MAS open to change on 'sensitive' outsourcing rules

The Monetary Authority of Singapore is raising the regulatory bar, but there is a feeling that the city-state is making it harder for hedge funds to exist, especially smaller ones.
MAS open to change on 'sensitive' outsourcing rules

The Monetary Authority of Singapore (MAS) says it is adopting “an open and consultative approach in regulating the financial sector”.

In a discussion with AsianInvestor, following our report last week on suggestions that hedge funds are fleeing the city state, the regulator emphasised its desire to have a “robust and predictable regulatory framework”.

The MAS also said there is flexibility in proposed new rules on outsourcing by financial institutions, and that it is taking on board comments from the industry.

As a result, outsourcing rules could be markedly different from the guidelines issued for consultation in September 2014. That is especially relevant for hedge funds, which have led the charge when it comes to outsourcing.

The new rules stipulate, for example, that the MAS should be notified of any adverse development or breach of regulatory requirements by a service provider and sub-contractors, and that employees of service providers and sub-contractors undertaking an outsourcing arrangement have to be assessed to be fit and proper. 

The rules are still being finalised, but the MAS spokesperson said the regulator “is reviewing the feedback and will take on board constructive industry inputs in finalising our policy recommendations”.

Peter Douglas, Singapore-based representative of CAIA, the regional body for alternative asset manager education, said the MAS “formally or informally is always open for industry comment”, but he acknowledged that the outsourcing guidelines “have been very sensitive” because they extend to areas not previously covered by financial services regulation.

The MAS is raising the regulatory bar, but in doing so there is a feeling amongst hedge fund industry observers that Singapore is making it harder for hedge funds to exist, especially smaller ones.

In its annual report released this week, the MAS highlighted “attracting institutional investors” as a key to building a “dynamic and purposeful” financial centre. The threshold for hedge funds has risen too, say industry observers: “Half a billion dollars is the new small,” said Albourne Partners’ managing director Richard Johnston.

The MAS annual report highlighted Korea’s National Pension Service setting up an office in Singapore this year and Caisse de depot et placement du Québec’s establishment of an office last year. They join the Investment Company of The People's Republic of China, Norges Bank Investment Management and the Swiss National Bank among sovereign wealth managers based in Singapore.

Douglas said that “the fund management industry globally is homogenising”, with conventional managers adding alternative strategies and alternative managers adopting traditional strategies: “What's going on in the regulatory environment is reflecting that,” he said.

On the issue of a size criteria, the MAS spokesman told AsianInvestor that its “supervisory approach is risk-based and does not depend solely on the size of the asset manager”.

A dollar size criteria was introduced three years ago. Having less than S$250 million ($184 million) AUM and up to 30 qualified investors is the criteria for registering as a registered fund management company (RFMC). The exempt fund manager (EFM) scheme – which was discontinued in August 2012 – did not have an AUM hurdle.

Presently, there are 275 RFMCs out of 623 asset management companies in Singapore in total. That is around half the number of EFMs (527) which existed when the EFM scheme was discontinued. In part, that is because some EFMs – which could only serve 30 or fewer qualified investors – had more than S$250 million AUM and thus had to apply for a capital markets services (CMS) licence. Still, around a fifth (119) of EFMs ceased fund management activities.

Combined, Singapore added 85 RFMC and CMS license holders between March 2014 and March 2015. And while fewer small asset managers are setting up in the city, that hasn’t dented the pace at which assets under management is increasing. Last year, assets managed in Singapore rose to S$2.3 trillion ($1.69 trillion), up 30% from S$1.8 trillion the year earlier.

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