I OVERVIEW OF RECENT ACTIVITY
Singapore continues to be an attractive proposition for asset management activities, particularly in light of continued wealth creation in Asia and the inflow of wealth from other parts of the world. A recent survey by the Monetary Authority of Singapore (MAS) indicates that the assets under management (AUM) in Singapore increased to S$2.4 trillion at the end of 2014, which represented a growth of about 30 per cent from 2013 to 2014,2 demonstrating the continued faith that asset managers have in the regulatory infrastructure established to support asset management in Singapore.
Given the current global financial market conditions resulting in volatile corporate finance markets, asset managers in Singapore encounter some challenges such as certain difficulties in identifying desirable assets to invest in and some barriers to exiting from their investments in an optimal fashion. Asset managers also grapple with regulatory oversight and requirements in multiple jurisdictions, and the implementation of necessary steps to ensure compliance with global standards. However, continued low interest rates and easier access to debt markets have counterbalanced such challenges to some extent.
The recovering US and European economies may also begin to influence where investment funds are deployed, but it is commonly expected that this impact should be moderate, at worst, as the Asian economies further expand, led by powerhouses such as China as well as newer markets such as the newly opened markets of Myanmar and Vietnam. Singapore’s position as a pan-Asian hub for asset managers continues to serve it in good stead in this regard.
II GENERAL INTRODUCTION TO the REGULATORY FRAMEWORK
The main legislation for the regulation of asset management activities in Singapore is the Securities and Futures Act (Chapter 289) (SFA) supported by the subsidiary legislation, practice notes and guidelines issued by the MAS. The MAS is the regulator for, inter alia, asset management activities in Singapore.
i The SFA
The SFA governs a range of activities in Singapore and, for the purpose of asset management, the most relevant of activities tend to be the following:
- a real estate investment trust (REIT) management;
- b trading in futures contracts;
- c leveraged foreign exchange trading; and
- d fund management.
An entity can only carry out such regulated activities in Singapore if it either holds a relevant capital markets services licence (CMSL) for that specific activity or falls under some form of exemption listed in the SFA. Most asset managers will apply for the relevant CMSL, or structure their activities so that they do not need a CMSL, although care needs to be taken to ensure that the structure is appropriately set up so that there is no inadvertent breach of the SFA.
ii Fund management
Generally, fund management, which is broadly defined in the SFA as an ‘undertaking on behalf of a customer of (a) the management of a portfolio of securities or futures contracts; or (b) foreign exchange trading or leveraged foreign exchange trading for the purpose of managing the customer’s funds, but does not include real estate investment trust management’, would be the most common regulated activity that an asset manager would carry out in Singapore.
The regulatory regime requires fund managers to be licensed as licensed fund management companies (LFMCs), which are fund management companies that provide fund management services to accredited or institutional investors only (A/I LFMCs) or to all investors (including retail investors) (retail LFMCs). There are some differences in relation to the qualifying criteria for A/I LFMCs and retail LFMCs, such as a lower base capital requirement for A/I LFMCs, and asset managers will need to consider which type of LFMC would be more appropriate for its activities.
The alternative to being licensed as an LFMC is for a fund manager to be registered as a registered fund management company (RFMC). The minimum requirements for registration as an RFMC are less stringent than the requirements imposed on an A/I LFMC or retail LFMC, including more leeway in terms of using outsourced compliance support services for its fund management activities and substantially less annual reporting obligations to the MAS. The key restriction for an RFMC is the requirement that an RFMC is only permitted to carry out its fund management activities 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 AUM must not exceed S$250 million. As a result, for larger asset managers, the option of carrying out fund management activities in Singapore as an RFMC may not be possible.
