Starting a Fund Management Company in Singapore
The Singapore government has adopted a proactive approach to building its position as a key fund management center in Asia. Asia’s economic ascendancy has boosted the size of the high net-worth demographic in the region. Furthermore, the Asian growth story is attracting a lot of investments from other parts of the world, thus catalyzing the prospects of the fund management industry in the region.
Singapore is well-positioned to capitalize on the enormous potential this industry offers. Singapore’s pro-business regulations, mature infrastructure and government support for the wealth management sector continue to be attractive to fund managers who have or aim to opt for Singapore company registration. More importantly, the attractive tax environment has reinforced Singapore’s strong foothold in the region.
As the industry evolves and grows in terms of complexity and size, the underlying system is required to respond by enhancing and enhancing the sophistication of its regulatory framework. Post crisis, cautious investors have underscored the need for heightened supervision and enhancement of standards. Singapore’s industry regulator Monetary Authority of Singapore (MAS) has responded to growing concerns of investors by its recent enhancement to the regulatory framework for the Fund Management Companies (FMC) after elaborate public consultations. It is considered a timely measure given the fact that Singapore’s role in the regional fund management industry is growing significantly.
The following article provides the background and an overview of the changes.
Following the 2008 financial crisis which drew the attention of the global financial industry to the regulatory frameworks pertaining to financial markets and fund management industry, Singapore embarked on measures to strengthen its regulatory regime for the local fund management industry.
In April 2010, the MAS announced proposals to restructure the regulatory regime for FMCs operating in Singapore and in September 2010 the conclusions of the consultation were published. In September 2011, MAS released the draft legislative amendments to implement the proposals, seeking further consultation and comments. The MAS announced that the implementation of the enhanced regulatory regime that has been shaping up gradually through elaborate public consultation for FMCs would take effect on 7 August 2012.
To give effect to these changes, amendments have been made to the Securities and Futures (Licensing and Conduct of Business) Regulations, Securities and Futures (Financial and Margin Requirements) Regulations, and the Financial Advisers Regulations. This marks the next step in efforts made by MAS to position Singapore as the leading Asian jurisdiction for fund management activities.
Preview of Changes
- The revised framework provides for three categories of FMCs depending on the size and nature of their business. The current categories of licensed FMCs (LFMCs) and Exempted FMCs (EFMCs) will be replaced by the following
- Registered FMCs – FMCs with less than S$250 million Assets Under Management (AUM) and which serve not more than 30 qualified investors (of which not more than 15 are funds). Registered FMCs will replace the current category of Exempt FMCs.
- Licensed A/IFMCs (A/I LFMCs) –FMCs with more than S$250 million AUM and that serve only accredited and/or institutional investors.
- Licensed Retail FMCs (R LFMCs) –FMCs with more than S$250 million which serve retail investors
- The FMCs depending on their category must adhere to the type and number of customers they service at all times.
- FMCs are required to meet the following minimum competency requirements:
- The LFMCs and RFMCs are required to appoint a minimum of 2 directors having relevant industry experience. One of the directors must be an executive director employed full-time in the day-to-day operations of the company and should be resident in Singapore.
- The FMCs must have at least 2 Relevant Professionals (at least 3 in the case of LFMCs that targets retail investors). Relevant Professionals would include the directors, CEO and representatives of the FMC. Representatives are required to meet applicable minimum entry and examination requirements.
- FMCs should satisfy fit and proper criteria, in accordance with the Guidelines issued by MAS.
- Registered FMCs and Licensed A/I FMCs are required to maintain a minimum base capital, which varies depending on the investment schemes offered and type of customers, serviced. Licensed FMCs are required to meet at all times the risk-based capital requirement criteria.
- FMCs shall put in place a risk management framework to identify, address and monitor the risks associated with customer assets that it manages
- Business conduct rules in the form of independent custody, valuation and reporting, as well as minimizing conflict of interests and adequate disclosure shall apply to all categories of FMCs.
- FMCs shall be subject to adequate internal audit that commensurate with the scale, nature and complexity of its operations.
- A/I LFMCs and RFMCs are strongly encouraged to maintain adequate Professional Indemnity Insurance (PII) coverage.
- Applications, notifications and annual declarations have to be made via a new online submission system.
Overview of the revised framework
FMCs shall either be Licensed by MAS or Registered with MAS. The current exempt fund manager (“EFM”) category will be phased out and a new category of Registered Fund Management Companies (RFMC) will replace the current Exempt Fund Managers and such RFMCs may serve up to 30 Qualified Investors and manage up to S$250 million in assets under management. All other FMCs will have to apply for a license.
Even within the Licensed FMC category, there is a subcategory Under this new category (“A/I LFMCs”), FMCs are restricted to serving qualified investors only, but unlike the RFMCs, are not otherwise subject to any constraints on the number of investors or assets under management. This category is applicable and attractive to FMCs that do not target the retail customers and also whose scope of activities expand beyond that of an RFMC, because the qualifying criteria can be easily met and there are no restrictions regarding the number of customers or Asset under management.
Current EFMs will have six months to apply for a license or to register with MAS under the new regime by submitting their license applications or register online via the Corporate e-Lodgment system.
|Carrying on business in fund management with all types of investors.
|Carrying on business in fund management with qualified investors only, without restriction on the number of qualified investors.
|Carrying on business in fund management with no more than 30 qualified investors (of which no more than 15 may be funds or limited partnership fund structures) AND the total value of the assets managed does not exceed S$250 million.
Licensing and registration requirements
FMCs should be Singapore incorporated companies and have a permanent physical office in Singapore.
