Variable Capital Companies Bill

Order for Second Reading read.

6.19 pm

The Second Minister for Finance (Ms Indranee Rajah): Mr Deputy Speaker, I beg to move, "That the Bill be now read a Second time."

The Variable Capital Companies Bill provides a legislative framework for the incorporation and operation of a corporate structure tailored specifically for investment funds. The introduction of this corporate structure, known as the variable capital company or "VCC", will be a game-changer for Singapore’s fund management industry as it will allow us to capture value from the full fund management value chain. The VCC regime will strengthen our position as the Asian hub for fund domiciliation and management.

Singapore is already recognised as a leading Asian fund management hub. Assets under management or AUM have grown by an average of 15% per annum over the past five years, reaching S$3.3 trillion at the end of 2017. Almost seven in every $10 under management are invested into the Asia-Pacific region, reflecting Singapore's role as a key node for global fund managers and investors to invest in the region’s growth opportunities.

The Industry Transformation Map (ITM) for financial services has set out Singapore’s strategy to be an Asian hub for fund management and domiciliation. Besides the introduction of VCC to encourage fund domiciliation activities in Singapore, we are deepening fund management capabilities in specialty and alternative investments to complement our strengths in portfolio management, trading and research. We are also building a deeper and more diverse capital pool for investment into Asia from Singapore.

The VCC structure will complement and expand the existing suite of fund structures available in Singapore, such as the company, the limited partnership and unit trust structures. Taken together, this will provide a comprehensive range of investment fund vehicles and structures to support investors’ needs.

The Bill takes reference from similar corporate fund structures available in other global investment fund centres, such as Ireland, Luxembourg and the United Kingdom. MAS has consulted on the VCC framework and the Bill, and has engaged extensively with the industry and the public over the past 18 months. There was broad industry support for the VCC framework and the Bill. MAS has considered all the feedback received, and taken it into account where appropriate.

Mr Deputy Speaker, let me first elaborate on the rationale for introducing the VCC framework, before taking Members through the key areas of the Bill.

Today, fund managers already conduct a good range of their fund management activities in Singapore – portfolio management, trading and research. The VCC framework will encourage fund managers to domicile their funds in Singapore, adding domiciliation activities to the fund management activities. This in turn will establish a full-service fund ecosystem in Singapore.

The fund management industry is an important component of Singapore’s financial sector, contributing 12.4% of the overall financial sector’s nominal value-add last year. Besides the direct value-add contribution, it has significant spillovers to other financial sector activities, such as the trading of foreign exchange, as well as to other service providers such as lawyers and accountants.

There is potential for Singapore to capture a greater share of the full value chain of fund management, particularly in the fund servicing space. A substantial proportion of investment funds that are managed by fund managers in Singapore are domiciled elsewhere, for example in Luxembourg and the Cayman Islands, owing to the flexible corporate structures that are available there. As a result, most of the economic benefits generated by service providers to these investment funds accrue outside Singapore.

Singapore-based fund managers who domicile funds locally as VCCs can look forward to significant cost economies and fewer cross-border administrative and compliance hurdles through the use of local service providers operating out of just one country. In contrast, funds domiciled overseas but sold in Singapore typically incur additional costs from having to use multiple service providers across different countries. VCCs would also be able to avail themselves of Singapore’s competitive tax regime.

Beyond fund managers, the VCC framework will create new business opportunities for lawyers, accountants, tax advisors, fund administrators and custodians in Singapore. In practice, VCCs will operate from an office in Singapore and employ Singapore-based corporate secretaries, engage Singapore-based lawyers, fund administrators and so on to facilitate their operations. MAS has estimated that the VCC framework could create over 1,000 new jobs for service providers in the first two years of its introduction.

Singapore is not the only jurisdiction in this region that has introduced VCC equivalent structures. We need to keep pace with other international fund management centres if we are to capture the additional economic benefits of fund domiciliation.

Mr Deputy Speaker, let me now take the Members through the key areas of the Bill.

The VCC is a body corporate incorporated under the VCC Bill. This can be likened to how companies are incorporated under the Companies Act (Cap 50). The sole object of a VCC is to be a structure for investment funds. The shareholders in a VCC are the fund investors. The board of directors owe duties to act in the best interests of the VCC, and a fund manager must be appointed to manage the VCC.

I will now highlight several features of the Bill that will specifically address the needs of investment funds.

The Bill caters to an investment fund’s need for flexibility in the use of its capital. Unlike companies under the Companies Act (Cap 50), VCCs are able to vary their share capital, without having to seek investors’ approval. This is a common feature in investment funds, and allows investors the flexibility to exit their investments in the fund when they wish to do so.

To safeguard the interests of creditors, VCC shares must generally be issued and redeemed at their net asset value. This is so that liabilities will always be accounted for in the price of issuance and redemption.

In addition, VCCs will be able to pay dividends using capital. In contrast, companies under the Companies Act (Cap 50) can only pay dividends out of profits. This feature is important, as it allows investment funds to meet their dividend payment schedules which may have been agreed upon with investors.

The Bill allows a VCC to be established as a standalone fund, or as an umbrella fund with multiple sub-funds. The umbrella with sub-funds structure creates economies of scale, as the sub-funds can share a common board of directors and use the same service providers, including the same fund manager, custodian, auditor and administrative agent. This would benefit fund managers, who may, for example, wish to group their funds, such as their Asian bond fund together with their European equities fund, under a single umbrella VCC.

Certain administrative functions can also be consolidated, such as the holding of general meetings and preparation of prospectuses.

