Securities and Futures (Amendment) Bill

Order for Second Reading read.

Mdm Speaker: Minister Ong.

3.02 pm

The Minister for Education (Higher Education and Skills) and Second Minister for Defence (Mr Ong Ye Kung): Mdm Speaker, on behalf of the Minster-in-Charge of the Monetary Authority of Singapore (MAS), Deputy Prime Minister Tharman Shanmugaratnam, I beg to move, "That the Bill be now read a Second time".

In the aftermath of the Global Financial Crisis, the Financial Stability Board (FSB), an international organisation comprising policymakers and financial regulators around the world, was established to promote international financial stability. MAS, as a member of FSB has been actively involved in the development of its recommendations.

In 2010, FSB introduced a set of recommendations for its members to implement reporting, central clearing and trading of over-the-counter (OTC) derivatives and to subject OTC derivatives market operators and intermediaries to stronger regulatory oversight.

Arising from the FSB's recommendations, the Securities and Futures Act (SFA) was amended in 2012, as part of this international effort to strengthen the regulation of OTC derivatives markets. The 2012 amendment also drew on our own review in light of Singapore's experience in the crisis and sought to strengthen safeguards for retail investors and enhance MAS' supervision and enforcement powers.

As the amendments are wide-ranging, MAS had indicated then that the reforms to strengthen the regulation of OTC derivatives would be undertaken in two phases for effective implementation. The first phase of reforms undertaken in 2012 requires contract details of OTC derivatives transactions, such as the size, mark-to-market value and maturity, to be reported to licensed trade repositories. This enables MAS to monitor any potential financial stability risks. Later this year, MAS will finalise and implement regulations for the central clearing of widely traded OTC derivatives contracts. Central clearing will mitigate the counterparty credit risks inherent in such trades and limit the effects of systemic contagion.

This Bill implements the remaining aspects of the reforms in OTC derivatives reforms and regulations. MAS also took the opportunity to amend the SFA in three other key areas: first, enhancing regulatory safeguards for retail investors; second, enhancing credibility and transparency of capital markets; and third, strengthening the enforcement regime against market misconduct.

MAS has consulted the industry and the public on the proposed amendments. It has considered all the feedback received and taken them into account as appropriate.

I will now go through the amendments in turn.

Mdm Speaker, let me elaborate first on the amendments relating to OTC derivatives reforms arising from the FSB's recommendations.

The events leading to the collapse of major financial institutions during the Global Financial Crisis exposed significant weaknesses in the structure of OTC derivatives markets, necessitating regulatory reforms. As a leading financial centre and an active member of FSB, it is important that we align to these latest international standards and best practices.

This Bill completes the reforms to further enhance transparency and improve supervisory oversight of our OTC derivatives market operators and intermediaries. The Bill also empowers MAS to require OTC derivatives products that meet prescribed criteria to be traded on organised trading facilities, such as exchanges, instead of OTC.

Internationally, the United States (US) and Japan have commenced their requirements to trade OTC derivatives products on organised trading facilities. Others, like the European Union, Hong Kong and Australia, have yet to do so, despite having the legal frameworks in place. MAS will continue to monitor international developments and market liquidity conditions in determining the timing and scope of implementing the trading requirement in Singapore.

Operators of organised trading facilities for OTC derivatives products will have to be authorised by MAS and must comply with requirements aimed at maintaining fair, orderly and transparent markets. Intermediaries in the OTC derivatives markets will also be subject to regulation to ensure that risks associated with their activities are well-managed.

While the Bill tightens the OTC derivatives regime to better safeguard financial stability, we also need to strike a balance against our objective to promote ease of doing business, innovation and a vibrant financial sector. As part of this effort, this Bill therefore also seeks to streamline existing regulatory regimes for commodity derivatives and exchange-traded derivatives.

Commodity derivatives market operators and intermediaries, which are currently regulated under the Commodity Trading Act administered by International Enterprise (IE) Singapore, will consequently be regulated under SFA. This avoids subjecting them to two regulatory regimes and ensures more efficient regulation. MAS will provide for appropriate transition periods to minimise any industry impact.

MAS will also allow derivatives products to be listed and traded on organised trading facilities without the need for case-by-case approval. They will be required to certify that the contract design satisfies conditions required for fair, orderly and transparent trading. As these conditions will be set out publicly, market operators will clearly know the boundaries within which they can design their products. They will not need to seek MAS' approval.

The streamlined listing process will enable our market operators to innovate and launch new derivatives products to meet market demands. Reducing the time-to-market could also encourage trading of derivatives contracts on organised trading facilities, instead of OTC, without MAS having to specifically require such products for platform trading.

Mdm Speaker, I would now like to turn to the next set of amendments to enhance regulatory safeguards for retail investors.

A primary objective of MAS' regulatory framework for capital markets aims to safeguard the interests of retail investors, who are really the man-in-the-street, putting their savings and nest egg in investment products. We want to ensure these investors have access to adequate information and that intermediaries deal fairly with them. That is why:

First, public offers of securities, such as shares and bonds and investment funds, must be made with a prospectus registered with MAS. The prospectus must contain all material information relating to the investment.

Second, intermediaries, such as brokers, financial advisers and fund managers, must be licensed by MAS and adhere to rules governing their conduct of business with customers in a fair, transparent manner.

In recent years, MAS has observed a number of non-conventional products that are marketed to retail investors as alternate investments. Some of these products display essentially the same characteristics as traditional capital markets products but are deliberately structured to fall out of MAS' regulatory framework.

To enhance investor protection, the Bill provides MAS greater flexibility and powers to bring non-conventional investment products within MAS' regulatory perimeters. This is achieved in the following ways.

First, the Bill empowers MAS to prescribe certain products as debentures. With these powers, MAS intends to prescribe as debentures, buy-back arrangements involving gold, silver and platinum. This is because, in substance, such schemes are similar to collateralised borrowing arrangements. Once classified as a debenture, offers of products with such buy-back arrangements will have to be made with a prospectus registered with MAS. This will provide retail investors better access to information on product features and risks and make more informed investment decisions.

Second, the Bill widens the definition of collective investment schemes (CIS), which must be authorised or recognised by MAS for public offers made available to retail investors. Currently, for a scheme to be regarded as a CIS, both profits and contributions from investors must be pooled. But investment schemes can be structured to sell investors sub-divided interests in physical assets, such as undeveloped land, plantation plots or even units in an apartment block to be run as a hotel. Such schemes have typically been called land-banking, plantation schemes, and condo-tels respectively. By structuring the schemes this way, the pooling element can be avoided, and regulation as a CIS circumvented.

The amended CIS definition will no longer require investors' contributions and profits to be pooled in order for a scheme to be regarded as a CIS. A scheme can be caught as CIS as long as the scheme property is managed as a whole. This recognises the "collective" nature of such schemes, since property is still managed as a whole by the scheme manager, to generate profits for the collective interests of scheme investors. Such arrangements, in substance, pose the same risks to investors as traditional CIS, and should be regulated as such. This is the approach adopted in the United Kingdom and Hong Kong.

At the same time, we do not want to extend the regulatory perimeter too far. The amendment will not capture schemes which are predominantly for the consumption of, rather than investment in, property, or where property is managed for the benefit of investors on an individual basis. For example, arrangements where property owners simply use the same operator to help them let out their individual apartment units, will not be considered as a CIS.

I would like to emphasise that all investments carry risk that, ultimately, investors must take responsibility for their financial decisions. Investors need to critically assess investment products and refrain from investing in any product that they do not understand or where the returns sound too good to be true.

The next set of amendments relate to the classification of non-retail investors. There are two main types of non-retail investors under MAS' capital markets regulatory framework.

First, accredited investors (AIs), who are identified based on prescribed wealth or income thresholds; and

Two, institutional investors, who are widely accepted as having a high degree of financial knowledge. Such investors are generally considered better able to protect their own interests, as compared to retail investors. In line with a measured regulatory approach, there are available exemptions from regulatory requirements for those who deal only with non-retail investors.

Currently, individuals qualify as AIs if they have more than $2 million of net personal assets. The Bill tightens the way net personal assets are calculated, such as the net equity of an individual's primary residence can only contribute up to $1 million of the $2 million threshold. The Bill also introduces another avenue for individuals to qualify as AIs if they have more than $1 million of financial assets, net of any related liabilities. With this amendment, individuals whose wealth is concentrated in their primary residence, with few other liquid assets to invest, will be treated as retail investors and will benefit from the range of regulatory safeguards under the SFA when transacting in capital markets products.

MAS also intends to introduce in subsidiary legislation an opt-in regime for the AI class.

