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Singapore’s government has set out to parliament how the city-state will amend its financial services law, including new compliance requirements for payments services and crypto-assets.
The Monetary Authority of Singapore (MAS) has garnered a reputation for pragmatic regulation of the financial services industry not just regionally but on a global scale, with Hong Kong’s democratic crackdown leading some to believe it may become the region’s biggest financial hub.
The financial sector is dynamic and rapidly evolving, driven by innovation, digitalisation and the design of new products and services, said government minister Alvin Tan in a speech to Singapore’s parliamentarians.
“The sector has transformed significantly in recent years, in terms of the types of transactions, and the persons, institutions and technology conducting these transactions.”
For this reason, there needs to be an overhaul of the tools at the MAS’ disposal to adequately regulate the sector to ensure innovation, as well as risk management.
According to Tan, there are two key areas in the new Financial Services and Markets Bill that improve the MAS’ effectiveness in doing this. “It enhances MAS’ regulatory and enforcement framework across the financial sector, besides rules designed for each segment of the sector.”
Consolidation is the second area that needs to be addressed, he continued.
“We will consolidate some of MAS’ powers on similar issues, which are currently spread across various Acts, into one single Bill,” he said
For instance, this includes the proper management of technology risk and measures to instil proper conduct among professionals in the financial sector, he said, while also addressing regulatory challenges presented by the digitalisation and transformation of the financial market.
The MAS will expand the scope of who it can issue with a prohibition order (PO). POs can be used by the authority to prevent individuals and legal entities from partaking in financial services activity in the city-state for misconducts, such as facilitating money laundering, fraudulent behaviour or market manipulation.
According to the MAS, the existing rules do not stretch far enough. “The current powers to issue POs only apply to persons who provide capital markets services, financial advisory services or insurance services,” said Tan.
“This is clearly not comprehensive enough, as it leaves out other traditional sectors such as banking, as well as newer sectors like payment services,” he argued.
The MAS’ existing powers do not extend to prohibiting persons from carrying out other activities, including providing payment services or conducting other important functions in the financial industry, such as risk management or compliance, and the administration of critical systems.
The new legislation broadens the categories of persons who may be subject to POs, rationalises the grounds for issuing POs from a list of specific criteria to a single fit and proper test, and widens the scope of the prohibition to cover functions critical to the integrity and functioning of financial institutions.
The revised PO powers are also broadly aligned with those in Australia, Hong Kong, the UK and US, he indicated.
“MAS will continue to exercise its PO powers judiciously, taking into account the nature and severity of each misconduct, and its actual and potential impact on trust in our financial sector,” Tan summarised.
New crypto requirements
“Vastly more financial transactions are now conducted digitally through mobile applications, and virtual assets such as Bitcoins and non-fungible tokens are becoming more common globally,” Tan said, outlining that the MAS is committed to facilitating the growth opportunities presented by digital finance, and the cheaper and more convenient services it often brings for consumers.
In so doing, the MAS also want to guard against new risks.
Therefore, the city-state is introducing enhanced crypto requirements via the legislation, Tan said, referring to crypto-asset service providers, such as digital token (DT) service providers (i.e., cryptocurrencies).
Although Singapore has implemented many of the standards for crypto-asset service providers that have been laid down by the Financial Action Task Force (FATF), there is still work to be done, he pointed out.
“DT service providers created in Singapore without providing any DT services in Singapore are currently unregulated for AML/CFT [anti-money laundering/counter-terrorist financing],” he said. “Further, these entities may claim to be headquartered here to take advantage of Singapore’s global reputation. This creates reputational risks for Singapore.”
This regulatory lacuna is global, he said. “Where a DT service provider established in one jurisdiction does not provide services in that jurisdiction but offers its services digitally to other markets, the gap in the current global regulatory framework leads to no single jurisdiction having sufficient regulatory hold over the DT service provider for its ML/TF controls.”
To close this gap, the enhanced FATF standards require DT service providers to be at least licensed or registered in the jurisdictions where they are created, which the legislation that Singapore is introducing would crack down upon.
For example, as it stands, crypto-asset service providers could easily structure their businesses to evade regulation in any one jurisdiction, as they operate mainly online, he warned. “We could be exposed to reputational risks brought by DT service providers created in Singapore, and which provide services relating to virtual assets such as Bitcoin outside Singapore.”
The legislation is now on its second reading, having been introduced to parliament in February.