A sub-fund will have separate assets and liabilities, distinct from other sub-funds. As the sub-funds will not have separate legal personalities, there is the possibility that the assets and liabilities of one sub-fund could be commingled with that of another sub-fund. As a safeguard for VCC shareholders and to enhance creditor protection, the Bill requires the assets and liabilities of each sub-fund to be segregated, such that the assets of one sub-fund cannot be used to discharge the liabilities of the umbrella fund, or of another sub-fund. Under the Bill, any agreement to use the assets of one sub-fund to discharge the liabilities of the umbrella fund, or another sub-fund, would be void.

The rule on the segregation of assets and liabilities of sub-funds will also apply during insolvency. To ensure ring-fencing of a sub-fund’s assets and liabilities in the event of an insolvency, each sub-fund has to be wound up separately.

Mr Deputy Speaker, Singapore is home to a vibrant and diversified group of over 700 global and local fund managers, spanning both the traditional and alternative space. Alternative funds, such as private equity and real estate funds, are typically structured as closed-end funds. This means that the fund has a fixed number of shares that cannot be redeemed at the election of shareholders, except in limited circumstances where permitted by the fund. In contrast, traditional funds are often structured as open-ended funds, where investors can exit their investments by redeeming their investment units or shares in the fund.

VCCs are flexible structures, in that they may be constituted as open-ended or closed-end funds, providing a suitable corporate structure for both traditional and alternative strategies. This caters to the diverse needs of the Singapore-based fund management community, which comprises both traditional and alternative managers.

Given the growth in the alternative space, it is also important that the VCC structure can be used by alternative managers. Alternative AUM in Singapore grew by 20% per annum over the past five years, led by the venture capital and private equity sectors; in comparison, traditional AUM grew by 13% per annum over the same period.

Mr Deputy Speaker, the Bill also incorporates features to ensure that VCCs are subject to appropriate governance and regulatory oversight.

Corporate structures can and have been used around the world for unlawful purposes. To mitigate against such risks for VCCs, VCCs must appoint a fund manager that is regulated by MAS to facilitate supervisory oversight on the use of the VCCs for investment funds.

Like companies, VCCs will be required to set up Boards. As mentioned earlier, VCC directors will owe fiduciary duties to act in the best interests of the VCC, similar to those owed by a director of a company to the company.

VCCs offered to retail investors, or that have sub-funds offered to retail investors, will be subject to an additional requirement to have at least three directors on their boards, at least one of whom must be independent. The requirement for an independent director is an additional safeguard to help ensure good governance of retail VCCs.

VCCs will have to prepare financial statements that must be audited. To cater to the needs of global investors, VCCs will be allowed to prepare their financial statements using not just Singapore accounting standards and principles but also International Financial Reporting Standards and the US Generally Accepted Accounting Principles or GAAP.

The register of VCC shareholders need not be made public, but must be disclosed to public authorities for regulatory, supervisory and law enforcement purposes upon request. This arrangement takes into account investors’ need for privacy and is consistent with the practice in other major fund jurisdictions such as the UK and Ireland.

VCCs will also be subject to, and supervised for, anti-money laundering and countering the financing of terrorism requirements, in line with international standards.

To facilitate fund domiciliation in Singapore, the Bill will provide a re-domiciliation mechanism for existing overseas investment funds constituted as corporate structures similar to VCCs. This means that the business opportunities and jobs created for the fund services industry will stem not only from the creation of new funds structured as VCCs, but also from existing overseas funds re-domiciling into Singapore as VCCs. In addition, existing funds domiciled in Singapore as companies, limited partnerships or unit trusts can also restructure to take advantage of the VCC structure.

The Bill provisions relating to the insolvency of a VCC and its sub-funds are adapted from the Companies Act (Cap. 50). The VCC Bill will be amended in 2019 to align the VCC insolvency regime with those of other corporate structures under the Insolvency, Restructuring and Dissolution Bill which has just been debated. The tax framework for VCCs will be separately set out in legislative amendments to the relevant tax legislation.

The introduction of the VCC framework will enhance our fund ecosystem and the value proposition Singapore offers to fund managers. The benefits of the VCC are not solely confined to fund managers, but will also extend to local service providers. It will benefit the Singapore economy, strengthen Singapore’s position as a full-service international fund management centre and create good jobs for Singaporeans.

Mr Deputy Speaker, I beg to move.

Question proposed.

Debate resumed.

6.37 pm

Order for Second reading read.

Ms Foo Mee Har (West Coast): Mr Deputy Speaker, Sir, Singapore has established itself as a vibrant and leading international fund management centre. We have seen impressive "asset under management (AUM)" growth over the years. AUM has more than doubled in five years, from S$1.6 trillion in 2012 to $3.3 trillion in 2017. As the Second Minister of Finance recapped just now, we are now home to 700 asset managers.

The introduction of Variable Capital Companies Bill (VCC) in short, is timely. It further strengthens Singapore’s position as a full-service international fund management centre. Close to 80% of AUM managed in Singapore are still domiciled overseas. So, this new corporate structure, tailored for investment funds, should spur co-location of fund managers and fund ancillary services in Singapore by enabling cost economies, ease of administration and compliance for fund managers.

However, attracting funds to be domiciled in Singapore will not be an easy task. Other established fund centres such as Cayman Islands, Republic of Ireland, Luxembourg and recently Hong Kong, come with their own distinct history and value propositions, offering a whole suite of incentives, ranging from tax-free regimes, flexible legislation, accounting flexibility and a real commitment to serving the international fund industry.