Fund management companies are also required to:3
- a be incorporated in Singapore and have a permanent physical office in Singapore;
- b meet the minimum competency requirements imposed by the MAS in terms of the number of executive directors with relevant experience and the number of relevant professionals residing in Singapore;
- c satisfy the MAS that its shareholders, directors, representatives, employees and the fund management company itself are fit and proper according to MAS standards;
- d comply with the minimum base capital prescribed by the MAS at all times. This ranges from S$250,000 to S$1 million;
- e comply with the risk-based capital requirements (for retail LFMCs and A/I LFMCs);
- f ensure compliance arrangements are in place that meet MAS requirements;
- g put in place an appropriate risk management framework and an appropriate internal audit process;
- h meet annual audit requirements;
- i obtain professional indemnity insurance if required by the MAS, although retail LFMCs and A/I LFMCs are strongly encouraged to maintain such insurance regardless of such requirement;
- j obtain a letter of responsibility from the parent company of an LFMC, should the MAS require it;
- k comply with all business conduct requirements imposed by the MAS, including requirements in relation to valuation and reporting, custody and disclosure;
- l comply with anti-money laundering (AML) requirements and requirements against the financing of terrorism;
- m comply with the misconduct reporting requirements;
- n if outsourcing services, comply with the MAS requirements in relation to outsourcing arrangements;
- o make such notifications and obtain such approvals as may be required by the MAS for transactions and changes in particulars; and
- p submit the necessary periodic returns mandated by the MAS.
iii Recent developments to fund management licensing and registration
Since August 2012, entities with fund management as their principal business activity have been required to either obtain a CMSL as an LFMC (if it is either carrying on fund management with all types of investors or with an unlimited number of qualified investors) or be registered with the MAS as a registered fund management corporation (if it is only providing fund management services to 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). This represents a departure from the earlier regulatory regime, which adopted a lighter touch in terms of regulatory oversight.
Another regulatory change that took effect on 1 July 2013 is the requirement for certain kinds of collective investment schemes in Singapore to be registered with the MAS. Prior to this change, foreign collective investment schemes that were offered to accredited investors and other relevant persons could be registered with the MAS by way of a relatively simple notification process and the collective investment scheme could be offered in Singapore thereafter. However, the change requires collective investment schemes where the units can only be acquired at a consideration of not less than S$200,000 to lodge an information memorandum with the MAS when carrying out the registration process. The information memorandum is meant to be a summary of the salient terms of the collective investment scheme. Under the previous regime, there was no such requirement to lodge an information memorandum. This also means that closed-end funds that are constituted on or after 1 July 2013 (including private equity funds) will need to be registered with the MAS and imposes a new compliance requirement for such funds.
There is increasing scrutiny of AML and countering of terrorism financing requirements. The MAS is paying more attention to the processes that regulated entities in Singapore are required to put in place – for example, requiring all holders of CMSL to carry out risk assessments and customer due diligence4 to prevent money laundering and to counter the financing of terrorism. In addition, the MAS announced that it would form a dedicated AML Department and a new Enforcement Department, as of 1 August 2016, to both oversee the development of regulatory policies as well as ensure that enforcement actions are brought in regard to regulatory breaches.5
In light of the 1Malaysia Development Berhad (1MDB) scandal, which led to Singapore authorities investigating 1MDB-related fund flows through Singapore, the MAS has released a joint statement (together with the Attorney-General’s Chambers of Singapore and Commercial Affairs Department of Singapore) in July 2016 stating that the MAS will take decisive regulatory actions against any financial institution that has breached regulations or failed to meet the expected AML standards. BSI Bank Limited Singapore (BSI Bank) is an example of a financial institution that has been found to be in serious breach of AML requirements, and the MAS has since withdrawn BSI Bank’s status as a merchant bank in Singapore.
In the area of technology, the MAS has stressed the importance of technology risk management as newer technologies begin to be adopted in business practices. For example, it has recently proposed guidelines for a ‘regulatory sandbox’ for FinTech experiments.6 This is to enable financial institutions and non-financial players to experiment with innovative FinTech solutions in an environment where actual products or services are provided to the customers but within a well-defined space and duration. For the duration of the regulatory sandbox, the MAS will relax specific regulatory requirements that an applicant would otherwise be subject to. In 2015, the MAS formed a new FinTech and Innovation Group, which is responsible for regulatory policies and development strategies to facilitate the use of technology and innovation to better manage risks, enhance efficiency and strengthen competitiveness in the financial sector.
iv Capital adequacy
Asset managers have been required to comply with risk-based capital adequacy requirements, but the manner of assessing such requirements was largely an internal process for asset managers. On 3 April 2013, the MAS issued a notice on risk-based capital adequacy requirements for CMSL holders (including retail LFMCs and A/I LFMCs). This establishes the methodology that such CMSL holders are to use to calculate their financial resources and total risk requirement, and CMSL holders will be required to comply with this methodology going forward.
