Singapore's Finance Minister addresses questions relating to the new asset management regime for hedge funds

The Monetary Authority of Singapore published a copy of a question and answer in Singapore's Parliament regarding the new regime for hedge fund and other asset managers in Singapore.  It is reproduced below:

Mr Ong Teng Koon, MP for Sembawang GRC

Question:

To ask the Prime Minister under the Enhanced Regulatory Regime for Fund Management Companies implemented in August 2012 (a) whether the requirement to maintain $250,000 as base capital is expected to result in smaller hedge funds having to shut down; (b) what is the purpose of the requirement to maintain $250,000 in base capital; (c) whether the requirements for internal audits and independent annual audits on top of financial audits are onerous for small hedge funds; (d) how many Exempt Fund Managers (EFMs) have deregistered since implementation of the new rules and how many have chosen to transition to the Registered Fund Management Companies (RFMC) regime; (e) whether the Ministry foresees start-up hedge funds with small AUMs (Assets under Management) choosing another country to base their operations; and (f) how competitive is Singapore compared to Hong Kong and Shanghai as a result of these rule changes.

Answer by Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in charge of MAS:

1   MAS is not alone in strengthening the regulatory regime for the fund management industry.  In the aftermath of the global financial crisis as well as the Madoff scandal,  regulators around the world have increased oversight of the industry to restore investor confidence and avoid a build-up of systemic risks in the industry.  MAS gave notice of its intention to enhance the regulatory regime for fund managers as early as April 2010. 

2   MAS has held extensive consultations with the industry on the proposed changes.  We  recognised the difficulties that some of the changes could pose, especially to smaller hedge fund managers with fewer resources, and worked closely with industry to ensure that the changes would be calibrated accordingly. 

3   The admission requirements for fund managers has been carefully adjusted according to the size and nature of the fund manager’s business activities. Fund managers managing assets of more than $250m or serving more than 30 qualified investors are required to obtain a licence from MAS.  Those who fall below these thresholds may either apply for a licence or register with MAS.  The required base capital ranges from S$250,000 to S$1 million and is tiered, based on the type of clientele served by the manager.  For a Registered Fund Management Company (RFMC), the base capital requirement is pegged at S$250,000 to provide a buffer for unexpected costs, arising from turbulent markets or operational shocks.

4   To further safeguard investors’ interests, all fund managers are required to comply with rules relating to the segregation of investors’ assets, independent custody, and valuation.  They are also required to implement compliance, risk management and internal audit arrangements.  These requirements are broadly in line with global standards.  The internal controls required of a small firm are in fact lighter than those imposed on firms with a larger pool of assets under management or those who deal with retail customers. 

5   Globally, fund managers are adapting to the new regulatory landscape and heightened investor expectations.  The criteria for selecting managers has become more stringent and investors’ due diligence has become more rigorous.  These developments have contributed to higher business costs and an increased difficulty in raising funds from investors, leading to a higher failure rate for fund managers.  Taken together with rising regulatory standards globally, a possible outcome of these changes is that some small firms in Singapore which are unable to adapt will close.  A similar trend has been observed in other fund management centres.

6   That said, MAS does not expect the recent changes to the regulatory regime for fund management companies in Singapore to deter fund managers from setting up business in Singapore. Since the introduction of the new regime on 7 August, 58 exempt fund managers (EFMs) have either registered to operate as a RFMC or applied for a licence under the enhanced regime, while 10¹ have shut down.

7   Those operating under the previous exempt fund manager regime have until 6 February 2013 to either register as a RFMC or apply for a licence. A survey of exempt fund managers conducted by MAS in March 2012 indicated that about 90% of exempt fund managers would either register to operate as a RFMC or apply for a licence under the enhanced regime.

8   Singapore’s competitiveness as a financial centre is built on a pro-business environment, a skilled workforce, and a solid reputation for trust and sound regulation. MAS’ regulatory reforms will place Singapore’s fund management industry on a strong footing to achieve sustained growth over the long term, while ensuring that we remain aligned with global regulatory standards observed by regulators in other fund management hubs.   

¹ Figures as at 31 October 2012.

Our firm in Singapore has already submitted a number of the applications referred to above and several more are being prepared.  It is certainly fair to say that the new rules will increase costs for managers over the former regime, but the Minister's comments that the industry has had many opportunities to be consulted on the new system and to adjust to these new rules is correct and our direct experience is that firms are moving forward.  Singapore will remain a very important regional center for asset management.

The new rules balance investor protection and market stability with concessions appropriate to the institutional nature of the industry.

In our view regulation is not an issue to choose either Singapore over Hong Kong or vice versa.  There are more fundamental issues relating to access to the markets you cover and lifestyle choices which are far more relevant to decision making.  Shanghai however continues to lag behind both Hong Kong and Singapore as there is not yet a viable licensing regime for alternative asset managers in the PRC.