Whilst the proposed Singapore’s VCC structure compares reasonably well against its international peers, catering to investment funds for traditional and alternative strategies, both on an open-ended and closed ended basis, there will always be inertia to try out a new structure. We must therefore ensure Singapore's VCC framework offers a unique value proposition. We must actively promote the structure to drive adoption and consider incentives that may be necessary to spur action amongst fund managers.

So, Deputy Speaker, Sir, to overcome the initial inertia to adopt the VCC structure, including the cost hurdles for adoption, the government should consider some "sweeteners", perhaps in the form of cost subsidies when setting up a VCC structure in Singapore. Conversions to VCC should be allowed to take place with no Singapore tax consequences and should be granted automatically to encourage transition to VCC. Re-domiciliation incentives could also be provided to encourage fund managers with funds domiciled in offshore jurisdictions to co-locate fund domiciliation with their fund management activities in Singapore.

I think the government should work closely with local champions such as Dymon Asia, Lion Global Investors to lead the way for the adoption of VCC for new funds. We should drive adoption starting from home base, and support early adopters with "early bird" incentive.

The proposed framework allows funds domiciled overseas to be re-domiciled in Singapore as VCCs by registration with ACRA. However, the industry has fed back that more needs to be done to refine policies to better support the conversion of local funds to VCC. Many industry players find the process for converting existing domestic collective investment structures into VCC cumbersome. Rightly or wrongly, some actually feel that the restructuring of local funds as VCC appears more difficult than re-domiciliation.

Being a relatively late comer, we should design our VCC framework with a distinct advantage to serve the rapidly growing alternative sector AUM, comprising hedge funds, venture capital, private equity, real estate and infrastructure. This would be an excellent window to establish ourselves as a vibrant financing hub to support the next generation of Asian growth companies.

With two-thirds of Singapore’s AUM invested in Asia Pacific and 40% in ASEAN, the VCC framework should be operationalised to enable us to compete strongly as a choice location for setting up fund management operations focused on investments in Asia and ASEAN. This will require nuanced understanding of the web of varied local regulations and international tax developments.

For example, one of the issues raised by the industry is the legal identity of sub-funds under VCC umbrella entity. Even with safeguards put in place to ensure segregation of assets and liabilities, market players view that giving sub-funds a legal identity would be a more straightforward and effective way to ring-fence sub-funds' assets and liabilities in order to facilitate flexible sub-fund set up and closure, or exit. Importantly, there is a need to cater to structural issues which feed into taxation matters. For example, investments into India via a sub-fund where a Certificate of Residence (COR) is required for claiming tax benefits. The lack of a legal entity status of sub-funds could potentially hinder fund managers to flexibly structure an umbrella entity with multiple sub-funds with distinct investment objectives.

Sir, the very purpose of the VCC structure is tailored for investment funds and dispenses with aspects of existing company law that are not conducive to investment funds. Thus, one of the VCC’s selling point is its flexibility to pay dividends and redeem shares versus companies with fixed capital. The notion of variable capital provisions is therefore critical to the operations of an investment fund. Yet, the closure of a VCC's sub-fund seems to mirror the process under the Companies Act, requiring a liquidator to be appointed and involve more formal company liquidation procedure. Would the Minister consider lightening the unwinding process for sub-funds, such as allowing a strike-off if the sub-fund satisfies all the criteria for striking off? This will improve operational flexibility to promote the usage of a VCC structure.

I applaud MAS for structuring VCC with a robust governance and oversight framework. Unlike other fund domiciliation centres, VCC in Singapore requires the appointment of a fund manager regulated by MAS to be based in Singapore and subject to anti-money laundering obligations, in line with international standards. This will help prevent VCC from being abused for unlawful purposes and prevent Singapore from becoming an offshore centre without actual investment management activities conducted in Singapore.

Mr Deputy Speaker, Sir, Singapore's success in positioning itself as a fund domiciliation hub is expected to create a thousand new jobs in the first two years of introduction for ancillary service providers – these will include lawyers, fund administrators, fund custodians, tax professionals and accountants, all attractive jobs for Singaporeans. We must invest strongly to nurture a vibrant local eco-system of fund service providers to enhance the sophistication of our overall system for the long term. We must ensure that the expertise required to operate the VCC framework does not constrain our growth. One particular area that the industry has concerns about is the availability of qualified professionals, including fund directors. I would like to ask the Minister to elaborate on the talent development plans being developed in conjunction with the VCC framework.

In conclusion, the proposed VCC framework, coupled with Singapore’s strong reputation for political and economic stability, transparency, sound and predictable rules and regulations, will position Singapore well as a compelling hub for both fund management and domiciliation activities. It could be a game changer for asset management in Asia Pacific. I support the Bill.

6.46 pm

Mr Leon Perera (Non-Constituency Member): Mr Deputy Speaker, Sir, the Variable Capital Companies Bill aims to create another option for fund managers for structuring investment funds, besides traditional entity models such as unit trusts and investment companies. In so doing, it aims to enhance the competitiveness of Singapore as a fund management hub.

For example, a Singapore Variable Capital Company (VCC) will be able to issue and redeem shares without shareholders' approval, enabling investors to exit their investments in the investment fund when they wish to and pay dividends using capital. Another way of looking at this is that the capital of a VCC will always be equal to its net assets, offering flexibility in the distribution and reduction of capital. This is in contrast to the company structure that has restrictions on capital reduction and can only pay dividends out of profits.

The VCC will also allow for a wider variety of accounting standards to be used in preparing financial statements, which may attract more global funds to be domiciled in Singapore. VCCs will be able to use International Financial Reporting Standards and US Generally Accepted Accounting Principles, in addition to Singapore accounting standards and recommended accounting principles.