Some of the key features of the methodology are:
- a such CMSL holders have to ensure that their financial resources do not fall below their total risk requirement and, where its financial resources falls below 120 per cent of its total risk requirement, immediate notification has to be given to the MAS. The MAS can then direct the CMSL holder to carry out or cease certain activities or, in the worst-case scenario, revoke the licence granted to the CMSL holder; and
- b various quarterly and annual financial filings with the MAS will now need to be carried out by such CMSL holders.
III COMMON ASSET MANAGEMENT STRUCTURES
A range of asset management structures are commonly used in Singapore, some of which are dependent on the exact type of asset management in question, including:
- a REITs, which are structured as trusts as required under Singapore law;
- b hedge funds – these will be structured as open-ended funds or collective investment schemes. Traditionally, these are often domiciled offshore in tax-neutral jurisdictions such as the Cayman Islands or the British Virgin Islands; and
- c private equity funds – private equity funds managed by Singapore asset managers will also often be domiciled offshore in tax-neutral jurisdictions like the Cayman Islands or the British Virgin Islands, and are often set up as limited partnerships.
However, there is growing acceptance of the setting-up of a Singapore-domiciled structure in recent years to take advantage of certain tax incentives granted by the government, the double taxation treaties that Singapore has signed with various jurisdictions as well as the introduction of the limited partnership concept in Singapore (which is most generally understood by private equity investors). Corporate or trust structures are also used, but these tend to be less common in the private equity context.
IV MAIN SOURCES OF INVESTMENT
The MAS’s 2014 Singapore Asset Management Industry Survey indicates that around 81 per cent of the total AUM in Singapore was sourced outside of Singapore, a slight increase from 77 per cent in 2013. The three main geographic regions where AUM was sourced were the Asia-Pacific region (54 per cent), Europe (19 per cent) and the US (18 per cent). This illustrates Singapore’s continued desirability as a hub for regional and institutional investors.
In terms of the allocation of assets by investors, equities and alternatives rose from 47 to 50 per cent and from 14 to 15 per cent respectively. This increase can be attributed to investors favouring investment strategies that offer relatively higher and uncorrelated returns in the low yield environment. On the other hand, there was a decrease for relatively lower yielding asset classes such as bond investments and cash holdings that fell from 23 per cent to 21 per cent and from 8 per cent to 4 per cent respectively.
The key investment destination for asset managers in Singapore remains the Asia-Pacific region, which accounted for approximately 68 per cent of AUM in both 2013 and 2014. The AUM results in 2014 and 2013 show a slight decrease from 70 per cent of AUM in 2012, and this is attributed to funds flowing into the US and Europe.7
This statistic is consistent with the increasing focus on the Asia-Pacific region in recent years for investment purposes, but it is also a sign of how investors and asset managers are beginning to see value in developed markets as their economies recover.
V KEY TRENDS
Singapore’s asset management industry continues to grow. The total assets managed by Singapore-based asset managers increased from S$1,818 billion in 2013 to S$2,359 billion in 2014. This represents a year-on-year growth of approximately 30 per cent. This is a substantial increase from the 11.8 per cent growth in 2013.
It is anticipated that growth in the industry is likely to continue, with some speculation that Singapore could overtake Switzerland as the world’s leader in wealth management in the future. As such, Singapore fund managers are well placed to take advantage of the growth in the Asia-Pacific region.
In line with a preference among Asian investors for increasing yield rather than wealth creation, asset managers in Singapore are expected to create more interesting and complex products rather than rely on more traditional and conservative products. This appears to have been successful, as traditional asset managers continue to develop innovative products (such as specialised fixed income strategies for their clients) and AUM for such asset managers saw growth in 2014.