So, even if an investor qualifies as an AI, intermediaries cannot automatically treat him as such. Instead, intermediaries will have to inform the investor of the trade-offs involved and get his agreement to be treated as an AI. The investor can choose not to opt-in and remain as a retail investor with greater regulatory safeguards; or he may willingly forego such safeguards in order to more easily access a wider range of niche financial products and services, likely more complex and with higher risk. The choice is ultimately his or hers to make, dependent on his or her own risk profile, investment needs and circumstances.

The Bill also amends the institutional investor class to cover a wider range of entities that are professionally active in the capital markets. These institutions are sophisticated in their investment approach and should, therefore, be accorded minimal safeguards. This includes financial institutions that are regulated by a foreign regulator, foreign central governments and sovereign wealth funds.

On the other hand, statutory bodies, other than prescribed Statutory Boards, such as the Central Provident Fund (CPF) Board or even MAS, will no longer be deemed as institutional investors. Many such entities, such as Town Councils and religious bodies, do not always possess the level of financial sophistication to be deemed an institutional investor. They will, by default, be retail investors. But as explained above, they can opt-in as AIs if they meet the criteria, which, for corporations, include having $10 million or more in net assets.

Mdm Speaker, I will now move on to amendments to enhance the credibility and transparency of our capital markets. These changes take into account global best practices recommended by the International Organisation of Securities Commission (IOSCO), the international standard-setting body for securities markets. MAS is an active member of the Commission and has contributed to formulating best practices.

The Bill will introduce a new regulatory framework for financial benchmarks. Financial benchmarks play an important role in the pricing and settlement of financial instruments and contracts. One example is the Singapore Interbank Offer Rate (SIBOR), which is used by various lenders to set interest rates. As it has wide systemic influence, it is critical that the process of setting financial benchmarks is credible and reliable.

Following the uncovering of misconduct in the setting of the London Interbank Offered Rate, IOSCO has developed principles to address vulnerabilities in the benchmark-setting process. Regulatory frameworks for financial benchmarks have been implemented in the United Kingdom and are in the process of being implemented at the European level.

Under the Bill, MAS will be able to designate key financial benchmarks. Once designated, MAS will regulate those who administer these benchmarks as well as those who submit the information required to compute these benchmarks. MAS intends to designate SIBOR and the Swap Offer Rate (SOR). Both are widely referenced by banks to set interest rates for commercial term loans and residential property loans; it is thus important that the setting of these benchmarks be subject to a robust and credible process.

The Bill also introduces criminal sanctions and civil penalties to deter manipulation of financial benchmarks. This will cover manipulative acts that occur in Singapore or are committed in relation to financial benchmarks administered in Singapore, even if the acts are perpetrated overseas.

Next, we will strengthen disclosure requirements for short selling of listed securities. Short selling is the practice of selling securities that one does not own. It enhances the price discovery process by allowing market participants who hold a negative view on the price of a security to express this view. The efficacy of the price discovery process can be improved by making available to all market participants information on the extent of any such short selling in a security.

In line with jurisdictions, such as Australia, Europe and Hong Kong, the Bill introduces disclosure requirements on the level of short-sell orders and short positions in securities listed on an approved exchange in Singapore. The Bill requires market participants to specifically indicate short-sell orders, giving statutory effect to reporting obligations currently imposed through the trading rules of the Singapore Exchange. Those who hold outstanding short positions above a prescribed threshold will also be required to report those short positions to MAS. Aggregated short-sell orders and short positions will be made available to the public, so that they can make more informed investment decisions.

Mdm Speaker, I will now turn to the last category of amendments to strengthen MAS' enforcement powers against market misconduct.

Section 199 of SFA currently prohibits disclosures of statements that are false or misleading in a material aspect and are likely to have an effect on the market price of securities. In the 2012 case of Madhavan Peter vs Public Prosecutor, the Court held that a significant price effect is required for liability to be established against a person with respect to false or misleading statements under section 199. The Bill clarifies that the section 199 prohibition applies regardless of the price effect. Price movements of securities may be affected by other contemporaneous and irrelevant market factors, such as the general market sentiment or market liquidity. As such, MAS' ability to take enforcement action against materially false or misleading disclosures that may wrongly influence persons to trade in the market should not be constrained by the requirement of a significant price effect.

The Bill also introduces a statutory definition of "persons who commonly invest", to better reflect market participants who are accustomed to or likely to invest in securities. This term − which is currently not defined in SFA − will be used as the reference point in insider trading cases or assessing whether a particular information is generally available and is likely to have a material price impact by influencing the behaviour of common investors.

In the 2012 case of Lew Chee Fai Kevin vs MAS on insider trading, the Court of Appeal held that "persons who commonly invest" are reasonable investors who possess general professional knowledge, but do not include retail investors who trade regularly. The Court also defined "general professional knowledge" as having a very high standard of market analysis and trading knowledge. This is not reflective of the average investor in the market. The new statutory definition will strengthen MAS' ability to pursue insider trading cases without having to meet an unrealistically high standard for "persons who commonly invest". The Court will be able to take into account the reality that there can be different classes of "persons who commonly invest", each with a different level of knowledge and expertise. MAS will issue guidelines on the interpretation of this statutory definition.

Currently, the maximum civil penalty that can be awarded against an individual is capped at three times the benefits gained or losses avoided, subject to a minimum of $50,000. So, where the benefits gained or losses avoided are small, the civil penalty is effectively $50,000 and may not adequately reflect the culpability of the offender or achieve sufficient deterrence. On the other hand, where there is no benefit gained or loss avoided, the civil penalty can be much higher, currently capped at $2 million. So, the two outcomes are not congruent.

The Bill standardises the maximum penalty that can be awarded in all civil penalty cases to the greater of $2 million or three times the amount of benefits gained or losses avoided. This ensures that the civil penalty quantum that can be awarded is commensurate with the gravity of the misconduct and is not unduly limited by the value of the benefit gained or loss avoided by the offender.

The Bill also confers priority on MAS' civil penalty claims over private unsecured claims that accrue subsequently to the contravention of SFA. Such priority will strengthen MAS' ability to resist attempts by third party creditors to divert funds frozen by MAS under the civil penalty regime towards satisfaction of the contravening person's private debts. This is in line with the priority that is accorded to Government claims in other civil proceedings taken by the Government. This also reduces the potential for dissipation of a defendant's assets, which may cause MAS' civil penalty claims to be nothing more than paper judgments.

Mdm Speaker, let me conclude. This Bill introduces significant and timely changes to our capital markets legislation, particularly to strengthen safeguards for retail investors and enhance the transparency and credibility of the securities and derivatives markets. MAS will continue to review its capital markets regulatory framework to ensure that it keeps pace with market developments and international standards and supports the growth of Singapore's economy. Mdm Speaker, I beg to move.

Question proposed.

Mdm Speaker : Mr Saktiandi Supaat.

3.26 pm

Mr Saktiandi Supaat (Bishan-Toa Payoh): Mdm Speaker, before I begin my speech, I would like to declare that I work in a bank.

Mdm Speaker, Singapore has a financial sector that is recognised as one of the world's leading financial centres. From real estate to insurance to banking and more, we offer local and global investors direct access to a plethora of regional and global investment opportunities.

Economic and political stability, robustness of the legal and regulatory framework as well as the reliability and transparency in the way business is conducted also helped to enhance our reputation as a top wealth management and regional derivatives hub. The vibrancy of the financial sector has led to a tremendous growth of the sector and we now have over 200 banks with a presence in Singapore.

The growth of the local and global capital markets has created a lot of wealth in the past decades and this has also given rise to the notion that it may be easy to make money from investments and that the risk of failure is low. It may not be uncommon for beginners to jump into hefty investments based on blind trust for a friend or financial consultant.

I support this amendment Bill, which is quite extensive and probably the biggest change in a long time for SFA. It has changes, first, on the regulatory front, as the Minister mentioned, with reforms needed to strengthen regulation of the OTC markets, and now, exchanges, recommended by FSB and the Group of 20 (G20) will strengthen Singapore's financial sector hub status; second, enhancing regulatory safeguards for retail investors which is quite key; third, enhancing credibility and transparency of capital markets with new regulatory frameworks to instil better governance in the setting of financial benchmarks, such as SIBOR, and transparency in line with international best practices; and fourth, strengthening the enforcement regime against capital market misconduct and deter future offenders.

In particular, this Bill enhances the robustness and transparency of the legal framework which could further protect the interest of investors, especially those who may not be as financially sophisticated as the bankers or financial consultants serving them. This is especially important as investment products have gone beyond plain vanilla to highly complex structures. Investor protection in Singapore is pertinent, given Singapore's standing as a pre-eminent global financial centre, its value-added growth contributions to the Singapore economy and its role as an intermediary for various players in the economy is also important.

