The Singapore Story: Strong Economic Growth Enabled By Careful Regulation

The government has focused on continually developing Singapore as a regional and international financial centre, offering financial institutions (FIs) and Fintechs a pro-business environment, excellent infrastructure, international connectivity, as well as a highly skilled labour force. In addition, its free market and legal and political stability ensure a competitive, safe and secure jurisdiction for foreign investment.

This year, Singapore’s economy was ranked the freest in the world by Heritage Foundation’s 2021 Index of Economic Freedom, having been noted for its rule of law, regulatory efficiency, and open markets.[i] Its central bank, the Monetary Authority of Singapore (MAS) balances the twin aims of encouraging innovation and investment, and ensuring financial systems remain stable with high levels of investor confidence.

In recent years, a key area of focus has been the development of Singapore’s asset management industry. Assets under management in the Asia Pacific region are projected to grow faster than any other region globally, from US$15 trillion in 2017 to almost US$30 trillion in 2025.[ii] A large part of this is driven by conventional growth in the asset management industry. However, a potentially exciting trend appears to be around shaping the nascent development of funds focused on investing in crypto-assets, and the potential use of fund structures to tokenise a wide range of assets for trading on the blockchain.

In spite of the pandemic, or perhaps because of it, Singapore is well-positioned for growth, driven by a growing middle class with increasing wealth pools and its investor-friendly financial industry.

Clear And Balanced Financial Regulatory Aims

Several key trends and regulatory developments have been identified as contributing to the growth of Singapore as a financial and asset management hub.

Trends in asset management

The asset management industry in Singapore has come a long way since its inception in the early days. However, to ride the growth momentum in Asia, Singapore is not resting on its laurels. A pragmatic regulatory approach, coupled with bold and innovative private endeavours, mean that Singapore continues to find ways to grow and innovate in its fund offerings to investors: 

• In January 2020, the MAS launched a new Variable Capital Companies (VCC) structure under the Variable Capital Companies Act 2018, aiming to encourage the domiciliation of funds in Singapore. Under the VCC structure, fund managers are provided flexibility in the issuance and redemption of shares. The VCC structure also enables payment of dividends out of capital (as opposed to profit). The new corporate structure provides flexibility to fund managers to originate a wide range of investment funds, whilst at the same time also bringing about cost savings through tax-efficient planning for their funds.
• The rise of Bitcoin and other digital tokens as an asset class has resulted in increased interest from the investment public in gaining access to such digital assets. In Singapore, the MAS has introduced the Payment Services Act which provides a comprehensive framework for the regulation of digital payment token services. The relative regulatory certainty this affords has resulted in a rise in private enterprise in crypto-focused funds, tracking developments in the US of funds such as Grayscale Bitcoin Trust which enables investors to gain exposure to Bitcoin through a fund structure wrapper.
• We are also seeing interest in the potential use of fund structures to tokenise assets for trading on the blockchain. This could allow investors easier access to private assets (such as shares in private companies and unlisted bonds).

Regulatory and other developments

In early 2020, as part of their response to COVID-19, the MAS announced it would defer implementation of new regulatory policies and guidelines, aiming to reduce strain on FIs’ resources. Since then, regulatory developments have seen a resurgence. A few key themes can be noted – in particular, the developments aim to ease the entry of foreign asset managers into Singapore and ensure the stability of the financial system and continued investor confidence.  These include the following developments: 

