RHTLaw Taylor Wessing’s Nizam
Ismail provides an important guide on the complex regulatory
aspects of Southeast Asia’s fintech
Southeast Asia is going through a fintech revolution.
Vietnam recently launched the first digital-only bank, called
'Timo'. Over in Malaysia, the Securities Commission announced
the country's first six equities-based crowdfunding platforms
last year – pipping its neighbour, Singapore, which is
only expected to announce its equities crowdfunding regulations
later this year. Malaysia is also looking at introducing
regulations for peer-to-peer (P2P) lending.
In Singapore, the chairman of the Monetary Authority of
Singapore (MAS) and the deputy prime minister, Tharman
Shanmugaratnam, in April this year, announced Singapore's
aggressive push to develop a fintech ecosystem in Singapore and
a week-long fintech festival in Singapore in November (complete
with a slick promotional video on YouTube). The announcement of
this event was made in New York. This venue choice was
meaningful, subtly positioning Singapore as a fintech hub for
global players. MAS has actually started a fintech department
and appointed a chief fintech officer. MAS has led the
formation of a fintech office – a one-stop platform to
promote fintech in Singapore. MAS has also promoted the use of
application programming interfaces (APIs), taking the lead by
making its data available through APIs.
In Indonesia, communications and information technology
minister, Rudiantara, announced in March 2016 plans by the
Indonesian bourse, IDX, to set up a dedicated technology board,
to foster tech entrepreneurs. The minister proudly proclaimed
the emergence of two unicorns (billion dollar start-ups) within
Accelerators and investors are active in the region, making
bets on which fintech platform will be the next unicorn.
Regulators are similarly busy, largely acknowledging the
revolutionary impact of fintech, as well as nervously
acknowledging its many risks, which they are struggling to
"There are pressing challenges for fintech start-ups in
dealing with regulations in Southeast Asia"
Every fintech start-up knows that regulatory risk is the
most important risk factor for its business. The reality is
that the financial services industry is the most heavily
regulated in the world.
The repercussions for a fintech start-up being ignorant of
its regulatory status can be severe. If it conducts regulated
activities without obtaining the necessary licences, this could
typically attract criminal penalties (including the threat of
imprisonment) or civil liability.
There are pressing challenges for fintech start-ups in
dealing with regulations in Southeast Asia.
Southeast Asia is not monolithic. There are diverse
jurisdictions with different legal traditions, and which are at
different stages of regulatory development. For
over-the-counter (OTC) derivatives and futures trading may not
be regulated in all Southeast Asian jurisdictions.
Understanding the applicable rules in Southeast Asia
presents an interesting challenge – regulators may not
publish all laws and regulations on their websites. Even where
they are published, the information might not be up to date.
Language can also be a problem: not all data is published in
English; and even where the published regulations are up to
date and in English, it is not certain that what is published
encompasses all the rules that might apply in reality. There
may be a level of discretion that requires personal engagement
with the regulators.
Therefore, while the ASEAN economic community, which was
established in 2016, with its vast pyramid base of under-banked
communities, promises the allure of tapping into a market that
is the seventh-largest in the world, the reality is that
fintech start-ups face a daunting task when trying to
understand and navigate the complex and often frustrating
regulatory quirks of the various jurisdictions in that
Against this backdrop of the diverse nature of ASEAN, the
other challenge for fintech start-ups is that regulators may
not have made up their minds on how to regulate fintech.
The philosophy of financial services regulators typically
focuses on safety and soundness objectives, putting in place
prudential safeguards such as capital and liquidity
requirements. This is typically the approach for banking and
insurance regulations. Capital markets regulations, on the
other hand, tend to focus on promoting fair and efficient
markets and fair dealing for consumers.
The difficulty is how to apply the regulatory philosophy to
the fintech industry. There are several inherent tension
By nature, fintech start-ups disrupt. They look for
opportunities where regulations do not exist, or are vague.
They seek to do things in a cheaper, more efficient, convenient
and transparent manner compared to traditional financial
institutions. Fintech start-ups could grow exponentially and
become systemically important in a short period of time. The
issue is that fintech start-ups may not have in place a robust
governance, risk-management or compliance framework. A fintech
start-up may be looking for a quick exit through a trade sale
or IPO, and may not see the need to invest in a set of robust
controls. It may not necessarily have a long-term view. Indeed,
there are good reasons why traditional financial institutions
have sophisticated governance, risk and compliance frameworks.
A fintech failure or crisis could also have a widespread impact
on consumers, and could adversely affect the reputation of a
By definition, regulations cannot foreshadow industry
development. Regulators also do not want to inhibit innovation.
However, there will be a tipping point, when because of
customer protection reasons, or worse, because of a failure or
crisis relating to a fintech platform, regulations just have to
One example of this is the issue of whether regulators
should regulate bitcoin or other cyber-currencies. Most
regulators feel that the use of cyber-currencies may not be
sufficiently widespread so as to justify regulations. In
Singapore, MAS takes the view that cyber-currencies may
introduce money laundering and terrorist financing risks. In
March 2014, MAS announced that it would introduce anti-money
laundering and combating of terrorist financing requirements
for cyber-currency players. As of April 2016, the rules have
yet to be introduced.