It is the responsibility and moral obligation of financial institutions to explain to their clients, especially those who are investing in complex instruments, and ensure that risks are properly understood before making an investment. The market operates like the car windscreen wiper, if I can make an analogy. It can swing to the left and also to the right. So, you can lose money in as much as you can make it. In fact, in certain cases where the clients use leverage, they may even lose more than their initial capital.

Bond investors are often lured with coupons or better interest rates without being explained that higher rates mean higher risk of loss as the quality of the underlying instrument is often poorer. Retail investors may feel that because the persons selling investment products are from the financial industry, they would have better knowledge of the market and are trustworthy. What they fail to appreciate is that these same people are selling the products also because they have to meet their targets and their key performance indicators. Conflicts of interests may also not be properly disclosed to investors and this may prevent investors from making informed decisions.

A retail investor may be told not to worry about the corporation issuing the bond because their parent company is a big company with a good track record. What investors do not understand is that the bond may not be issued by the parent company but a subsidiary which is a separate corporate entity altogether and which may have limited assets.

Another point is the investors may be told that the bond may have this and that rating from one of the bond rating agencies, for example, Fitch, Moody's or Standard and Poor's. But many of them may not actually understand or are able to truly explain what these ratings mean. In today's market, we must remember the phrase: "nothing is too big to fail".

Another bug-bear is the use of financial jargons which may impress the retail investor that you are someone knowledgeable but, at the same time, confuse the investor. The investors may find themselves persuaded into buying products when the risks are not fully explained. Look at how the fall in oil prices impacted on the oil and gas industry, resulting in a series of bond defaults. Disclaimer clauses and additional contractual obligations, often neglected or discretely mentioned amidst a wall of incomprehensible financial terms, may be skimmed over and never explained.

On the other hand, in Hong Kong, it will eventually be mandatory to enforce a suitability clause in all applicable client agreements. It would be a good idea to have something similar here, as this should help prevent banks from hiding behind disclaimer clauses, while enhancing the level of protection for all retail investors, including AIs.

I am glad that the Bill enhances regulatory safeguards for retail investors by extending regulatory safeguards to retail investors in two types of non-conventional investment products that share features of capital market products such as the buy-back arrangements involving gold, silver or platinum and collectively managed investment schemes, such as land-banking. We have seen how some of our residents who face losses investing in some of these schemes.

Next, I am pleased to note that the Bill seeks to tighten the qualification to be an approved investor. It is welcomed that the individual's primary residence can only contribute up to S$1 million of the current S$2 million net personal assets. In fact, if I may suggest, MAS should perhaps not allow the primary residence of the investor to be used to contribute to the net personal assets to meet the S$2 million threshold. A family can one day find themselves having to sell their home if they are not careful in investing on the basis of using their primary residence to pledge against any open positions.

Additionally, in light of inflation, a higher threshold than S$2 million net worth should be established. In the US, although the qualifying net worth is US$1 million for an individual to be an AI, levels of consumer protection are higher due to the fact that litigation and regulatory activism are prolific in the US. By contrast, in Singapore, this is not in our culture.

Regardless, wealth should not be the sole major indicator here, as being rich in asset does not necessarily mean good financial knowledge. To better increase protection, the threshold for attaining Approved Investor status should be raised based on his or her experience and expertise. According to the European Union laws, a retail client, in order to gain status as an "elective" professional client, must satisfy at least two of the following requirements:

(a) he/she has carried out trade transactions, in significant size, at least €50,000, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

(b) the size of financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds €500,000; and

(c) he/she works or has worked in the financial sector for at least one year in a professional position which requires knowledge of the transactions or services envisaged.

So, I hope the Government will consider placing greater emphasis on the importance of knowledge in investing, rather than just personal assets. We can create any number of laws and restrictions but, ultimately, nothing empowers a customer more than possessing knowledge.

Next, I would like to point out some potential gaps. In the case of joint accounts, when one party is a non-AI, he or she can opt out of protection measures available to retail investors. While it may be common in the wealth management industry where only one joint account holder is an AI, for example, a millionaire father with a joint banking account with his son who is still in university, we cannot over regulate to not permit non-AIs from being joint account holders. It may be prudent to add a requirement that mandates banks to primarily deal with the party who is the AI, if the investment products sold are not permitted to be sold to retail investors.

Additionally, for accounts opened in the name of a private investment company or trust, where there is more than one beneficial owner, all beneficial owners need to qualify as an accredited investor. This may not be reflective of how potential private banking clients operate their accounts. It is proposed that the laws should be revised to ensure consistency so that beneficial owners of such structures, such as trust or private investment company accounts who may not be AIs are placed on the same footing as those who choose to invest as joint account holders.

It is almost always to the bank's benefit to deal with AIs over retail investors. My concern is that some bankers may not be properly incentivised to accurately determine a customer's net assets. For example, a careless banker may "overestimate" a potential client's net assets so as to "upgrade" him to an AI. Lessons from the recent 1Malaysia Development Berhad (1MDB) money laundering scandal should be a stark reminder that self-regulation by banks may not be completely effective in some areas. So, having a third party to do the assessment may be fairer and more transparent. In the case of Australia and New Zealand, an independent accountant has to certify the net assets of the client.

As a global financial centre with many non-Singaporean clients, in order to uphold our good reputation, the Government has a duty to look out for the interests of our overseas investors. So, it is important to make clear that all protection for local investors should apply to all overseas investors as well. Conversely, the interests of Singaporeans must also not be neglected in a bid to cater to the foreign financial entities.

Last, but not least, the timing and implementation period of the changes in the Securities and Futures Bill would be critical. With the potential of some level of deregulation coming out of the US under the Trump administration, it may be essential to communicate the main broad objectives of this amendment to the public and financial institutions, as it signals a move towards slightly tighter regulation which can be interpreted as onerous. As a result, the impact of the amendments on the value-added growth of the financial sector should also be examined. I would also urge MAS to have a meaningful implementation period for the changes as it is very hard and expensive for the banks to get clients certified and new systems to be set up to track products.

Overall, the changes, particularly its elements of investor protection, including that for commodity-related products, as well as enforcement action, are highly lauded and should ensure a more resilient, transparent and stable financial sector.

Mdm Speaker: Mr Leon Perera.

3.37 pm

Mr Leon Perera (Non-Constituency Member): Mdm Speaker, the Securities and Futures (Amendment) Bill seeks to update and broaden regulations that apply to the trading of capital market products, the operation of approved exchanges, the disclosure requirements for certain types of trades and so on. On the whole, these changes are positive and, in fact, overdue. While I do not oppose the Bill, I would like to seek clarifications on some aspects of the Bill and make some comments on gaps that remain unaddressed.

Madam, it is crucial that our business ecosystem for the trading of securities, derivatives, fixed income and other financial products achieve several things. We must be seen to be progressive and advanced, taking into consideration global best practices and leading edge developments in technology and business models. This is, of course, necessary to attract investments and create jobs in our financial services industry. It is also necessary to broaden investment options for Singaporeans. At the same time, our ecosystem must be seen to be fair and transparent. We should never allow it to be seen as a rigged game, which insiders can exploit for unfair advantages over the smaller players or retail investors. To allow this, is to risk weakening the viability of our financial services industry and, indeed, our social fabric.

We have seen in other countries how there can be a public backlash against traders and market-movers who can make personal incomes of up to $100 million a year or more, seemingly, by not creating anything of value to society. So, we need to get the balance right. Too much regulation, and we risk strangling business, investment job creation and wealth creation. Too little regulation, and we risk feeding the perception that the markets are a rigged game. The right balance is smart regulations.

I would like to speak on two areas: firstly, on our capabilities and safeguards for the enforcement of these and other financial services industry regulations; and secondly, I have some queries on the changes to the "accredited investor" definition, which I fear is insufficiently prescriptive.

Complex regulations are only as good as the regulator's ability to enforce those regulations, lest they become, in Shakespeare's words, "rules more honoured in the breach than the observance". Insider trading is a good example of this. Insider trading crimes are difficult to prove in Court and require strong expertise and capabilities on the part of investigators and prosecutors. Given this widening of the scope of our securities and futures regulation that this Bill embodies, I would like to ask the Ministry what steps are being taken to beef up the enforcement capabilities of MAS and other agencies to proactively enforce adherence to these new rules.

Of course, no regulator and no policing regime can be perfect, but what measures are being put in place to ensure a reasonably robust regime for detecting possible breaches, investigating them and, where warranted, bringing them to the Courts? It took several years for the authorities to bring charges, in the case of the penny stocks saga. This episode, which saw share prices see-saw, has unnerved retail investors.