The hedge fund and private equity sectors also grew substantially, with the AUM by private equity showing the strongest growth of 24 per cent to S$93 billion, underpinned by a favourable environment for fund raising and investments. Hedge fund managers based in Singapore saw AUM grow to S$108 billion, a growth of 21 per cent from 2013 to 2014.
While the challenges faced by the asset management industry in Singapore remain largely unchanged, regulatory oversight remains the most significant. More stringent requirements in the regulatory regimes of established jurisdictions (such as the US and the UK) will impose greater regulatory costs on asset managers based in Singapore if they have investors from such jurisdictions or invest into such jurisdictions. Muted capital markets activity may also result in asset managers being less able to achieve or sustain the level of performance witnessed in previous years. On a more positive note, M&A activity has recently substantially increased, which is an indicator that funds are flowing into Singapore at a greater extent.
In addition to investor uncertainty over the growth in the US and Chinese markets, the other factors arising from the recent global events could potentially weaken investor confidence in global markets and adversely affect asset managers in 2016. Such recent global events include the market responses and potential fallout in relation to the Greece bailout approved by the International Monetary Fund, the potential raise in the interest rates by the US Federal Reserve, the devaluation of the Chinese yuan and the aftermath of the UK referendum vote to exit the EU, all of which are likely to shape investor confidence in global markets.
However, the lower oil prices, depreciation of currencies (such as the euro at the start of 2015) and the European Central Bank’s announcement of its qualitative easing programme have aided the recovery of the relatively stagnant European markets since 2014, and are indicative that the global economy may continue to recover. The MAS is aware of the uncertainty in market conditions that is likely to persist, and has commented that it stands ready to curb excessive volatility in the Singapore dollar.8 Barring any unforeseen circumstances or drastic events, Singapore’s asset management industry should continue to see growth in the future.
VI SECTORAL REGULATION
Asset management activities by insurance companies are regulated under the SFA, although the licensing regime for insurance activities is governed by the Singapore Insurance Act.
Pension fund management activities are regulated under the SFA.
iii Real property
Real property fund management activities (other than REITs) are regulated under the SFA. REIT trustee-managers, who are also governed by the SFA, would generally be licensed as a CMSL-holder for REITs activities rather than as an RFMC or licensed fund management company.
iv Hedge funds
Hedge fund management activities are regulated under the SFA. As hedge fund structures are sometimes set up in a way that falls under the definition of collective investment schemes in the SFA, foreign hedge funds now must be aware that they may need to lodge more information with the MAS for the purpose of registration in Singapore before an offer of units is made.
v Private equity
Private equity fund management activities are regulated under the SFA. In addition, foreign private equity funds may now be required to register with the MAS before they can be offered in Singapore, which is a significant departure from the previous regime (which did not require any such registration of foreign private equity funds before an offer was made).
VII TAX LAW
Singapore is widely regarded as an ideal location for foreign investors to set up their operations, and key drivers are Singapore’s attractive tax rates (both at personal and corporate levels), the absence of capital gains taxes and a wide tax treaty network. Singapore’s current tax treaty network includes 80 double taxation treaties, eight limited treaties, one exchange of information treaty, and another five treaties that have been signed but not ratified.9
Generally speaking, there is a wide range of tax incentives available in Singapore. The financial sector (including fund management) is viewed as being important for the Singapore economy, and concessionary tax rates of between 5 and 12 per cent can be available to players in this sector.
ii Tax relating to asset management
An asset manager based in Singapore will be treated as a taxable person under Singapore tax laws, regardless of whether the fund is based in Singapore or offshore (as is commonly the case). However, there are certain safe-harbour provisions that relate to asset management, as set out below.
The offshore fund regime
An offshore fund that is managed by a Singapore-based fund manager will be exempt from tax on its income from designated investments if the fund falls within the definition of a prescribed person.
