk management functions;
- Identification and measurement of risks associated with customers' assets; and
- Timely monitoring and reporting of risks to management.
Adequate Internal Audit
The business activities of all FMCs are expected to be subject to adequate internal audit commensurate with the scale, nature and complexity of their operations.
Other New Requirements for RFMCs include:
- compliance arrangements to be put in place,
- minimum competency requirements of key individuals,
- fit and proper criteria for its shareholders, directors, representatives, employees and the RFMCs,
- managed assets should not exceed S$250 million,
- maintenance of minimum base capital,
- anti-money laundering measures,
- outsourcing requirements with service providers, and
- business conduct requirements such as:
- independent custody and valuation & reporting,
- mitigating measures for conflicts of interest, and
- adequate disclosure to its customers
Refined Operational Risk Requirement for Licensed FMCs ("LFMCs")
LFMCs, which hold capital markets services licences for fund management, will now be required to maintain risk-based capital based on a more refined operational risk requirement at the highest of S$100,000, 5% of average annual gross income and 10% of average annual adjusted gross income for the last three years. This was introduced after the feedback and response to the Consultation Paper on Proposed Revisions to the Regulatory Capital Framework for Holders of Capital Markets Services Licences dated 3 April 2012.
Minimum Professional Indemnity Insurance for Retail LFMCs
Accredited Investor LFMCs and RFMCs are also encouraged to maintain adequate coverage.
How RSM Chio Lim LLP and RSM Ethos can help?
Although all RFMCs have six months from 7 August 2012 to implement the above requirements or changes, we recognise the concern of many CEOs and directors of RFMCs who are looking to find solutions that will enable them to satisfy the new requirements. As there is no "one size fits all" solution, we recommend that management consider engaging us to work out the possible solutions sooner rather than later. For instance, audits for compliance with certain rules of the SFA are new to the RFMCs, and thus may create additional costs and anxiety for staff and management.
In addition, we understand that although the risk management framework for some RFMCs may have been developed and implemented, management must formalise and document this before the internal controls and governance involved are auditable. The majority of the RFMCs may not have the expertise and experience to perform a risk assessment process in order to create such a framework. We have the expertise and experience to fill this gap.
As outsourcing of accounting and fund administration is widespread among RFMCs, the extent of documentary evidence may create an administrative burden for some. We hope to share our auditing experience to free up the time and resources of CEOs and directors from the new compliance requirements.
An extract of all key changes can be found here.
The links to the abovementioned references are as follows:
Consultation Paper on Proposed Revisions to the Regulatory Capital Framework for Holders of Capital Markets Services Licences dated 3 April 2012
Proposed Enhancements and Draft Legislative Amendments to Give Effect to the Regulatory Regime for Fund Management Companies dated 27 September 2011
MAS' Response to Feedback Received - Consultation on Review of the Regulatory Regime for Fund Management Companies and Exempt Financial Intermediaries dated 28 September 2010
Review of the Regulatory Regime for Fund Management Companies and Exempt Financial Intermediaries dated 27 April 2010