In my grassroots work, I met a retired resident who lived in a 3-room flat, who had invested small amounts of his money in the local stock market. Referring to the penny stocks incident and the time it took to resolve, he was very concerned that insufficient enforcement would lead to retail investors like him losing money to rich market-movers, who may or may not be breaking the law.

I recently filed a Parliamentary Question on this and Deputy Prime Minister Tharman Shanmugaratnam replied that the resources that Singapore has devoted to investigating market misconduct offences are commensurate with the capitalisation and number of listed companies in our securities market, and comparable with other developed markets, such as Hong Kong and Australia. However, numbers were not cited for the level of investment that we put into enforcement, either in terms of budget or staffing. Specifically, I would like to ask a few questions.

Firstly, will resources be expanded to cope with the expanded scope of the legislation and how will this be done?

Secondly, are the numbers of civil penalty actions and prosecutions under this Act, which were cited in the Deputy Prime Minister's reply to my Parliamentary Question, commensurate with what is seen in other developed cities with a large stock exchange, like London, New York, Hong Kong, Chicago and Frankfurt, for example?

Thirdly, does MAS monitor the ratio between the number of incoming leads for possible breaches of the Act on the one hand, from suspicious transaction reports, electronic meta-data analysis, public feedback and so on, and the number of staff analysing those leads, on the other hand? Is this ratio commensurate with what we see in other enforcement agencies, like the British Serious Fraud Office or the American Securities and Exchange Commission, for instance? The reason I ask this is that good systems for generating intelligence will be useless if the staff who have to sieve through the data are overwhelmed.

Lastly, on this subject, I would like to pose a question about the robustness of our enforcement regime that is broader. What steps are being taken to prevent conflicts of interest between the regulator and the industry? And specifically, are there rules in place to control the ease with which Government employees with financial industry oversight responsibilities can join financial institutions immediately after they leave Government service? Are there rules in place which require such employees to exercise a cooling-off period, before they can join industries that they used to help regulate?

In other countries, this matter has been a subject of some debate. The concern fuelling such debates is easy to see. If a tendency takes root whereby regulators often leave their Civil Service jobs to take up positions in the industries they used to regulate, sometimes with the expressed responsibility to manage communications with the Government, there is the possibility that serving regulators may be at risk of industry capture. What this means is that the regulators may tend to keep one eye on the interests of the industry that they are regulating, knowing that they may one day, sooner or later, join the employer of that industry.

For example – and this example does not relate to the financial services industry or indeed to regulation per se, but the principle is the same – on 9 December 2016, US President-elect Donald Trump floated the idea that US military procurement officials should be banned for life from ever joining defence contractors.

Next, I would like to query the changes made to the definition of an AI. With the passage of this Bill, the wealth criteria for an individual to qualify as an AI will be tightened, such that the net equity of the individual's primary residence can only contribute up to S$1 million of the current S$2 million net personal assets threshold.

Alternatively, individuals will be able to qualify as an AI if they have S$1 million of financial assets, net of any related liabilities. Individuals whose wealth is concentrated in their primary residence and have little liquid assets otherwise, will no longer qualify as AIs. The aim of this change seems to be to ensure that AIs have at least S$1 million in liquid assets, that is, financial assets net of the property they reside in, which is a reasonable intent, and one that I agree with.

I would like to ask a few questions about how these definitions will be operationalised so as to best realise this intent. Firstly, does the S$1 million financial asset threshold include the value of insurance policies? If so, how is this value calculated? By virtue of total premiums paid, maturity value of the policy or some other criteria?

Secondly, should mark-to-market prices be used to determine the value of the property as well as the value of the more liquid assets? At the moment, some banks depend on investors' self-declaration in form filling. Will financial service institutions (FSIs) be required to ascertain mark-to-market prices for the properties and financial assets that the investors declare? If so, this may saddle FSIs with higher compliance costs, costs which may get passed on to their customers to some extent. But in any case, it would be important and useful for the position to be clarified so that FSIs are held to the same standard and are consistent in their practices.

Thirdly, the S$1 million threshold presumably includes bond holdings, but some bonds may be illiquid in practical terms, because it is either extremely difficult or impossible to sell such bonds to the secondary markets, for example, the bonds of companies undergoing some debt restructuring exercise or companies that are undergoing liquidation. Are illiquid bonds included in the definition of "financial assets" or should we differentiate between illiquid and liquid bonds to be considered within the S$1 million financial asset threshold?

As these questions demonstrate, it may be necessary for MAS to be more prescriptive about how these legislative changes to the definition of an AI will, in practice, be operationalised.

Mdm Speaker: Mr Thomas Chua.

3.47 pm

Mr Thomas Chua Kee Seng (Nominated Member): Madam, in Mandarin.

(In Mandarin): [Please refer to Vernacular Speech.] Mdm Speaker, I support the Securities and Futures (Amendment) Bill, mainly for two reasons.

Firstly, the amendment to the Securities and Futures Bill safeguards the investors' interests. Recently, I read a newspaper article in Lianhe Wanbao, and the headline is, "Sleepless Nights for elderly couple who lose $30,000". An elderly retired couple attended an investment talk and forked out $10,000 to buy bonds. The other party promised they would get back their principal plus 10% interest within a year. However, when the bond matured, they did not get their principal back. This elderly couple has been suffering from insomnia because they would also lose their further investment of $20,000 in bonds which are about to mature.

This is by no means an isolated case, as there are many other similar stories. There are so many types of financial products in the market now and many seniors hope to retire comfortably using these avenues of wealth management, but not all investors are savvy enough or equipped with the necessary knowledge to evaluate the risks and the merits of a financial product. The sales executives tend to be glib and persuasive and those with no investment experience can be easily misled.

Based on the current legislation, investors' risk category is defined according to their financial assets, including the value of their properties. For instance, some investors may have financial assets of $2 million, but this is mainly in property, with very little in cash. Once the investment fails, practically everything is wiped out, bringing their quality of life under jeopardy. Amending the Bill would define more clearly the conditions for retail investors and institutional investors; only part of the property value can be included as part of their personal assets. This would bring up the threshold for the retail investors and safeguard their interests.

The second reason is that the amendment of the Bill would widen the scope of governance and ensure that transactions are properly regulated. In recent years, some "non-conventional investment products" have become increasingly popular, like precious metals, red wine, land banking and so on. Prior to the amendment, with the exception of collective investments, these non-conventional investment products do not come under the purview of MAS. In order to avoid coming under MAS regulation, some market players have become very creative and restructured their products. Once the amendments are enacted, all investment products would come under the purview of MAS. This is a very good move.

However, besides these two points, I still have some reservations. Overly strict controls may make the financial markets stagnate. A prosperous and lively market has to have some element of risk. How could the Government achieve a balance between the two? For example, small and medium enterprises (SMEs) always encounter problems of financing. There is a new financing method called crowdfunding, which could provide capital for SMEs and startup companies.

Earlier on, MAS has already issued new guidelines to improve access to these new platforms, enabling SMEs and startups to raise capital more easily. After amending the Securities and Futures Act, this could hamper such new funding channels. Hence, I hope that when the Government decides to stipulate related legislation in the future, it could strike a balance between maintaining an active market and strengthening governance. An over-regulated system could produce the "hairy-crab effect" of constraining the markets. The desire to achieve a balance between financial innovation and effective governance is a tall order and a real test of management wisdom.

Mdm Speaker: Mr Louis Ng.

3.52 pm

Mr Louis Ng Kok Kwang (Nee Soon): Madam, I applaud the amendments proposed in this Bill as it contributes to a higher level of transparency and enhanced protection for retail investors. That said, I would like to seek a few clarifications.

Firstly, with the rapid ascent of technology, the financial industry has witnessed a transformation in the development and delivery of financial products. Today, a retail investor can access and trade various financial products, such as stocks, bonds, futures and options, through voice or electronic trading.

However, this ease of access and the wide range of financial products could bring about unintended consequences, especially for retail investors. Recently, there has been a sharp rise in scams involving online trading in binary options, with more than 30 reports of such scams lodged to date, as of 14 December, and investors losing more than S$1 million to unregulated binary options trading platforms. The complexities of such derivative products may not be fully understood by a retail investor who lacks access to professional advisory services.

While an investor with the privilege of a private banker's advisory may be well-hedged against such risks, I remain concerned for retail investors. We must always strengthen our regulatory framework to ensure the average retail investor is protected, as they remain exposed to an increasing range of investible products, in particular, financial derivatives.