Mr Deputy Speaker, Sir, this Bill represents a step in the right direction and I do not oppose it. I do, however, pose the following questions and requests for clarification.

Firstly, it would appear that VCCs would be allowed to offer non-traditional strategies to more sophisticated investors, such as accredited investors, but will VCCs be allowed to offer products to retail investors if they pursue mutual fund-type strategies? If so, what safeguards would protect retail investors from the risk that the fund manager would deplete capital by paying dividends from capital rather than profits, a trend that has not been unknown in other jurisdictions that allow VCCs?

No doubt retail investors would receive explanations about the nature of these funds and they would have visibility of a declining net asset value (NAV), and the matter could thus be left to market forces. But would regulations impose a duty of care on VCC fund managers to explain this possibility to retail investors?

Secondly, the VCC consultation paper did not treat the issue of tax in great detail. The MAS consultation paper of in 2017 stated: "MAS recognises that tax treatment is one of the considerations for deciding on the domiciliation and management of funds. In this regard, MAS is studying the tax regime for VCCs, including exploring the feasibility of extending the current fund vehicle tax schemes to VCCs, and welcomes feedback on the VCC tax regime."

I would like to ask if VCCs would be eligible to receive the current Government tax incentives available to investment companies. For example, will VCCs be eligible for Singapore fund tax incentive schemes currently provided for under sections 13R, 13X and 13Y of the Income Tax Act and the Financial Sector Incentive (FSI) scheme? Another example, would stamp duty be imposed on transfers of shares in VCCs?

6.50 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, I stand in support of this Bill. When investment managers are deciding where to house their funds, they look for three key things: privacy for their investors, flexibility in their operations, and tax exemptions from the Government.

Until now, we have had no corporate structure providing all of these features. This means that asset managers based in Singapore have been overseeing funds mostly domiciled in offshore jurisdictions like Cayman Islands.

I am happy to say that this Bill plugs the gap. It allows investment funds to use popular global accounting standards rather than just the Singapore standard. It allows non-disclosure of the fund’s investors and financial statements. It allows investors to exit their investments easily. And as the Minister clarified in his 2018 Budget Statement, existing tax exemptions will be extended to this new company type.

I commend the Monetary Authority of Singapore (MAS) for taking a consultative approach on this issue. In 2017, it held a public consultation on the issue. Industry observers and interested citizens provided feedback, and the MAS responded by tweaking its proposal. The final product blends sensible Government with industry expertise. That said, I have some clarifications to make.

The first point relates to the investigation of VCCs for misconduct. Can the Minister clarify in what circumstances would the Ministry investigate the affairs and ownership of a VCC? What are the processes that the Ministry has in place to ensure that VCCs conduct themselves in a lawful manner?

I appreciate that the Minister has shared some information about this in her opening speech. My concern stems primarily from the fact that unlike regular companies in Singapore, VCCs not need to disclose their list of shareholders or their financial statements to the public.

While this is consistent with how unit trusts are already treated and with what investors expect from an investment fund, it nonetheless limits the level of public scrutiny and places a sole responsibility on the Government to spot and uncover misconduct.

We have learned from the leaks of the Panama Papers and the Paradise Papers that highly secretive company structures can hide unlawful activities. These leaks have triggered worldwide investigations and toppled Governments.

If this Bill succeeds in its goals and investment funds re-domicile from offshore jurisdictions to Singapore, the gaze of the world will inevitably turn towards our nation. How will we distinguish ourselves from places like the Cayman Islands?

We should be concerned about the risks to Singapore's international reputation. Fairly or not, Singapore is already widely labelled as a tax haven.

In 2016, UK charity Oxfam labelled Singapore the "fifth-worst" corporate tax haven in the world. This year, the Tax Justice Network, a global NGO, ranked Singapore fifth on its Financial Secrecy Index. A 2018 research paper by economics professors from Berkeley and Copenhagen also branded Singapore as a tax haven.

The risks come amid a sustained global push against tax havens. Entities like the European Union and the OECD have moved to blacklist tax havens, though neither has included Singapore on their lists. But researchers, reporters and NGOs namedrop us when reporting on this issue nonetheless.

Our reputation as a clean, fair, and transparent financial hub takes a hit with every mention. Not to mention that the legitimate concerns about money laundering and fraud, and an ever-pervasive problem in a world of complex financial and corporate arrangements.

Currently, the Bill provides little guidance on the scenarios in which the Government would investigate VCCs, their managers and their shareholders. It states that any investigations would be in the interest of the public, creditors or the shareholders, or based on allegations of misconduct. It would be good if Minister can further outline the practices, principles, policies and systems it has in place to safeguard against misconduct related to VCCs.

Sir, my second point relates to the average Singaporean. In 2016, then Senior Minister of State, and now Minister Indranee Rajah said at a conference of investment management professionals that the introduction of VCCs would create more "good jobs" in the professional services sector, including in accounting, legal, compliance, marketing, and IT. That was quite some time ago.

The MAS's public statements in more recent weeks have not addressed similar topics and have instead tailored its message to investment managers.

In addition to what Minister Indranee said, VCCs will surely contribute to the Singapore economy by paying corporate registration fees, name registration fees, annual filing fees and legal fees. This direct impact can be measured in dollars and cents.

Can Minister provide an estimate or outline of the benefits that the establishment of VCCs in Singapore would bring for the average Singaporean? Sir, clarifications notwithstanding, I stand in support of this Bill.