• In June 2020, the MAS announced it is planning to streamline its foreign-related corporation framework. Under the streamlined regime, international FI groups will be permitted to service Singapore-based customers without a Singapore licence, so long as they have a licensed affiliate in Singapore and have entered into an arrangement with them that complies with certain ‘boundary conditions’. For example, a foreign entity may enter into an arrangement with its Singapore affiliate to provide product financing as a complement to its Singapore affiliate’s business in dealing in capital markets products, even where the Singapore affiliate is not licensed to provide such services. Unlike the earlier regime, no prior approval from the MAS will be required for such an arrangement.
• More recently in March 2021, the MAS announced a related exemption framework for cross-border business arrangements of capital markets intermediaries involving their foreign head offices or branches. This seeks to address a gap in the legislation which existed for many years and will likely provide welcomed clarity to international FIs seeking to service Singapore investors via a foreign head office or branch.
• In practice, these licensing exemptions are useful for global FIs (e.g. asset managers) who wish to provide a seamless service to Singapore clients. In an increasingly digitalised world, FIs are able to easily reach wider pools of customers, including on a cross-border basis. However, provision of financial services may be limited due to licensing rules across regulatory regimes. The new streamlined frameworks will facilitate the cross-border provision of financial services into Singapore by ‘lowering’ barriers of entry for foreign investment.
• The MAS is also focused on investor protection – reflected in the September 2020 rollout of its Best Execution regime, which will take effect in March 2022. Under the Best Execution regime, holders of capital markets services licences (e.g. asset managers), along with banks, merchant banks, and finance companies who deal in capital markets products, fund management and/or real estate investment trust management under the SFA, must implement policies and procedures to (1) place and/or execute customers’ orders on best available terms; and (2) execute comparable customers’ orders in accordance with time of receipt. In particular, the regime demonstrates the MAS’ ongoing commitment to the concept of fair handling in the execution of customer orders. Notably, similar rules have been rolled out in the EU / UK and Hong Kong SAR.
• More recently, operational resilience in the financial industry (i.e. ensuring the financial industry’s ability to continue providing services during times of disruption or uncertainty) has also been a topic of focus for the MAS. In particular, the MAS has been keen to address risks that arise from the digitalisation of the financial industry, which in turn has enabled FIs to increasingly outsource their services.
• In December 2020, the MAS consulted banks and merchant banks on a proposed Outsourcing Notice which would (amongst others) require them to maintain a register of their outsourced services; manage risks arising from the outsourcing of material services, e.g. through a framework to evaluate service providers; conduct regular audits of service providers; and ensure the protection of customer information shared with service providers. The MAS is expected to roll out similar requirements to the rest of the financial industry.[iii]
• In January this year, the MAS also issued enhanced Technology Risk Management Guidelines (TRM Guidelines) which now provide further guidance on risk mitigation strategies for FIs. For example, FIs are expected to establish robust processes for the timely analysis of cyber threat intelligence within the financial ecosystem, and exercise strong oversight of third-party service provider arrangements.

COVID-19 Recovery And Future Economic Priorities

Last year, the world went on ‘pause’ as it battled the COVID-19 pandemic. As a result, Singapore’s economy shrank by 5.4 per cent,[iv] the nation’s worst-ever recession since its independence in 1965. Several COVID-19 economic support packages have been rolled out by the government, including the MAS’ S$125million support package for the financial and fintech sectors to sustain and strengthen capabilities. The funds were focused on workforce training, digitalisation, and increasing access to digital platforms.[v]

In February this year, the Singapore government also announced its annual Budget, including S$24bn of funding to be allocated over the next three years. The pledge will go towards building a more vibrant business sector and innovation ecosystem, helping businesses to transform and scale up their operations, and creating opportunities for workers (e.g. upskilling, digital skills). Heng Swee Keat, Singapore’s Deputy Prime Minister, has said, “Singapore must deepen its position as a global-Asia node to emerge stronger from the COVID-19 crisis”.[vi] In practice, this is expected to involve working to restore Singapore’s physical connectivity with the rest of the world, expand its digital connectivity, and deepen its capacity to collaborate and innovate with global partners.

Future Growth

Going forward, Singapore’s financial and asset management industry is expected to continue growing. Most recently, Goldman Sachs announced its plans to add about 100 staff in Singapore. The new positions will mainly be in technology, supporting the bank’s cash management operations. The firm also plans to hire more investment bankers. E.G. Morse, head of Goldman Sachs’ regional operations, said on the Singapore expansion, “We are looking to really grow our franchise here across all products. [Singapore is] a significant and major client hub from banking clients to asset managers”.[vii]

The Ministry of Trade and Industry has predicted that Singapore’s economy will grow by 4-6 per cent in 2021, expecting to see a “gradual recovery over the course of the year, although the outlook remains uneven across sectors”. In particular, “the information and communications, and finance and insurance sectors are expected to continue to post steady growth, supported by sustained enterprise demand for IT and digital solutions, and credit and payment processing services respectively”.[viii] As also reflected in this year’s Budget – digitalisation, competition, and innovation are expected to be key areas of focus in ensuring Singapore’s continued economic growth and stability.

 

Footnotes:

[i]            Singapore is world's most free economy: US think-tank, Singapore News & Top Stories - The Straits Times

[ii]           Opening Address by Mr Lim Cheng Khai at the Investment Management Association of Singapore’s 6th Regulatory / Legal Roundup Forum on 15 February 2019 (mas.gov.sg)

[iii]           Consultation-Paper-on-Outsourcing-by-Banks-and-Merchant-Banks.pdf (mas.gov.sg) p1

[iv]          PR_AES2020.pdf (mti.gov.sg) p3

[v]           MAS Launches S$125 Million Package for Financial Institutions and FinTech Firms to Strengthen Long-Term Capabilities

[vi]          Budget 2021: $24b channelled to firms and workers to boost transformation efforts, Singapore News & Top Stories - The Straits Times

[vii]          Goldman to swell to record size in Singapore with 100 tech hires, Banking News & Top Stories - The Straits Times

[viii]         PR_AES2020.pdf (mti.gov.sg) p5