Asymmetrical information generally contributes to false triggers and leads to costly investment decisions. As such, educating retail investors should and must always remain a key focus of financial market regulation. Can the Minister share how the Ministry intends to do this?

Secondly, excessive short selling distorts the fundamental function of a financial market, which is the signalling effect of price. By requiring market participants to declare their short-selling positions, as prescribed in clause 74, it will go a long way to ensure responsible trading. Most importantly, it would deter excessive short selling by syndicates at the expense of retail participants.

Thirdly, I am heartened to read about the stiffer penalties for people who flout disclosure requirements. However, will the Ministry consider imposing a two-year trading ban instead of just fines, for those who fail to meet disclosure requirements, or those who present information which gravely affects the movement of prices, thereby distorting efficient trading activities? What is at stake here is the credibility of our financial markets, something which should not be taken for granted.

Madam, the relevant bodies should continue to ensure that Singapore's capital markets keep pace with key developments and standards in the international market.

But in this pursuit, we should also ensure that retail investors understand the complicated risks involved in the various classes of investment products and the penalties of misconduct. That said, Madam, I stand in support of the Bill.

Mdm Speaker: Ms Foo Mee Har.

3.55 pm

Ms Foo Mee Har (West Coast): Mdm Speaker, first, I wish to declare my interest as the Chief Executive Officer of the Wealth Management Institute. I speak in support of the Bill.

The Securities and Futures (Amendment) Bill introduces extensive changes and keeps standards in Singapore on par with international capital markets and best practices and ensures our capital markets regulatory framework keeps pace with market developments.

It is important that we strengthen regulation of OTC derivatives markets in the wake of the Global Financial Crisis. The proposed amendments are in line with the recommendations made by FSB and the G20.

Madam, I welcome the long-awaited amendments aimed at enhancing the credibility and transparency of capital markets, including better governance in the setting of financial benchmarks, strengthening MAS' ability to take enforcement action against market misconduct and strengthening safeguards for retail investors.

Malpractice in the market can be very damaging. Members of this House may recall when news broke of the extent of the LIBOR fixing in 2012, that scandal sent shock waves around the world. As many as 20 big banks were named in various investigations or lawsuits alleging that LIBOR was rigged. To many, the pervasive misconduct amongst traders felt like "daylight robbery", and served to further corrode what little remained of public trust in banks and those who run them. Their manipulation of the LIBOR rate impacted the man-in-the-street as well as corporations around the world, because it affected what was paid for loans and earned for savings. It is estimated to involve up to US$800 trillion worth of financial instruments, ranging from complex interest rate derivatives to simple mortgages.

Singapore has not been immune to financial malpractice. In 2013, MAS punished 20 banks and revealed that 133 traders had tried to manipulate three interest rate and foreign exchange benchmarks. The revelation affected trust and confidence in Singapore's financial institutions.

There was widespread public outrage at the extent of bankers' misconduct, the flawed benchmark setting mechanisms that provided ample room for manipulation, and how the perpetrators got away with punishments that appeared light in comparison to the severity of their crimes.

I therefore support the new regulatory framework proposed to instil better governance in the setting of financial benchmarks and transparency in the listed securities markets. My question to the Minister is whether the proposed enforcement regime is punitive enough to guard against capital market misconduct, to deter future offenders and to regain investor confidence. Would the Minister also illustrate how the proposed criminal and civil penalties for capital market misconduct compare to those implemented in other international financial markets?

Madam, in light of the millions of dollars that banks and their traders stand to gain from manipulation, I am concerned about the adequacy of capping the maximum civil penalty quantum to the greater of $2 million, or three times the amount of benefits gained or losses avoided. I urge the authorities to arm ourselves with a sufficiently "big stick" to weed out temptations to manipulate and use the full extent of the law to punish offenders.

Madam, I also welcome the enhanced regulatory safeguards for retail investors provided under this Bill. I was saddened by the heart-breaking experience of many Singaporeans, including several of my residents, who have lost their life savings in unregulated buy-back arrangements involving instruments, such as gold.

I am comforted that MAS is now extending the regulatory safeguards to investors in two types of unconventional investment products. These include debentures involving buy-back arrangements involving gold, silver and platinum as well as CIS, such as land-banking.

Madam, whilst I understand regulations cannot cover every type of investment instrument, I do wish that the law had covered these products sooner, so that many Singaporean families could have avoided becoming hurt. Many people wondered why it took so long to bring these products under MAS' oversight. As the investment landscape evolves and the new "creative" financial instruments emerge to prey on unsuspecting investors, I urge the authorities to prioritise regulatory oversight in order to protect retail investors. Many consumers are particularly vulnerable in the current environment of low returns; they may be easily tempted by products that promise higher yields to make their hard-earned savings work harder.

Of course, individual investors must also protect themselves by doing their own homework, being responsible for their own investment decisions, and managing their financial assets in a manner appropriate to their stage in life. In the world of investments, there is no free lunch. Much more can be done to promote financial education in a systematic way, making financial literacy pervasive in our community and strengthening our immunity against mis-selling and fraud. This is especially key to helping our fast-ageing population preserve precious savings that provide the safety net they need in their retirement.

Madam, I commend MAS for the slew of regulatory changes that it put in place recently, with the aim of improving access to products and capital whilst strengthening disclosure and accountability. However, this aim must be balanced with the equally important goal of keeping Singapore competitive as a world-class financial centre. There is much concern in the industry about the overwhelming number and rate of regulatory changes taking place, just when the financial industry is facing significant headwinds of lower growth and squeezed margins. Some players actually feel that their very survival is being threatened by escalating compliance costs as a result of the heavier regulatory burden. There is a sense that jobs are being threatened, as are employment prospects of Singaporeans in this sector.

With this in mind, I am concerned about the timing to amend rules around AIs. Whilst I agree with the intent of these proposed changes, which will enable high net worth individuals to benefit from the full range of safeguards for retail investors, I am worried about the capacity of banks to take action with yet another set of new regulations.

Madam, many relationship managers and their banks are already struggling to cope with the increased paperwork and operating procedures required to comply with the new rules implemented earlier. These include enhanced anti-money laundering measures as well as common reporting standards. The changes proposed for the AI framework would involve private banks going through the extensive exercise of re-segmenting their business, reviewing every client account, with client calls to do more reviews. For offshore clients, the exercise could prove challenging, given access to information on clients' liability is limited in Singapore. Similarly, categorisation of joint accounts as AI can be complex, with varying degrees of sophistication amongst accounts holders.

So, the avalanche of regulatory changes is also distracting banks from serving their clients. In the midst of a challenging business environment, they should instead be focusing their efforts on innovation and providing better service, enabled by smarter but not more regulation. Would the Minister please elaborate on what drives the priority of implementation of new rules?

In conclusion, I believe the proposed amendments to improve market conduct are in line with standards set in other leading financial centres. However, we must be careful to take a balanced approach to regulation, so as not to stymie growth and impact Singapore's competitiveness. Mdm Speaker, I support the Bill.

Mdm Speaker: Mr Henry Kwek.

4.05 pm

Mr Kwek Hian Chuan Henry (Nee Soon): Mdm Speaker, I would like to declare that I am a part-owner in a firm that trades in equities and forex. Mdm Speaker, the amendments to the Securities and Futures Act are a timely refresh to our regulations. Therefore, I rise in support of the Bill. I would like to talk about three broad issues today: (a) protecting the jobs in our sector; (b) promoting truth in lending and investing; and (c) promoting financial literacy.

First, let me talk about protecting our jobs in the financial industry. The amendments put forward today strengthens our role as a trusted financial centre. However, echoing what my colleague Ms Foo Mee Har said, our industry is facing many challenges: (a) our wholesale banking is undergoing restructuring; (b) our private banking sector is grappling with complex regulations, especially arising from anti-money laundering requirements; and (c) our mainstream financial industry, as a whole, is being disrupted by financial technology. These challenges have a direct and immediate impact on our people's job security. As such, it is important that we keep both our regulations and the implementation of our regulations, flexible.

For a while after the Global Financial Crisis, there is a broad consensus on the regulatory direction. However, uncertainty in the direction has increased recently. After Brexit, it is unclear what the United Kingdom's (UK's) financial centre's role will be for the world and for the European Union. Logically, UK regulations could change as her role evolves. So, there is some uncertainty there. After the US presidential election, it is unclear whether the Dobb-Frank Act still speaks for the future of US regulations.

In short, as the trajectory of global regulations is increasingly unclear, we must be wise in the direction and pace of evolution of our own regulations. We must not front-run the regulations of the world's leading financial centres, or we will be holding our industry back from serving the needs of Asia and beyond. As such, it would be helpful if MAS can provide a perspective on:

Firstly, what is MAS' perspective on the evolution of US regulations, especially with regard to the Dobb-Frank Act? How do we see the UK's role as a financial centre and the UK's financial regulations evolve? Does the UK's changing role represent opportunities or challenges for Singapore?

