The Monetary Authority of Singapore ("MAS") has issued a consultation paper on 21 July 2020, proposing a new Act that aims to strengthen MAS' regulatory and supervisory framework to keep pace with emerging risks and challenges that impact the financial sector. In particular, the new Act will put in place an omnibus framework that consolidates MAS' regulatory oversight of different classes of financial institutions ("FIs") (including in respect of anti-money laundering and countering of financing of terrorism ("AML/CFT") and the resolution of FIs) under the MAS Act; provides MAS with harmonised and expanded powers to issue prohibition orders and to impose requirements on technology risk management; and introduces a licensing regime for virtual asset service providers.
The regulatory regimes in Singapore for financial services are generally entity and activity-based. FIs in Singapore may be subject to regulation under one or more Acts administered by MAS, depending on the class of FIs that they fall under, and the activities that they conduct. Given the shift in the nature of the emerging risks and challenges facing the financial sector in Singapore, MAS has perceived an increasing need for a financial sectorwide regulatory approach to complement the current entity and activity-based regulation. MAS is thus proposing a new Act to bolster its regulatory oversight of different FI classes by integrating, within the new Act, certain provisions in the MAS Act that may be applied generally across the financial sector. In addition, the new Act will empower the MAS in its supervisory functions generally, by:
- Broadening the power of MAS to issue prohibition orders;
- Introducing a licensing regime for virtual asset service providers in Singapore who provide digital token services overseas and expanding the scope of AML/CFT requirements to such persons;
- Harmonising the power of MAS to impose requirements on technology risk management; and
- Enhancing the effectiveness of dispute resolution by providing mediators, adjudicators and employees of an operator of an approved dispute resolution scheme with statutory protection from liability.
This client update provides an overview of the proposals raised by MAS in the consultation paper.
I. Broadened Powers to Issue Prohibition Orders
As Singapore's financial services regulator, MAS may take regulatory or enforcement actions against FIs and individuals for breaches of MAS-administered laws and regulations. Currently, the range of enforcement actions which MAS may pursue include prohibition orders ("POs") against persons who are guilty of serious misconduct. The effect of a PO is to bar the offending individual from conducting regulated activities, or from taking up specified positions (i.e. directorship, substantial shareholding, management) in FIs for a specified duration.
However, MAS is presently empowered to issue POs only under the Securities and Futures Act ("SFA"), the Financial Advisers Act ("FAA") and the Insurance Act ("IA"). POs may not therefore be employed against persons who are regulated under other Acts administered by the MAS (such as the Banking Act and the Payment Services Act 2019 ("PS Act")), even if they have committed a serious misconduct.
To ensure that POs serve as an effective deterrence against misconduct and to preserve trust in Singapore's financial industry, MAS has proposed to expand its power to issue POs, enabling it to:
- Issue a PO to any person who is not fit and proper. In this regard, MAS has indicated that persons in respect of whom MAS may issue POs may include former, existing or prospective participants in the financial industry such as employees and service providers of FIs, who have demonstrated by their misconduct that they have the potential to cause harm to the financial industry.
- Use the fit and proper criteria set out in MAS' Guidelines on Fit and Proper Criteria (Guideline No: FSG-G01) as the sole ground for which a PO should be issued. The fit and proper criteria encompasses the elements of (i) honesty, integrity and reputation; (ii) competence and capability; and (iii) financial soundness. MAS has explained that by adopting the fit and proper test, this will enable MAS to holistically assess whether a person ought to be issued with a PO on the basis that his misconduct renders him unsuitable to perform one or more roles or activities within the financial sector. At the same time, MAS has acknowledged that POs can materially affect individual livelihoods, and as such in exercising its power to issue POs, MAS has said that it will adopt a risk-proportionate approach, taking into account factors such as the nature and severity of the misconduct, the relevance of the misconduct to the financial industry, and the passage of time since the misconduct, so as to arrive at fair and balanced outcomes.
- Prohibit the subject from
carrying out additional functions and activities. MAS has
proposed to widen the scope of prohibition under the POs to include
regulated activities falling outside of the SFA, FAA and IA, and in
particular, the following specified functions that MAS regards as
critical to the integrity and functioning of FIs:
- Handling of funds, including safeguarding or administration of a digital payment token or digital payment token instrument;
- Risk management and control; and
- Critical system administration.
In addition, MAS has proposed to include a power to prescribe additional specified functions in subsidiary legislation, as the financial industry develops and new risks emerge, for the purpose of protecting trust and deterring misconduct in the financial industry.
II. Regulating Virtual Asset Service Providers in Singapore for AML/CFT
The Financial Action Task Force ("FATF") (of which Singapore is a member country) has recently revised the FATF Standards to require countries to regulate virtual asset service providers ("VASPs") (or digital payment token ("DPT") service providers, in Singapore's context) for AML/CFT. Under the enhanced FATF Standards, VASPs must be licensed or registered in the jurisdiction(s) where they are created in order to mitigate the risk of regulatory circumvention, and must comply with AML/CFT requirements when carrying out the following activities:
- Exchange between virtual assets and fiat currencies;
- Exchange between one or more forms of virtual assets;
- Transfer of virtual assets;
- Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- Participation in and provision of financial services related to an issuer's offer and/or sale of virtual assets.
In a separate consultation paper issued in December 2019 on proposed amendments to the PS Act, MAS had already proposed to subject DPT service providers to AML/CFT requirements under MAS Notice PS-N02 Prevention of Money Laundering and Countering the Financing of Terrorism - Digital Payment Token Service ("PS Notice 02") when performing the above activities.
Entities that carry on business in providing DPT services in Singapore (whether or not the entity is established or incorporated in Singapore) are presently also required to be licensed under the PS Act. However, given that the business operations of VASPs are typically internet-based and cross-jurisdictional in nature, there may be entities created in Singapore that do not perform such services in Singapore, but offer such services outside of Singapore. As such entities are not captured under current legislation, they would not be subject to AML/CFT regulation and supervision.
Hence, to align with the enhanced FATF Standards and to prevent regulatory circumvention, MAS is now proposing to license under the new Act, entities that are established or incorporated in Singapore, but which provide VASP services outside of Singapore. For the purposes of the new Act, such entities will be referred to as digital token ("DT") service providers. We have summarised key aspects of the proposed licensing and regulatory framework for DT service providers below. MAS has also indicated that further requirements may be set out under the subsidiary legislation that will be made under the new Act, which MAS will consult on in due course.
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