6.55 pm

Mr Saktiandi Supaat (Bishan-Toa Payoh): Thank you, Mr Deputy Speaker, Sir. The new corporate structure under the Variable Capital Companies (VCC) Bill is a significant addition to our financial services industry. Given the advantages that come with it, I foresee we will experience a substantial growth in the number of local and international portfolios. Certainly, it will be a major boost to our status as a regional and international financial hub.

Currently, investment companies impose a number of restrictions. For example, shareholders' approval is needed for the issuance and redemption of shares and this can result in delays, especially when there are many shareholders. Furthermore, for company structures with restrictions on capital reduction, dividends may only be paid out of profits. For VCC, investors have the flexibility to exit their investments when they wish to, and they can pay the dividends using the fund's capital. Such freedom would encourage more fund managers to base their investment activities in Singapore.

However, I am concerned about whether this may give rise to situations where we see more disruptions as a result of investors changing their minds and trying to move in and out of their investments. We have to consider how it may affect our financial system in terms of systemic risk, and as what hon Member Mr Louis Ng has mentioned, either due to misconduct or market risk, or counterpart risk and its related impact into systemic risks as well.

Will too much freedom lead to a more volatile economy? Perhaps Minister can share her views with the House on this. For example, in the current global economic climate, and with the volatile political environment in the West, the big movement of funds in an out of an instrument cannot be under-estimated. The current volume may be small as we proceed with the VCC Bill, if it is approved, but as we build depth and breadth in this sector, its impact on our financial account flows can be substantial in the future.

Thus, the implementation of the VCC could possibly see a larger number of portfolio inflows. Additionally, there is also potential for foreign corporate entities that were initially established as collective investment schemes to be re-domiciled as VCCs here. Hence, fund managers in Singapore who have their funds domiciled in offshore jurisdictions like the Cayman Islands may consider co-locating their fund domiciliation with their fund management activities.

Our stable economy, our political stability, with our pro-business environment and good governance, we already have an edge over many other countries in the provision of financial services. With the VCC, I am confident that many funds will be happy to move their fund management activities to Singapore. All these could mean jobs for Singaporeans in the support sector or ancillary services. Will the Government proactively engage these foreign corporate entities to make the conversion? We also need to train a talent pool of people when this sector of the business expands.

I also note that the VCC allows for the accommodation of a wider scope of accounting standards in the preparation of financial statements. Aside from local accounting standards, International Financial Reporting Standards and the US Generally Accepted Accounting Principles can also be used by VCCs. This brings to mind the possibility of rejuvenating the accounting industry in Singapore, which is in danger of being edged out by technology. Can we make use of this opportunity to upskill our accountants? When new accounting standards are incorporated, it is inevitable for discrepancies to arise so perhaps local accountants can get acquainted with the new standards and serve as bridges. Being equipped with professional financial knowhow, they will also be in a better position to support our endeavour to become an exemplary global fund management centre. I believe our Finance Ministry and MAS would be working with the universities to address this new demand for people in a specialised area, from accounting to fund management and to custodian services. Could Minister confirm if this is being addressed?

Mr Deputy Speaker, Sir, the VCC will breathe new freshness into our financial industry and it has the potential to create more jobs for Singapore. We must make use of this opportunity to make the most out of it. I am looking forward to its implementation. I support the Bill.

6.59 pm

Mr Murali Pillai (Bukit Batok): Mr Deputy Speaker, Sir, I declare my interest as a lawyer in private practice. I support the aims behind this Bill which is really to propel Singapore as a premier international fund management centre. I fully agree with the hon Minister's characterisation of this Bill as a game changer.

Like the hon Member Mr Louis Ng, I also applaud MAS' move in conducting public consultation on the proposed framework for the draft Bill over 18 months and incorporating feedback into the Bill where appropriate, before this Bill was tabled. Singapore's ability to attract and domicile funds is significantly advanced. Hitherto, there were three vehicles for fund set-up, as the hon Minister mentioned: trust, LLPs and companies. However, only companies as compared to trust and limited liability partnerships, have access to Singapore's network of avoidance of double taxation agreements (DTAs). Off the top of my head, I believe about 100 countries have DTAs with Singapore.

There are significant restrictions in using companies as structures for funds, however. The hon Member Mr Sakitiandi mentioned about it. There are limitations with redemption of shares without shareholders' approvals where returns are to be via shareholders and limitations with respect to redeeming shares using capital. This is because of the need to satisfy the solvency requirements which are on the whole entity basis. And also there is a limitation in relation to not being able to maintain the confidentiality of investments.

All these problems would be addressed directly by the introduction of the VCCs. VCCs are recognised under the DTAs as corporations that can benefit from the DTA agreements. And this is a unique and significant advantage that funds domiciled in Singapore will get.

At the same time, there are safeguards in that only MAS-regulated fund managers might operate the funds under the VCC corporate structure. In particular, well-established regulations dealing with prevention of money-laundering and terrorism financing apply to regulated fund managers.

I do note, though, that there are two exempted classes of managers, namely, managers operating family offices and managers operating real estate assets. The funds via VCC themselves are regulated for AML via the proposed Part VII of the Bill. What steps can be taken to ensure that the level of supervision on these exempted managers are also comparable to regulated fund managers. This is because AML risks exist, viz a viz family office and real estate managers too.

I further seek clarification on the following. In relation to the re-domiciliation of funds, what would be the criteria to allow the migration? I gather that for companies, it is provided that there must be more than 50 employees, profits of more than $15 million or revenue of more than $50 million.