Secondly, what is MAS' view on aligning our regulations to those of the US and UK? How do we factor in the conditions of emerging Asia, as well as the key markets that we serve, to ensure our industry stays competitive, so that we can protect our people's jobs? Can MAS provide specific examples of this?

Lastly, for the new framework on AIs, can MAS assure our industry that there will be adequate implementation safeguards to ensure that our industry, like what Ms Foo Mee Far has said, has room to adjust?

Next, I would like to talk about promoting truth in lending and investing. The financial industry is both complex and competitive. This creates some undesirable outcomes. For example, lending cost is advertised differently for different products. It is calculated differently for: (a) housing loans compared to car loans, (b) car loans compared to credit card loans; and (c) credit card loans compared to hire-purchase financing. Processing fees and penalty costs for these different products vary considerably, too. Because of all these, consumers have difficulty understanding the true cost of their spending decisions. For decisions like buying a house or a vehicle, a miscalculation could be a big financial impact.

To protect consumers, I call on MAS to mandate a simple and unified way of explaining interest rates and lending cost. Perhaps, MAS can study international best practices, including from the US' "Truth in Lending" Act. This Act requires the lenders to provide important pieces of information, such as the annual percentage rate (APR), the term of the loan, and the total cost for the borrowers. Can MAS share what it considers as the best formula to calculate interest rates, be it annual percentage rate (APR), effective interest rate (EIR) or nominal rates, and lending cost, which also includes fees and penalties, to our consumers? Would MAS also consider gradually aligning our companies towards communicating interest rates and lending cost, in a simple and unified way?

Related to truth in lending is transparency and straightforward information on other financial products, such as investments and insurance that the majority of Singaporeans use. By "majority", I refer to non-AIs, who may not have detailed financial information. Compared to lending products, it is even harder to provide clarity on such products. But I hope that MAS can push forward, even if complexity limits us to taking small steps.

Specifically, perhaps MAS can consider gradually getting our financial industry to adopt a common language, as well as a straightforward and concise approach, to explaining financial products. We could, perhaps, pay more attention on how the industry explains: (a) returns; (b) price of product; (c) processing fees and penalties; (d) risks; and (e) duration of product coverage.

Finally, I believe now is the time to promote financial literacy to Singaporeans at large. As I talk to many Singaporeans across differing age and income groups about financial security, a common theme emerges.

(a) For the past few decades, many Singaporeans are assured of a steady career and income progression, as well as rising housing values. These provide both financial security and retirement adequacy.

(b) With the increasingly uncertain world, the financial cushion that Singaporeans are used to may not be there for all.

(c) At the same time, while some Singaporeans are well-informed, wise and prudent in their financial decisions, some are not.

(d) And good income or academic qualifications do not always equate to financial prudence or literacy.

The upcoming changes to our CPF system are excellent and form an important pillar to helping Singaporeans save for retirement. However, I feel that now is the time for us to systematically promote financial literacy. This will empower our people to be financially savvy and prudent in uncertain times. Specifically, I have three suggestions.

One, could we explore the mandatory teaching of financial literacy in our tertiary educational institutes? If our schools are focused on preparing Singaporeans for the future, then teaching them how to guard and manage their finances is surely an important guarantee for their future.

Two, during National Service, there are the occasional down time in between training. As such, when there is time between training, can the Ministry of Defence consider working with voluntary groups like MoneySENSE to teach basic financial literacy to our young men who are sacrificing so much to serve our country?

Three, can we provide ample opportunities to attend courses on financial literacy under SkillsFuture?

Mdm Speaker, in conclusion, while we debate on our Securities and Futures Bill today, it is important to go beyond the specific provisions being amended to broaden our discussions to: (a) what is the right regulatory balance that protects our jobs? (b) how could we best promote truth in lending and investing; and (c) how can we best inform our people to make sound financial decisions? I look forward to the response from MAS and I stand in full support of the Bill.

Mdm Speaker: Mr Ong Teng Koon.

4.14 pm

Mr Ong Teng Koon (Marsiling-Yew Tee): Mdm Speaker, I rise in support of the Bill. The proposed amendments to the Securities and Futures Act are an important step towards strengthening Singapore's position as a global financial centre and protecting our citizens' hard-earned savings.

I would, first, like to thank our colleagues at the Ministry of Finance for putting together numerous consultation papers which culminated in this very important Bill. This Bill builds on the amendment Bill of 2012. At that time, I had spoken in support of the Ministry's move to impose a principles-based approach to the regulation of OTC derivatives.

Today, I would like to focus on measures to protect investors and, in particular, retail investors, like the many uncles and aunties who are just trying to have a comfortable retirement.

In this low interest rate environment, they are trying their best to make their money work for them. But they often lack the financial knowledge to determine if a product is right for them. We still remember the heart-breaking stories of the many retirees who lost their entire life's savings during the Minibond debacle. It is, therefore, heartening to see that measures to enhance the regulatory safeguards for retail investors are a central component of the amendments.

The amendment seeks to expand the scope of regulatory oversight to non-conventional investment products and this is critical. Flip open the Straits Times today and you will see so many new, fangled investment schemes purporting high returns and low risk. Some deals seem too good to be true and, indeed, they are, or they are nothing but scams designed to separate the ordinary investor from his money.

I understand that risk is an inseparable part of the investment process, that higher returns necessarily involve higher risks. We cannot and should not insulate investors from market risks because that is the natural order of things. We must, however, seek to protect them from fraudulent scams.

I am concerned that the policeman is always chasing, but never catching, a shape-shifting thief. The profit incentive strongly motivates financial innovation − new products, both good and bad, are being created all the time. Backward-looking regulation can only prevent a recurrence of the previous crisis, but not to prevent the next one. It is telling that elements of this Bill, similar to many Bills around the world, are still reacting to the Global Financial Crisis of 2008, a full nine years ago. What do we need to put in place to prevent the next crisis, the next scandal, and the next hit to the retirement finances of our loved ones?

In my humble opinion, a successful regulatory regime should have the following components. One, eyes and ears: multiple channels that make it easy for the public to report suspicious activities, lodge complaints or become whistle-blowers. Two, brains: a team of highly qualified experts who can quickly assess the risk profile and complexity of any new products, and flag potential risks. Three, teeth: the power to act swiftly to blacklist or shut down any activity that is proven to be fraudulent or deemed to be highly dangerous. And fourth, helping hands: tools that help retail investors make the right decisions.

Let me first elaborate on eyes and ears. Financial products can now be distributed through multiple channels, not all of them visible to the authorities. To counter this, we should enlist the help of the public to flag any suspicious offerings. The goal is to make this as simple and as painless as possible, to encourage people to highlight any products where malfeasance may be suspected. While this may create false positives, it is more important here to avoid the converse problem of false negatives resulting in significant losses for investors.

Brains. Regulating new financial products is a challenging task. On one side, you have some of the smartest people in the world who are so incentivised to create new products and very complicated products to make as much money as possible for themselves. On the other hand, you have overburdened regulators trying to stay on top of new innovations over multiple asset classes. One solution could be to create a committee that convenes to assess the complaints and determine if new structures and products are fraudulent. This should be staffed by industry experts drawn from leading financial institutions, who would be called upon on a regular basis.

Teeth. The regulator must have "bite". This means empowering them to make immediate and decisive action, including blacklisting or even shutting down entire asset classes. It could also define which investor types are allowed to invest in a particular asset class. Again, there might be "false positives" where the asset class ultimately proves to be legitimate, but the focus should be on protecting retail investors.

Putting these three angles together, I propose to introduce a structure whereby the committee considers suspicious offerings highlighted by the public. And if the expert panel judges that there is reason to believe that it is fraudulent, that it does not pass muster, then the committee puts it on a blacklist. The burden then falls on the issuer to prove that it is innocent by undergoing the full suite of regulatory due diligence. All further activities in this issue must cease and all monies collected since must be held in escrow until regulators are satisfied. The committee acts as a "rapid response force" to flag suspicious activities, giving the regulators more time to respond to it fully. Speed is of the essence here as we must stop fraudulent offerings before too many people get affected.

My final point relates to helping hands. Ultimately, individual investors need to take responsibility for their own actions. But given the asymmetry of information, they need help to decide. A classification scheme that indicates the likelihood of capital loss and the size of losses as well as the technical complexity of the product, would help retail investors avoid unsuitable products. In one of the consultation papers, there was mention of this complexity versus risk framework which personally I thought was a good idea. The only challenge was that it required a high degree of technical expertise to execute well. This would require additional regulatory resources, which I would like to encourage and support.

