This content is from: Local Insights

Fund management’s new regulatory framework

Nicholas ChangAmy Han
The asset management industry has been facing tighter regulation globally. Singapore's much-anticipated enhanced regulatory framework for fund management companies (FMCs) was finally implemented by the Monetary Authority of Singapore (MAS) in August. This move will help to align Singapore's fund management regulatory framework more closely with those adopted in other international financial hubs.

Broadly speaking, the revised licensing and regulatory requirements vary depending largely on the categories that the FMC falls into. There are three categories of FMCs, namely Retail Licensed FMCs (Retail LFMCs), Accredited Investor Licenced FMCs (A/L LMFMCs), and Registered FMCs (RFMCs). The RFMCs will replace the Exempt Fund Managers (EFMs) under the old regulatory framework. As a result, the existing EFMs that manage funds for not more than 30 qualified investors will have to either apply for a licence to conduct fund management, or register with the MAS under the RFMCs regime. RFMCs are allowed to serve up to 30 qualified investors and manage up to S$250 million ($203 million) in assets under management. If any of these thresholds are exceeded, the FMC must apply for a licence either as Retail LFMCs or A/I LFMCs. A transition period of six months is given to affected FMCs.

All FMCs must meet the enhanced business conduct and capital requirements. These include rules in relation to custody, valuation and reporting, competency of key individuals, conflicts of interest, disclosure, and requirement for the implementation of risk management policies corresponding to the size and operations of the FMCs.

The additional requirements will result in the escalation of operating cost structure. For instance, the new base capital requirement of S$250,000 will considerably increase the start-up cost of RFMCs as well as the fulfillment cost of existing EFMs, when they subscribed for the RFMCs status. The rules requiring independent custody and valuation of investor assets and independent annual audits by external auditors will further increase compliance costs.

The FMCs, especially under the existing EFMs status may have to revisit their business strategies such as forming business alliances with other players. There will also be a need for FMCs to identify the key implications of the requirements to their business strategy, business model, cost and profitability, and allocation of resources.

Despite these challenges faced by the industry players, the revamp of the regulatory framework is necessary to sustain Singapore's position as a leading wealth management center. It will do this by safeguarding investors' interests, while promoting the growth of the fund management industry. Besides, the tightening of rules can be a catalyst for FMCs to improve operational processes and governance, which will in turn increase their overall level of productivity and marketability. The improved industry standards are expected to raise the quality of new entrants and to a certain extent, resulting industry consolidation in the forms of mergers and exits of existing FMCs in Singapore.

Nicholas Chang and Amy Han

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