What is the corresponding criteria for VCCs? Recognising that fund vehicles have a long time span, it is not unusual for fund vehicles to be operating for 10 years or more. So, what is the structural value proposition that Singapore can offer to fund managers to migrate their existing funds to Singapore? And I believe this is a point that was made by the hon Member Ms Foo Mee Har as well.

Next, does the Government also intend to extend the corporate structure? Currently, only usable for collective investment schemes to other spaces. For example, the insurance space because the insurance companies also have segregated funds dealing with various insurance policies; they may find the VCC structure attractive. Or the securitisation space because Singapore is also seeking to promote securitisation under the approved Special Purpose Vehicle Scheme. Notwithstanding my comments, I support the Bill.

7.03 pm

Mr Gan Thiam Poh (Ang Mo Kio): Deputy Speaker, the new corporate structure, Variable Capital Company (VCC), is attractive as it will provide greater flexibility for fund management companies. Before I go on, let me declare my interest. Currently, I am an employee of a local FI.

As the VCC structure allows it to issue and redeem shares without needing to seek shareholders' approval, investors may enter and exit from their investments freely. It will make it easy for the fund manager to facilitate change of investors to meet business needs and keep pace with market practices. This will encourage fund managers to have the domicile of their investment funds here.

I am pleased to note that the Bill will be requiring the assets and liabilities of different sub-funds to be segregated so that the assets of one may not be used to discharge the liabilities of the others. This is a vast improvement in addressing the problem of contagion risk. This is due to the issue of sub-funds having their own set of investors but the same legal personality, leading to the risk of assets and liabilities commingling.

I have some clarifications to seek.

Will the Financial Institutions (FIs) be responsible for the KYC (Know your Client) process and SOW (Source Of Wealth) verification for each of the investors of that VCC or investors in the sub-funds? If so, it may be necessary to allow FIs to have access to the information of the investors and shareholders if the authorities expect FIs with whom the account is opened to be compliant.

I would also like to ask what had been the number of disputes received so far from investors against fund managers in each of the last 10 years? Singapore has a strong reputation as a safe, stable and well-regulated financial centre. What measures are in place to eradicate scams and Ponzi schemes?

I support the Bill. Thank you.

7.05 pm

Mr Deputy Speaker: Second Minister for Finance.

Ms Indranee Rajah: Mr Deputy Speaker, I would like to thank all the Members who have spoken on the Bill and for their support for its introduction.

Let me address their questions in three parts. First, competitiveness of the VCC framework as well as clarifications on its features. Second, opportunities for local fund service providers and how we are working with them to capture these opportunities. And third, the potential impact on Singapore from a financial stability, risk and reputational standpoint.

As Ms Foo Mee Har has highlighted, Singapore is, relatively speaking, a newcomer, competing with long established fund domiciles such as Luxembourg and Ireland.

Being a newcomer, though, has its advantages. We are able to take reference from tried and tested features of comparable structures such as UK and Ireland so that our VCC framework is on par intentionally, and tailor the features to meet the needs of our industry. For instance, the key advantage of our VCC framework is its enhanced flexibility to be used for both open-ended and close-end funds, and which are suitable across traditional and alternative investment strategies. This may not necessarily be available in other jurisdictions.

Ms Foo raised feedback that giving sub-funds legal identities would be a more straightforward and effective way to ring-fence their assets and liabilities. MAS did in fact consider this, but decided against it. Internationally, corporate fund structures with cellular cells are structured either as protected cell companies (PCCs) or incorporated cell companies (ICCs). The key difference between the PCC and the ICC is whether sub-funds are accorded separate legal personalities. The PCC does not; the ICC does.

While ICC structure provides legal certainty over the status of its sub-funds, it has significant limitation in allowing umbrella funds to reap economies of scale, and is therefore not conducive to the operation of investment funds. For this reason, the PCC structure adopted by the VCC framework is also used in most international fund domiciles such as the UK, Ireland and Luxembourg, whereas the ICC structure is only adopted in Guernsey.

Notwithstanding the lack of separate legal personality, VCCs are required under legislation to segregate assets and liabilities of sub-funds. This will mitigate cross-cell contingent among sub-funds under the umbrella structure, and at the same time, ensure proper ring-fencing.

I would also like to reassure Ms Foo and Mr Perera that VCCs, including their sub-funds, can avail themselves of Singapore's competitive tax regime. As announced by the Ministry of Finance in its 2018 Budget Statement, a VCC will be treated as a company for tax purposes and will be allowed to enjoy our tax incentives for funds.

Mr Perera asked about sections 13R, 13X and 13Y of the Income Tax Act. The tax exemptions under sections 13R and 13X of the Income Tax Act will be extended to VCCs. However, section 13Y is not applicable as that is for prescribed sovereign entities and approved foreign government-owned entitles.

The 10% concessionary tax rate under the Financial Sector Incentive – Fund Management Scheme will be extended to approved fund managers managing incentivised VCCs, and the existing GST remission for funds will be extended to incentivised VCCs.

We intend for VCCs that are tax residents to access Singapore's tax treaties. Tax residence of VCCs and their sub-funds are determined based on facts and circumstances. To demonstrate that a VCC and its sub-funds are tax residents of Singapore, IRAS will issue a Certificate of Residence (COR) in the name of the VCC, with the names of the relevant sub-funds in the COR. Singapore will allow a sub-fund, being part of a VCC resident entity, to access Singapore's tax treaties. More details on the tax treatment for VCCs will be released by the end of this year.