Madam, in conclusion, engaging and competing with the market to make a successful investment is an honourable pursuit. But that is often not what is happening. There are many unprincipled, immoral people whose sole expertise is to scam money from the general public, exploiting ignorance and asymmetry of information. I take great umbrage at these people for giving the finance industry a bad name. I am pleased that this amendment takes a significant step towards addressing this scourge. With that, I support the Bill, Madam.

Mdm Speaker: Minister Ong Ye Kung.

4.21 pm

Mr Ong Ye Kung: Mdm Speaker, I would like to thank all the Members who have spoken on the Bill and their support for its introduction. I will start with answering some of the specific queries, followed by the broader considerations.

First, on enforcement. Ms Foo Mee Har asked about how our proposed criminal and civil penalties for capital market misconduct offences compare internationally and whether our penalties are sufficient to deter market misconduct and maintain investor confidence. Mr Louis Ng, too, asked if fines are a sufficient punishment and whether we should impose, say, a trading ban.

I agree with Ms Foo that the authorities should have a sufficiently big stick for deterrence. MAS can pursue a wide range of enforcement actions, including penalties and criminal sanctions. The quantum of civil penalties that MAS can pursue and the maximum criminal imprisonment term for market misconduct offences are comparable with other major financial centres.

Under the Bill, if the offender made substantial profits as a result of his misconduct, MAS is able to now disgorge the offender of his ill-gotten benefits. As MAS is able to claim a maximum penalty up to three times the benefits, this will provide a sufficiently punitive stick for his misconduct. And even if the benefits gained or losses avoided are not substantial, the Court can still award a civil penalty of up to $2 million.

But we all know that the key deterrent of any crime is the custodial sentence. The criminal penalty for market misconduct offences, which include the new offence of financial benchmarks manipulation in this Bill, is imprisonment of up to seven years. This is comparable with the UK, also seven years; Hong Kong and Australia, 10 years.

In addition, if the offender is a regulated person, MAS also has the powers to issue a prohibition order on him to ban him from the industry for a specified period of time. So, what Mr Louis Ng has suggested can be done. MAS can issue the prohibition order independently and separately from any criminal prosecution or civil penalty action proceedings.

It is also important to remember that legally prescribed penalties are one side of the equation. To achieve a real deterrent effect, statutory penalties have to be complemented by swift and strong enforcement action. That leads me to a point raised by Mr Leon Perera on the adequacy of resources in terms of enforcement.

We did the comparison before. And as the Member has noted in an earlier written reply, our resources are comparable to major regimes around the world. Having said that, last year, in 2016, MAS set up a dedicated enforcement unit. This will take on criminal powers of investigation and joint investigation of market misconduct offences, together with the Commercial Affairs Department. It has also set up a civilian unit to monitor unusual trading activities, all with sufficient resources, including forensic and civilian analysts. Unfortunately, I would not be able to provide the Member with the exact number of officers because that should be confidential so that offenders do not start thinking and making calculations.

On the AI regime, I want to first assure Ms Foo Mee Har and Mr Henry Kwek that our regime is also comparable internationally. Specifically in relation to the thresholds for individuals based on their wealth, the thresholds in various regimes, excluding primary residence and expressed in Singapore dollars, are as follows: in the US, it is $1.4 million; the UK, $0.8 million; Hong Kong, $1.5 million. We are effectively at $1 million.

Mr Saktiandi asked if we could use knowledge as a criterion for defining AI instead. As he pointed out, investors who have more wealth may not necessarily be better informed or require less regulatory protection than retail investors. Likewise, someone who has certain knowledge, such as having made certain investment transactions or worked in the financial industry for some time, also may not necessarily be sophisticated investors when it comes to their own money. The truth is that all criteria are never perfect − we are all finding proxies and the best possible proxies. But the use of wealth or income thresholds, while not perfect, is a fairly objective proxy for financial sophistication and is also widely used by other regulators around the world.

What is more pertinent is that now, we are introducing an opt-in regime. With that, the specific AI-eligibility thresholds become much less critical. In a similar vein, Mr Leon Perera asked several questions on what are the detailed calculations of the threshold. To answer his question, it does include insurance and life policies; it does include all bonds, liquid or not. But ultimately, because it is now an opt-in regime, the specifics of the thresholds are no longer so critical because the right is on the investor, whether you want to stay as a retail investor or you opt in to be accredited an AI.

To Mr Saktiandi's point on requiring third party certification of an investor's assets to assess AI-eligibility, financial institutions (FIs) currently must, and will continue to be expected to, conduct proper due diligence and maintain proper records of the basis of an investor's classification as an AI. MAS supervises the FIs closely to ensure that they do so, but we do not prescribe the specific processes.

Mr Saktiandi raised a fairly convoluted point that we allow all corporates or trusts to be AIs, so long as at least one shareholder or trust beneficiary is an AI, and similar to a flexibility which will be given to joint accounts. MAS has considered this carefully but we decided against it. The flexibility which will be given to joint accounts where at least one account holder is an AI is on the condition that every account holder opts in to be an AI, and only in respect of investment transactions made out of that joint account. However, unlike joint accounts, corporates and trusts are distinct legal persons, and shareholders and beneficiaries behind them do not enjoy that right to opt in. Hence, corporates and trusts should only be treated as AIs if they are AI-eligible in their own right, or all shareholders or beneficiaries are AIs.

I would like to assure Ms Foo Mee Har that MAS is mindful of the operational concerns of the industry in adjusting to the revised AI regime, particularly for those with a large number of existing AI clients. In response to industry's concerns − and this came about because of our consultation effort − the industry raised concerns on the potential impact to their business. MAS will apply an opt-out approach for existing AI clients. So, the default for existing AI clients is to remain as AIs if they continue to meet the AI-eligibility criteria. FIs would only need to notify them of their right to opt out of the AI status, and the implications of their choices.

As what Ms Foo said, the industry should focus on providing better services and value to its customers. However, this need not be at odds with the enhancements to the AI regime. The new definition of AI is a sharper one and will accord protection to investors who need them the most. The opt-in mechanism raises awareness of their own investment needs and a better understanding of the nature of their relationship with their financial service provider. These are really the key reasons behind the changes to the AI scheme, a sharper protection, and is important for the long-term competitiveness of the industry and sophistication of the market.

Let me now move to the regulation of non-conventional investment products. I want to also assure Mr Thomas Chua that the proposed changes in this Bill will not affect crowdfunding of projects and startups. In June last year, MAS had introduced measures to make it easier for startups to raise funds from investors through securities-based crowdfunding. Startups can continue to conduct small fund-raising exercises of up to $5 million within 12 months without having to issue a prospectus.

Ms Foo Mee Har cautioned that new "creative" instruments will emerge to prey on unsuspecting investors. Mr Ong Teng Koon suggested setting up a committee to assess new structures or products that come onto the market.

I wish to highlight that there are existing channels through which MAS and other enforcement agencies receive information on such suspicious investments. These come from a wide range of sources, including members of the public, the financial industry and other regulatory and enforcement agencies, local as well as overseas. Where information received suggests a breach of laws, the relevant experts within the authorities will investigate and take appropriate action. It actually operates in similar ways as the committee suggested by Mr Ong Teng Koon. But the function is operationally sited, as opposed to becoming a staffed committee. This, we think, can ensure greater responsiveness.

However, thorough investigations can take time. To warn consumers early that they are dealing with entities that are not licensed by MAS, MAS publishes an Investors Alert List (IAL). The IAL contains a list of entities that may have been wrongly perceived by the public to be licensed by MAS. Consumers are encouraged to exercise caution when dealing with such entities as they will not be able to rely on regulatory safeguards under SFA. The list is not exhaustive and is updated based, in part, on public feedback and complaints received by MAS.

What is different about Mr Ong Teng Koon's suggestion of a committee is a "guilty until proven innocent" approach. However, as highlighted by several Members of this House, this can be seen as draconian, and we must be mindful that an overly-regulated environment could stifle legitimate business and innovation. We should avoid inadvertently subjecting all forms of economic activities, involving consumers handing over monies to a third party in anticipation of a return, to financial regulation. We see them, such as in purchasing of wine or art; we do not want to inadvertently catch them all.

Also, in practice, the distinction between a legitimate product with a more speculative business model or strategy and a fraudulent one sometimes may not be that clear-cut. A legitimate product, due to unexpected market conditions or turn of events, or even poor investment decisions, may not be able to deliver its claims. Prejudging whether a new product is fraudulent is not straightforward.