In April this year, the chairman of MAS explained that a
fintech player that grows and acquires 'meaningful scale' will
be regulated like any other financial institution. Conditions
must be consistently fair for all, and there are good reasons
why regulations exist in the first instance.
Earlier this year, MAS' managing director, Ravi Menon,
explained that MAS would take a risk-focused and proportionate
approach towards regulations. He provided an example for P2P
lending platforms which do not need to be regulated in
Singapore so long as the platforms do not take deposits.
However, if these P2P platforms were to grow and raise
macro-prudential concerns – for instance, if they were
to become pervasive and systemic – MAS would regulate
Similarly, non-systemically important payment systems will
not be regulated in Singapore until such time that they become
systemic. This is the prevailing approach under Singapore's
Payment Systems (Oversight Act).
From the perspective of the fintech player, this means that
they could be victims of their own success and be subject to
regulations when they become successful.
However, the Singapore regulator's assurance is that
regulations will be proportionate – they will be
calibrated to address the specific risks of the activity.
Apart from the risk of being regulated in future, another
issue is that of dealing with existing regulations; in other
words, working to old-style rules that may not be relevant for
new world business models. Force fitting one into the other may
"One good initiative introduced by MAS in promoting
fintech is the regulatory sandbox"
For instance, regulations requiring capital or the payment
of a security deposit for each place of business, or the
displaying of physical licences at those places of business,
simply has little relevance for a fintech platform.
Another example of the shackling effect of existing
regulations can be found in the context of equities-based
crowdfunding rules proposed by MAS in a consultation paper in
February 2015. MAS had considered existing licensing and
prospectus requirements and proposed equities-based
crowdfunding activities that were only allowed for accredited
investors (high-net-worth individuals or corporations meeting
certain net asset or income requirements) and institutional
investors (essentially, regulated financial institutions). In
other words, equities-based crowdfunding platforms would not be
allowed for retail consumers. This effectively removes the
'crowd' from crowdfunding.
One good initiative introduced by MAS in promoting fintech
is the regulatory sandbox, similar to the approach taken by the
It is conceptually a good initiative. The regulatory sandbox
allows for controlled experiments – where a start-up
that requires licensing could get its proof of concept up,
demonstrate a working platform (within limited confines of
volumes and number of customers) fairly quickly, instead of
going through a long licensing process.
However, the practical implementation has been a little
difficult. There has been no guidance on the form or
requirements of the sandbox. There have been instances where
MAS has imposed a high level of innovation before proceeding
further with a sandbox application, turning down applications
even in instances where a proposed business model may be novel
The jury is out on whether Southeast Asian regulators will
write dedicated regulations for fintech. There may be a good
argument for such dedicated regulations, given the peculiar
needs of fintech start-ups for a proportionate approach
– a sliding scale of regulations depending on the risk
profile of the start-up.
Whether or not dedicated fintech regulations are introduced,
we will see a flurry of regulatory activities in Southeast Asia
as regulators start addressing gaps in their regulatory
frameworks, or updating various pieces of legislation to keep
pace with the demands of innovation.
Regulatory development is really not an option for
regulators, but a necessary step to foster consumer confidence
and maintain the good standing and reputation of their
While regulations can increase the cost and complexity of
doing business, fintech players should perhaps see regulations
as assets – after all, they promote consumer
confidence, and protect the longer-term interests of a fintech
Importantly, they also introduce a barrier to entry to
Partner, RHTLaw Taylor Wessing
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Nizam Ismail is a partner of RHTLaw Taylor Wessing
under its banking and finance and corporate practice.
He also is a co-founder of RHT Compliance Solutions, a
dedicated financial services compliance
consultancy/solutions provider. He has 20 years of
experience and expertise in financial services
regulatory compliance and litigation.
He was executive director and head of compliance for
Southeast Asia in Morgan Stanley Singapore. Ismail was
also formerly senior vice president and head of
compliance for Southeast Asia at Lehman Brothers
Singapore, Executive director (legal and compliance) in
Nomura Singapore and senior legal counsel of Citigroup
(corporate and investment bank). Ismail's area of
compliance coverage included markets, investment
banking, corporate banking, private banking and asset
management. Ismail's product coverage included fixed
income, equities, commodities, currency, rates,
derivatives, futures, structured deposits.
Ismail spent six years as a regulator at the
Monetary Authority of Singapore (MAS), where he was
deputy director and head of the Market Conduct Policy
Division. There, Ismail worked on various policy
reviews relating to the capital markets, including
various policy reviews leading to the enactment of the
Securities and Futures Act, the Financial Advisers Act,
Trust Companies Act and the Business Trust Act. Ismail
also conducted a review on the application of
competition law on financial services.
The policy reviews that Ismail oversaw at MAS
included: revamp of regulatory framework on
markets/recognised market operators, dual currency
investments, credit card solitication rules, disclosure
requirements for investment products, rationalisation
of wholesale/retail investors, extra-territorial
application, regulation of traded life/endowment
policies, civil penalty regime for market misconduct,
review of insider trading, licensing and business
conduct issues, policies behind regulation capital
markets intermediaries, and implementation of
recommendations of Corporate Law and Regulatory
Framework Committee (CLRFC).