Ms Foo has also noted the importance of operational flexibility in closing down sub-funds. However, operational flexibility must be balanced against other considerations, including creditor protection. As sub-funds have assets and liabilities attributable to them, we need a fair, orderly and robust procedure to deal with the legal issues and practical difficulties that may arise in the course of liquidating a sub-fund and distributing its assets. Importantly, the legal obligations of parties in respect of a sub-fund's assets and liabilities must be clear.

The laws in general principles on corporate liquidation under the winding up provisions of the Companies Act (Cap 50) provide an established framework to ensure that the assets and affairs of sub-funds are dealt with in a fair and orderly manner. Insolvency practitioners in Singapore are also familiar with the winding up regime under the Companies Act (Cap 50) and would be well placed to act as liquidators of sub-funds.

Ms Foo has mentioned there could be room to further streamline processes and enhance operational efficiency with regards to the procedure for closing down sub-funds. MAS will study this and consider if there is a need to make further changes in subsequent legislative amendments.

Mr Murali Pillai has asked whether it was intended for information relating to a particular sub-fund to be accessible by all shareholders of the VCC, including those who may not have interests in that sub-fund.

Under the Bill, a VCC's financial statements are required to be made available to all VCC shareholders. As Mr Pillai pointed out, this would mean that financial information of individual sub-funds in an umbrella fund would be made available to all shareholders of the same VCC.

One of the main benefits of the VCC framework is its ability to be used as an umbrella fund with multiple sub-funds. By not restricting shareholders' access to financial information of sub-funds within an umbrella VCC, this brings about economies of scale, as sub-funds within the umbrella fund would be able to consolidate certain administrative functions, including the preparation of financial statements.

For the same reason, a VCC will also be able to provide its financial information to prospective investors. Such transparency will allow and encourage existing and prospective investors to monitor and assess the VCCs ' financial performance. They will be more informed and be able to hold fund managers to account.

In terms of shareholder privacy, a VCC is not required to provide a shareholder with information relating to its other shareholders. An investor in a particular sub-fund will not have the right, under the Bill, to obtain information, such as the identity and shareholding of another investor in the same sub-fund.

Mr Pillai has also asked about the criteria for overseas fund structures to re-domicile as VCCs. The VCC framework will adopt similar requirements as the inward re-domiciliation regime under the Companies Act (Cap 50). We will, however, not require re-domiciling entities to be of a certain minimum size in terms of assets, revenue and employees, as investment funds are inherently different from operating companies. Moreover, imposing such minimum criteria for re-domiciling entities would restrict the entry for smaller funds, such as those investing in venture capital or those used to seed or launch a new strategy. MAS will provide further details on the operational process for re-domiciliation in the subsidiary legislation.

Ms Foo has asked whether more can be done to facilitate the adoption by local funds of the VCC structure. Existing local funds which are companies, unit trusts, or limited partnerships can restructure to adopt the VCC structure, for example, by incorporating a new VCC and transferring the assets to the VCC. MAS will also study whether and how statutory mechanisms to facilitate the adoption of the VCC structure can be provided for in subsequent reviews. The tax framework will be studied in tandem.

One of the key features of the framework is that the VCC may pay dividends using capital.

Mr Perera asked whether there are safeguards to make sure retail investors understand that the VCC may deplete its capital when paying such dividends. Let me assure Mr Perera that the regulations under the Securities and Futures Act (Cap 289) require offering documents of funds to contain all information necessary for investors to make an informed assessment. In particular, funds that pay dividends out of capital are expected to disclose that dividends may be made out of capital and the implications of such dividends for investors. MAS will, as part its review of the funds’ documentation, check that such disclosures are made. The Securities and Futures Act (Cap 289) requirements will apply to VCCs as well.

Looking ahead, Mr Pillai has suggested that some of the features of the VCC Framework, such as its ability to segregate assets and liabilities and avoid contagion risks between sub-funds, may benefit other financial activities such as insurance-linked securities, insurance captives, assets securitisation and family offices.

The VCC framework today is intended and designed for use as a corporate structure for investment funds. But I agree that some of the features could be useful for other applications. MAS will consider widening the scope of the VCC framework with appropriate modifications for applications in other sectors, in subsequent reviews.

Next, I will touch on the opportunities that the VCC framework will bring to Singapore. The introduction of the VCC framework will encourage fund managers to domicile their investment funds in Singapore. In turn, this will increase the pool of serviceable clients and create new work for local service providers, such as lawyers, auditors, fund administrators and fund custodians. For example, a new fund setting up as a VCC in Singapore will need, first, lawyers to draft the fund's legal documents; second, fund administrators to assist with the day-to-day operations of the fund; and third, accountants to prepare and audit the financial statements of the fund. The economic benefits rising from fund domiciliation will accrue to our local service providers and industry professionals.

Over the past year or so, MAS has worked closely with industry associations, local service providers and consultants to familiarise them with the value proposition and features of the VCC Framework. The fund management industry associations – Investment Management Association of Singapore (IMAS), Alternative Investment Management Association (AIMA) and Singapore Venture Capital Association (SVCA), as well as industry consultants, have provided useful feedback on the VCC framework. They have partnered MAS to reach out to their members and clients through industry briefing sessions. MAS will undertake more engagement sessions in the lead-up to the introduction of the VCC framework.

MAS is engaging local fund service providers as well as training providers to identify potential competency gaps and develop training programmes to ensure that industry professionals have the requisite skills to cater to the needs of VCCs.

Specifically, to Mr Saktiandi Supaat’s point about upskilling accountants, MAS has also been working with the auditing firms, as accountants will need to have the relevant competencies to support the preparation of financial statements of VCCs using either local or global accounting standards and principles. MAS will be issuing industry guidance notes prior to the launch to further support the practical implementation of the VCC framework.