Let me now move on to capital market regulatory safeguards.

Mr Henry Kwek suggested improving disclosures for loans and investment products so that consumers can easily understand and compare the features. Specifically on Mr Kwek's question as to the best way to calculate interest rates, I would like to highlight that for residential property loans and credit card facilities, EIR is used in Singapore. Fees and charges are included in the calculation of EIRs.

But I agree that we can certainly do more to simplify and standardise disclosures for investment products. As Mr Henry Kwek has rightly pointed out, the challenge is to do so in a way that adequately reflects the different investment risks and communicates the complex features, such as the payoffs under different scenarios and, yet, in a manner that investors can understand.

MAS has introduced guidelines for a Product Highlights Sheet (PHS) for offers of securities made with a prospectus. PHS is a simplified disclosure document that highlights salient features and risks of an investment product, including information on the type of investor that the product is suitable for, and fees and charges, in a clear and concise manner. To encourage the industry to draft disclosures in a clear and comprehensive manner, MAS has also introduced guidelines on good drafting practices for prospectuses. Plain language is encouraged, and legal, financial or technical jargon that may not be easily understood by lay persons should be avoided.

Mr Saktiandi has suggested adopting the approach in Hong Kong, which requires FIs selling investment products to ensure the suitability of the products sold to investors. Disclaimers included in the client investment agreements that circumvent these obligations are void and cannot be used to defend against allegations of mis-selling.

While we do not have this clause in Singapore, other similar safeguards are in place. Financial advisers are under a legal obligation to ensure that products recommended to investors are suitable for them. For complex investment products, such as derivatives, FIs are required to assess if the investor has the relevant investment knowledge or experience before selling them to the investor.

But the law can only go so far. MAS expects FIs to deal with all investors fairly. A fair dealing culture is key. The industry must do what is right, instead of focusing only on doing what is required under the law. MAS will continue to work with the industry to improve such a culture.

Let me now touch on the broader consideration of this Bill, which is what Ms Foo Mee Har, Mr Henry Kwek, Mr Leon Perera, Mr Thomas Chua and Mr Saktiandi Supaat have all emphasised − how to strike a balance between regulations, development of our capital markets and promoting Singapore's competitiveness and innovativeness as a financial hub.

As an international financial centre, we align our regulations to global standards or best practices where appropriate, but we will do so after careful consideration of our local market characteristics. MAS will go above international standards where necessary or refrain from certain measures which we regard as less relevant in our context.

The implementation of OTC derivatives reform is actually a good example of how we balance such competing objectives. We deliberately took a calibrated approach, in two phases, and for the first phase, focused on trade reporting and central clearing obligations because these have the biggest systemic implications. Even for trade reporting, we did not take a "Big Bang" approach, but start with larger FIs, such as banks, and for larger asset classes, such as interest rate derivatives, first. For clearing, it is a similar progressive implementation approach. Later this year, MAS will require large players, that is, banks with above $20 billion notional value of OTC derivatives, to have their widely-traded US-dollar and Singapore-dollar interest rate derivatives to be centrally cleared.

So, Mr Henry Kwek is right to point out that we should monitor what is happening in the US and UK on the financial regulatory landscape. Events are still unfolding. It would be premature to say which direction regulatory evolution will go. We will be mindful that the regulatory pendulum does swing, and we do what is right, both as a key member of the international financial community and also ready for our local market.

The fact is that whatever reforms or policy reviews we do now, not just for financial services, in fact, for many other policy areas, we have to strike this judicious balance between safeguarding the interests of the public and encouraging innovation and dynamism.

And we must expect to hear different and sometimes opposing voices. For example, just this Bill alone, Mr Saktiandi has suggested further tightening of the AI regime ‒ maybe raise the $2 million threshold. Ms Foo questioned, however, the need to implement this at this point in time. Mr Ong Teng Koon asked for tighter regulations on non-conventional products and a "guilty until proven innocent" regime; Mr Thomas Chua, on the other hand, cautioned against stifling innovation. So, we hear this all the time and we have to strike that judicious balance.

Mr Leon Perera also talked about this balance and smart regulations, and then went on to cite the example of President-Elect Trump's suggestion to ban the moving of civil servants into the financial industry. We must, first, be clear that while the President-Elect has spoken about it, there has been no ban in the US on such movements. If you look at the key appointments of the Trump administration, several are, in fact, from the industry.

I think Mr Leon Perera also asked if MAS imposes garden leave and cooling-off periods. We have. It ranges from three months to 12 months, depending on the seniority as well as the functional role of the officer. But conflict of interests does exist and we all know that. Ultimately, it is also an issue of integrity. Given the reputation of MAS, the conduct of our officers and our track record, I do not think there is any suggestion that our system is currently inadequate. So, we will continue to do these ‒ impose a garden leave but allow a movement of talent from industry to Government, to any other sectors. In that way, when we have regulation and policy reviews, there is greater understanding all round. With integrity, this is a fundamental basis to prevent conflict of interests.

Finally, what can really make balancing these trade-offs much easier is to have investors who will only part with their monies if they understand what is the level of risks they are taking and whether it is commensurate with the returns that are being promised. And that means financial literacy.

As Ms Foo Mee Har, Mr Henry Kwek and Mr Louis Ng have rightly pointed out, financial education efforts are, therefore, of utmost importance, and will be a key priority of MAS.

Through MoneySENSE, the national financial education programme, we have continued to step up on such efforts systematically. MoneySENSE provides financial education to different segments of society, through mainstream media, public roadshows and seminars. It also adopts a collaborative approach where the Government, financial industry and the wider community work together in outreach efforts. Let me highlight some of these efforts.

First, MoneySENSE organises regular seminars on a wide range of investment and financial planning topics. One popular series is the My Money Seminar which is organised with the Association of Banks in Singapore and the Securities Association of Singapore. These are for the general public and are conducted in both English and Mandarin.

Second, MoneySENSE also has nation-wide educational campaigns that are conducted across multiple platforms, media channels and delivered in different languages to maximise outreach. One example is the "I Save and Invest for Our Future" campaign last year, which encouraged Singaporeans to take a life-cycle approach to investing and highlighted the benefits of saving and investing from young. The campaign also educated consumers on simple, low-cost investment products, such as the Singapore Savings Bonds and exchange-traded funds.

Third, MoneySENSE also works closely with the Singapore Polytechnic's Institute for Financial Literacy (IFL) in developing and conducting free financial literacy talks and workshops delivered at the workplace and community level. There are also modules on investment-focused topics, such as "Fundamentals of Share Investing" and "Understanding Bonds". Since its setup in 2012, IFL has worked with more than 500 employers and organisations and reached out to over 100,000 participants.

Fourth, MoneySENSE recognises the need to better empower consumers to avoid falling prey to "get-rich-quick" schemes, and publishes consumer alerts on its website to warn consumers of unregulated products and schemes, and the key questions they should be asking as well as the red flags they should be looking out for when considering such investments or trading opportunities. MoneySENSE and MAS also provide a number of resources on their websites, such as the MAS Financial Institutions Directory and the Investor Alert List. Some of the unregulated binary options trading platforms Mr Louis Ng had mentioned are listed on MAS' Investors Alert List.

I thank Mr Henry Kwek for his useful suggestions of ways in which financial education efforts can be further enhanced and become more integrated and structured, from our youth's formal education years, throughout their lifetime and, potentially, even through SkillsFuture initiatives. There are existing programmes for our tertiary students and uniformed Servicemen to educate them on such matters and we will take his suggestions into account as we beef up MoneySENSE.

Mdm Speaker, in summary, this Bill reflects MAS' balanced approach to regulation in three key areas.

First, maintaining Singapore's reputation as a trusted and stable financial centre while ensuring ease of doing business and supporting financial sector innovation and growth.

Second, enhancing safeguards for investors while managing costs and impact of regulation on the financial industry and legitimate businesses.

Third, empowering consumers to take responsibility for their investment decisions through disclosures and fair dealing rules, supported by strong financial education efforts.

Mdm Speaker, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. ‒ [Mr Ong Ye Kung].

Bill considered in Committee.

[Mdm Speaker in the Chair]

The Chairman: The citation year "2016" will be changed to "2017" as indicated in the Order Paper Supplement.

Clauses 1 to 212 inclusive ordered to stand part of the Bill.

Bill reported without amendment; read a Third time and passed.

Mdm Speaker: Order. Before we proceed, I propose to take the break now. I think we sat for a long time. I suspend the Sitting and will take the Chair again at 5.10 pm.

Sitting accordingly suspended

at 4.47 pm until 5.10 pm.

Sitting resumed at 5.10 pm

[Mdm Speaker in the Chair]