A prescribed person is defined in the Income Tax (Exemption of Income of Non-residents Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010 as:
(a) [...] an individual who is neither a Singapore citizen nor resident in Singapore, and who is the beneficial owner of the funds managed by any fund manager in Singapore; or
(b) [...] a company which –
(i) is not resident in Singapore;
(ii) does not have a permanent establishment in Singapore (other than a fund manager);
(iii) does not carry on a business in Singapore;
(iv) at all times has less than 100 per cent of the value of its issued securities beneficially owned, directly or indirectly, by Singapore persons collectively; and
(v) is not a company the income of which is derived from investments which have been transferred (other than by way of a sale on market terms and conditions) from a person carrying on a business in Singapore where the income derived by that person from those investments was not, or would not have been if not for their transfer, exempt from tax.
Typically, a fund will be considered a prescribed person if it is not deemed to be a Singapore resident and is not entirely owned by Singapore-resident investors.
The other important requirement for the purpose of qualifying for this exemption is that each and every investor in the fund needs to fall within the definition of relevant owner. If this is not satisfied, a portion of the income derived by the qualifying foreign fund and attributable to the investors that are not relevant owners may be subject to tax in the hands of such non-relevant owners.
A relevant owner is:
- a an individual investor;
- b a bona fide entity not tax-resident in Singapore that either does not have a permanent establishment in Singapore (other than a fund manager) and does not carry on any business operations in Singapore), or carries on an operation in Singapore through a permanent establishment in Singapore where the funds used by the entity to invest directly or indirectly in the qualifying fund are not obtained from such operation;
- c certain designated government entities (including the MAS and the Government of Singapore Investment Corporation Pte Ltd); or
- d generally any entity other than those set out in (a) to (c) that owns not more than 30 or 50 per cent (depending on the number of investors a qualifying fund has) of the qualifying fund.
This tax exemption covers all income and gains relating to the qualifying designated investments, unless such investments fall within a specific exclusion list. Most investments would generally fall within the definition of designated investments. However, immoveable property in Singapore falls within the exclusion list, and asset managers should therefore be aware that the tax exemption would not be available for such investments.
Singapore-resident fund scheme
The key reason for the introduction of the Singapore-resident fund scheme in 2006 was to encourage fund managers to base their funds in Singapore. Essentially, a fund that qualifies for resident fund status has its specified income derived from designated investments exempted from Singapore income tax. This allows such resident funds to be treated in a similar fashion to offshore funds under the offshore fund regime.
In addition, a Singapore-resident fund is able to utilise Singapore’s tax treaty network, and advantages including the prevention of double taxation and a reduction in or exemption from tax for certain types of income (although the availability of such reductions or exemptions depends on the terms of the treaty in question).
To qualify as a resident fund, the restrictions applicable to the offshore fund regime are applicable, as well as the following conditions:
- a the resident fund has to be established as a company (i.e., no limited partnerships or limited liability partnerships);
- b be incorporated in Singapore only;
- c have its fund administration functions performed locally (which is even more relevant now with the new fund management regime); and
- d seek prior approval from the MAS.
Enhanced-tier fund scheme
The enhanced-tier fund scheme also provides an exemption for income and gains on designated investments. This scheme applies to both offshore funds and resident funds, and the key advantage is that there is no restriction on the Singapore-resident investors that invest in the fund, thereby removing the restriction that both offshore and resident funds face in falling under the definition of prescribed person for the two schemes set out above.
There are certain additional requirements for funds that wish to qualify as an enhanced-tier fund, including:
- a a minimum fund size of S$50 million;
- b prior approval of the MAS is required and, once obtained, the investment strategy of the fund cannot be changed;
- c the enhanced-tier fund scheme cannot be relied on if the fund is using other tax incentive schemes; and
- d certain administrative requirements (such as a minimum amount of local business spending and the use of a Singapore-based fund administrator in certain circumstances).
Singapore funds under the enhanced-tier fund scheme that acquire their ultimate investment through a Singapore special purpose vehicle (SPV) are now permitted to obtain a tax exemption for the SPV. Master and feeder funds and their SPVs are permitted to apply for the scheme, subject to specific economic conditions.