An FMC should ensure that the minimum competency requirements for its key personnel and should satisfy MAS that its shareholders, directors, representatives and employees, as well as the FMC itself, are fit and proper, in accordance with the Guidelines on Fit and Proper Criteria issued by MAS.
FMCs should have a minimum of 2 directors with at least 5 years of relevant experience in the financial services industry, including managerial experience or experience in a supervisory capacity. Nominee directors will not count towards meeting this criterion. The CEO of a Retail LFMC must have a minimum of 10 years of relevant experience as against 5 years in the case of RFMC and A/I LFMC.
Licensed Retail FMCs will be required to hire a minimum of three full-time representatives (RFMC and A/I LFMC require only two) who are resident in Singapore. The representatives are individuals who conduct the regulated activity of fund management such as portfolio construction and allocation, research and advisory, business development, and marketing or client servicing. The CEO and director can be counted in to meet the criteria.
An FMC shall at all times meet the base capital thresholds set out in the SF(FMR)R. Such base capital must be maintained on an ongoing basis with sufficient additional capital buffer and ranges from S$250,000 to S$1,000,000.
Category Base Capital Requirement (a) Carrying out fund management in respect of any CIS offered to any investor other than an accredited or institutional investor. S$1,000,000/- (b) Carrying out fund management (non-CIS) on behalf of any customer other than an accredited or institutional investor. S$500,000/- (c) Carrying out fund management other than that described in (a) or (b) above. S$250,000/-
An LFMC shall at all times meet the risk-based capital requirement in the SF(FMR)R. There are no proposed requirements for Registered FMCs. The new framework is designed to harmonize the risk-based capital requirements across all FMCs. There are detailed guidelines issued by MAS for determining the operational risk.
Category Risk-based Capital Requirement Retail LFMCs Financial resources are at least 120% of operational risk requirements. A/I LFMCs
All FMCs should ensure that it has adequate compliance arrangements that commensurate with the scale, nature and complexity of its operation. The CEO and directors of an RFMC are ultimately responsible for all compliance and regulatory matters.
For Registered FMCs, a compliance person is required but they do not have to be dedicated or independent. The CEO or senior staff is able to carry out these duties.
For Licensed AI FMCs, with more than $1 billion AUM and Retail LFMC, the compliance function is required to be kept independent from portfolio management. The dedicated compliance function in Singapore must be staffed with suitably qualified personnel. Such staff may perform other non-conflicting and complementary roles.
Licensed A/I LFMCs with less than $1 billion AUM, should have an independent compliance function with staff, who are suitably qualified and independent from the front office. Depending on its size and scale must appoint a senior staff independent from the front office (e.g. COO or CFO) to be responsible for compliance, or ensure adequate compliance oversight and support from an independent and dedicated compliance team at its holding company, or an overseas related entity. Where both options are not viable then the FMC must appoint a competent external service provider.
Risk Management Framework
FMCs must ensure adequate risk management framework to identify, address and monitor risks associated with the customer assets that the FMC manages. The risk management function should be subject to adequate oversight by the Board and senior management of the FMC and must be entrusted to competent staff and separated from portfolio management.
Appropriate tools and metrics must be acquired or developed to ensure accurate and timely tracking and assessment of risks pertinent to customer assets. Procedures must be in place to continuously monitor the identified risk exposures and the management must be updated on the risks on a continual and timely basis. All policies, procedures and reports relating to the risk management function should be properly documented and maintained.
FMCs must be subjected to adequate internal audit. The internal audit may be conducted by an internal audit function within the FMC, an internal audit team from the head office of the FMC, or outsourced to a third-party service provider.
An FMC shall meet the annual audit requirements and MAS may direct the FMC to appoint another auditor if the appointed auditor is deemed to be unsuitable, having regard to the scale, nature and complexity of the FMC’s business.
FMCs are strongly encouraged to maintain adequate Professional Indemnity Insurance coverage. PII may also be imposed as a requisite condition for licensing where MAS deems it fit.
Track record of the FMC and its holding companies, the regulatory regime that the holding company is subjected to, commitment demonstrated by the holding company and the FMC’s shareholders also play a major role in determining the approval of license for the FMC.
Business Conduct requirement
FMCs are required to entrust the AUM to independent custodians such as prime brokers, depositories and banks that are suitably licensed, registered or authorized in their respective jurisdictions.
AUM shall be subjected to independent valuation and reporting. An independent service provider must do such valuation or where an FMC has sufficient resource, it can be done by an in-house valuation function that is segregated from investment management function.
FMCs shall minimize conflict of interest and where one arises it should be properly disclosed. Conflict of interest may arise where the resources or services of related entities, related investment instruments or proprietary funds are involved.
Adequate disclosures should be provided at the inception of the fund, or at the point that the customer’s account is set up and subsequently along with periodic disclosures any changes that arise must be promptly disclosed. Relevant disclosures include investment and valuation policy, strategy and associated risks, terms covering fees, terminations, payments and exits, aspects relating to leverage and information regarding third parties engaged and involved.
All FMCs shall comply with Anti Money Laundering and countering the Financing of Terrorism requirements, promptly report any misconduct, ensure that competent service providers are engaged. FMCs shall promptly notify material changes and seek MAS approval where necessary and shall submit periodic regulatory returns in relation to its fund management activities.
The revised guidelines are based on the size and complexity of the fund manager. The level of supervision varies depending on the FMC’s market impact and the type and sophistication of the client base. The enhanced guidelines will ensure highest standards in the industry and alongside improve the transparency and thereby the investors’ confidence.
On the flip side, the compliance cost of FMCs will go up and the minimum capital requirements will shoot up the initial set up cost of fund managers. Nevertheless, the improved governance and procedural requirements will ensure that investors’ interest is upheld and the overall industry growth and performance are fail-safe.
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