Monetary Authority of Singapore consulting on Omnibus Act for regulation of Financial Institutions

The Monetary Authority of Singapore (MAS) launched a public consultation on 21 July 2020 on a new omnibus Act for the financial sector. The “Consultation Paper on a New Omnibus Act for the Financial Sector” proposes changes that enhance and consolidate MAS’s regulatory powers in the financial services, including regulating risks relating to digital services.

The Consultation Paper proposes a new omnibus Act (New Act) to facilitate MAS’s regulation of financial institutions across the financial sector. Provisions that apply across some or all financial institution classes under the MAS Act will be moved over to, or replicated in, the New Act. Provisions from the MAS Act that will be moved over relate to the prevention of money laundering and terrorism financing, the control and resolution of financial institutions, and the oversight of financial sector dispute resolution schemes.

We summarise the key proposals in the Consultation Paper, and provide our preliminary observations, in particular with respect to payment services providers.

Prohibition orders

MAS’s current prohibition powers derive from the Securities and Futures Act (SFA), the Financial Advisers Act (FAA), and the Insurance Act (IA), and the grounds for issuing prohibition orders are based on specific criteria. The Consultation Paper proposes expanding MAS's powers to issue a prohibition order against any person regulated by it who is not fit and proper to engage in regulated activities. The replacement of the lists of criteria with a single fit and proper test widens the grounds under which a prohibition order may be issued.

Currently, MAS can prohibit persons from taking up specified positions and conducting certain activities regulated under the SFA, FAA and IA. The Consultation Paper proposes that the following functions are added to the scope of prohibition:

• Handling funds, including safeguarding or administration of digital payment tokens (DPTs) or DPT instruments,
• Risk-taking,
• Risk management and control, and
• Critical system administration.

The Consultation Paper also proposes to give MAS a power to prescribe additional specified functions in subsidiary legislation.

Digital Token Service Providers

Regulation of digital token service providers that operate outside of Singapore:

MAS is concerned about regulating Virtual Assets Services Providers (VASPs) in line with Financial Action Task Force standards. Through various Acts, MAS currently regulates VASPs that conduct certain virtual assets activities in Singapore. In line with new Financial Action Task Force standards, proposed amendments to the Payment Services Act 2019 (No. 2 of 2019) (PS Act) in December last year seek to expand the scope of DPT services to include the transfer of DPTs, safeguarding or administration of DPT or DPT instruments, and inducement of persons to enter into agreements with a view to buy or sell DPTs.

As illustrated below, the proposed scope of digital token services under the New Act is closely aligned to the proposed widened definition of DPT service under the PS Act.

The Consultation Paper proposes to:

• Regulate VASPs that are created in Singapore. This is to prevent regulatory arbitrage which occurs when no single jurisdiction has a sufficient regulatory nexus over a particular VASP by virtue of the fact that the VASP may not have substantial operations in each jurisdiction in which it has presence.
• Regulate VASPs that ‘actively facilitate’ regulated activities, regardless of whether they have possession of the virtual asset.

To achieve that, the Consultation Paper proposes the creation of a new class of financial institutions namely, digital token (DT) service providers (persons who provide “DT service”), which will be regulated under the New Act.

DT will be defined to mean:

• A DPT as defined in the PS Act; or
• A digital representation of a capital markets product as defined in the SFA which: (i) can be transferred, stored or traded electronically; and (ii) satisfies such other characteristics as MAS may prescribe; but does not include an excluded digital token.

The scope of DT services will include services that ‘actively facilitate’ regulated activities, and is proposed to be defined as:

• Dealing in DTs;
• Facilitating the exchange of DTs;
• Inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any DTs in exchange for any money or any other DTs (whether of the same or a different type);
• Accepting DTs for the purposes of transferring, or arranging for the transfer of, the DTs or arranging for the transmission of DTs (where the service provider does not come into possession of the DTs);
• Safeguarding or administration of a DT or DT instrument, where the service provider has control over the DT or the DT associated with the DT instrument; and
• Advisory services relating to the offer or sale of DTs.

A DT service provider that is a company incorporated in Singapore, and which carries on a business of providing any DT service outside of Singapore, must be licensed under the New Act.

Licensing and ongoing requirements for DT service providers:

MAS proposes to regulate DT service providers through licensing and ongoing requirements. This includes having at least one executive director who is resident in Singapore, incorporation in Singapore, having a permanent place of business in Singapore, satisfying financial requirements, and having the relevant persons be fit and proper.

Apart from licensing and ongoing requirements, MAS proposes to subject all DT service providers to Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements. DT service providers will be required to establish and staff an adequate AML/CFT compliance function in Singapore.

MAS does not intend to provide any low risk exemptions in respect of DT services. As such, all DT service providers will be subject to the full set of AML/CFT requirements to be clarified in a further notice. It is expected that these AML/CFT requirements will generally be aligned with requirements imposed on MAS-regulated financial institutions carrying on DT services in Singapore. In particular, it is proposed that the AML/CFT requirements will be aligned with those currently imposed on DPT service providers under the PS Act.

MAS intends to provide a grace period to entities who are currently incorporated or formed in Singapore and that are wholly carrying on regulated DT services outside of Singapore.

Increased regulation of technology risk management

Currently, MAS imposes technology risk management requirements through the respective existing Acts. It is proposed that MAS will be able to impose technology risk management requirements on any financial institution or any class of financial institution in relation to the institution’s systems, regardless of whether the systems supports a regulated activity. The rationale is that even systems that do not support regulated activities can pose contagion cyber risks to systems that do support those activities, due to inter-linkages.

The maximum penalty for breaches of such requirements will be S$1 million.

Provision of information

The Consultation Paper also proposes that there should be a new general duty upon financial institutions to use reasonable care not to provide false information to MAS.

Comment

The New Act makes clear MAS’ intentions to enhance and harmonise its regulatory powers over the financial sector.

Aside from new classes of persons who are now subject to regulation by MAS due to the New Act’s enhanced extra-territorial reach, persons who are currently regulated by MAS should also be aware of the regulator's expanded powers under the New Act, such as those relating to Prohibition Orders.

Notably, the New Act is meant to cover payment services providers that would not be regulated under MAS’s present regime, including the PS Act. The New Act covers business that are incorporated in Singapore but carry out DT services for the benefit of customers in other countries. The New Act also regulates service providers that provide advisory services on DT. It is notable that this aspect of service is not a regulated DPT service under the PS Act.

These nuances may have certain implications. As drafted, the New Act may result in payment services providers being required to be licensed under the New Act even though they already hold a licence, or are exempted from holding a licence, under the PS Act, since the regulatory scope of the New Act is distinct from that of the PS Act. While there is an express licensing exemption under the New Act for SFA and FAA licence holders, the New Act does not provide for a similar exemption for a PS Act licence holder.

Given the additional administrative burden in maintaining multiple licensing regimes, it would be helpful for MAS to provide clarity on the intended interplay between the New Act and the PS Act.

The public consultation period runs from 21 July 2020 to 20 August 2020.