Fund management incentive
The fund management incentive was established to promote fund management activities in Singapore. This provides a concessionary tax rate of 10 per cent for income derived from fund management and investment advisory activities, provided certain conditions are met by the fund manager, including:
- a none of the investors must be a non-relevant owner (see ‘The offshore fund regime’, supra);
- b the fund manager must either hold a CMSL or be exempted from holding the relevant CMSL or, in the context of the new fund management regime, be an RFMC (at a minimum);
- c the fund manager must be a company; and
- d the fund manager must have at least three professional staff on its payroll whose role or function is focused substantially on fund management or investment advisory activities.
The MAS will also have discretion to consider other factors when deciding the eligibility of a fund manager for the fund management incentive, including the fund manager’s growth targets and total headcount in Singapore. This is similar to some other tax incentives in Singapore where the regulatory authority considers the applicant’s future plans and activities in Singapore when deciding whether to grant an incentive or exemption.
iii Obligations under the Singapore-US Foreign Account Tax Compliance Act (FATCA)
Under the FATCA Model 1 Intergovernmental Agreement and the Income Tax (International Tax Compliance Agreements) (United States of America) Regulations 2015, financial institutions in Singapore are required to fulfil reporting obligations under the FATCA through the Inland Revenue Authority of Singapore (IRAS). Reporting Singaporean financial institutions (SGFIs) are required to submit annual return reports to IRAS detailing the required information in relation to every US reportable account. FATCA reporting for SGFIs for Reporting Year 2015 closed on 31 May 2016.
Today, Singapore has become an affluent society and a global city, at the crossroads of international flows of trade, investment, finance and talent. However, the asset management industry will likely be subject to continued change in relation to the regulatory requirements imposed on fund managers in the near future due to Singapore taking a more active stance in regulating the financial industry. Globally and regionally, investor confidence and market sentiment, which have been affected by recent global events, remain uncertain.
Singapore will continue to be an important centre for asset and wealth management, which should result in increased AUM and the possibility of even more asset managers setting up here.10 This will be driven in part by the continued importance of Asia in relation to the global economy and Singapore’s macroeconomic advantages in the context of the region. More importantly, the government is strongly committed to growing and developing Singapore as a financial centre, as evinced by the MAS’ recent establishment of a new Financial Centre Advisory Panel comprising 26 leaders from the banking, insurance and asset management industries that seeks to strengthen the dialogue and partnership between MAS and the financial industry, and drive the growth and development of Singapore’s financial centre.
Moving forward, Singapore is set to enhance its market access to the region through its participation in the ASEAN Collective Investment Schemes Framework, which allows fund managers based in Singapore, Malaysia and Thailand to offer funds constituted and authorised in their home jurisdictions directly to retail investors in each other’s countries through a streamlined authorisation process. Singapore also participates in the Asia Region Funds Passport, which permits fund managers operating in a passport member economy to offer their funds in other passport member economies through a streamlined authorisation process.11
1 Stefanie Yuen Thio is the joint managing director at TSMP Law Corporation.
2 The MAS 2014 Singapore Asset Management Survey, available at http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Surveys/Asset%20Management/2014%20AM%20Survey%20Report.pdf.
3 ‘Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies’ MAS Guideline No SFA 04-G05 issued on 7 August 2012.
4 MAS Notice SFA04-NO2 issued on 24 April 2015 (revised on 30 November 2015).
5 MAS media release on 13 June 2016 ‘MAS Sets Up Dedicated Departments to Combat Money Laundering and Strengthen Enforcement’.
6 MAS Consultation Paper on FinTech Regulatory Sandbox Guidelines released on 6 June 2016.
7 The other significant investment destinations in 2014 are Europe (13 per cent of AUM) and the United States (11 per cent of AUM).
8 MAS media release on 24 June 2016 ‘Comments by MAS on Market Conditions’.
10 See speech by Ravi Menon, the Managing Director of MAS at the MAS Annual Report 2015/2016 Media Conference, at www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/Speeches/2015/An-Economic-History-of-Singapore.aspx.
11 Op cit 2.