Mr Supaat asked whether the Government will proactively engage foreign firm managers to come to Singapore. Ms Foo and Mr Pillai also asked if we can incentivise fund managers to set up VCCs here.

To attract global fund managers and deepen their investment capabilities here, MAS has taken the lead to foster and promote a conducive environment for fund managers. Global asset managers, such as AIA Investment Management, which set up its first group-wide regional investment hub in Singapore, continue to anchor activities locally.

The VCC will play an important role in enhancing Singapore’s value proposition which includes a robust regulatory regime. We believe foreign fund managers will find Singapore an attractive location to set up their operations and enjoy economies of scale from domiciling their funds in Singapore. Nonetheless, MAS will monitor the adoption and take up of the VCC structure and consider whether specific incentives are needed to encourage more fund managers to set up funds as VCCs.

Finally, let me address the points on the potential risks of the VCC framework, and the mitigating measures and safeguards that have been put in place.

Mr Supaat asked whether the flexibility accorded to investors to exit their investments in a VCC could cause disruptions or volatility to our economy. This flexibility is not unique to VCCs, and is available to fund investors today. We have recognised it is important for investors to have the flexibility to enter into or exit their investments at any point in time. MAS is very much aware of the risks and have taken steps to address them at the system and fund levels. MAS closely monitors systemic risks to the economy, including those that may be caused by capital flows through investment funds.

Risks posed by the Singapore fund management sector to our financial markets are currently contained. A large part of assets under management in Singapore are invested outside Singapore, in the Asia Pacific region. The VCC provides an alternative structure of fund vehicle, but is not likely to significantly affect the investment behaviour of fund managers and investors.

Money invested in investment funds constituted as VCCs are therefore expected, in large part, to continue to be invested in assets overseas.

At the fund level, all regulated fund managers – including those managing VCCs – are expected to put in place effective liquidity risk management frameworks and practices to ensure that their funds remain capable of fulfilling redemption requests in a timely manner when there are significant fund withdrawals.

Fund managers may also use liquidity management tools, such as suspension of redemptions and redemption gates, under exceptional circumstances, to pace out redemptions and help minimise the risk of transacting at-fire sale prices.

Mr Louis Ng has queried how we will safeguard against misconduct by VCCs and protect Singapore's international reputation. Mr Pillai has also asked how MAS can ensure risks relating to money-laundering and financing of terrorism are managed, in particular for certain managers that are not regulated by MAS.

Safeguarding the integrity of our financial system against illicit funds and activities is paramount in ensuring that Singapore continues to be a financial centre trusted by international investors and global financial institutions. Singapore is committed to the global fight against money-laundering and financing of terrorism. We remain vigilant to the risk of abuse of our financial system as it grows in scale and sophistication.

In crafting the policies for VCCs, we have considered these risks and put in place two levels of safeguards to address them, taking reference from international standards. First, we will impose anti money-laundering and countering the financing of terrorism (AML/CFT) requirements on VCCs, essentially requiring them to conduct due diligence checks and monitoring of all VCC shareholders, including looking through any nominees to the controllers behind them. This will help to ensure that the VCC shareholders are bona fide and will deter criminals from attempting to abuse the VCC for illicit purposes, including tax evasion.

In practice, being primarily an investment vehicle, the VCC can choose to outsource this function to its fund manager or distributer, such as a bank. However, MAS will require VCCs to delegate the performance of AML/ CFT controls to a financial institution that is regulated and supervised by MAS for AML/CFT purposes, to be assured that VCCs are leveraging well-qualified firms to do these important checks.

The financial institutions to which these AML/CFT requirements are delegated will be required to obtain information on the VCC shareholders to the extent necessary for them to perform the delegated responsibilities. MAS will consider providing further guidance on the eligible AML/CFT regulated financial institutions which a VCC can delegate its AML/CFT requirements to.

I should highlight that the VCC is ultimately responsible for its own AML/CFT obligations, regardless of which financial institution the VCC outsources these functions to. MAS will adopt a risk-based supervisory approach, and higher-risk VCCs will be subject to closer scrutiny. MAS will not hesitate to take firm action against any VCC if AML/CFT controls are found to be inadequate.

Second, to ensure that VCCs are set up for legitimate purposes, there are requirements in the Bill as to who can manage them. VCCs must appoint fund managers regulated by MAS and directors who are fit and proper to manage and give directions on its activities. ACRA may direct the removal or replacement of a director who it is satisfied is not fit and proper, where it is necessary in the interests of the VCC, the VCC’s shareholders, or the public, to do so.

I agree with Mr Ng that Singapore should not be perceived as a tax haven. Fundamentally, Singapore is a substantive economy, built on actual economic activities. The requirement for VCCs to be managed by fund managers regulated by MAS means that substantial fund management activities are already conducted in Singapore. Singapore works closely with the international community to deter the abuse of financial system for the laundering of illicit funds, including proceeds of tax crimes.

We have also implemented international standards to combat base erosion and profit shifting (BEPS). Under our laws, profits taxed in Singapore must comply with the international arm's length principle to ensure that profits commensurate with the actual economic activities conducted in Singapore. Singapore exchanges financial account information with a wide network of tax authorities in other jurisdictions.

As regards to Mr Gan Thiam Poh’s concerns about scams and Ponzi schemes, I would like to assure him that MAS continually renews its regulatory framework to safeguard the interests of retail investors. For example, to enhance investor protection, amendments to the Securities and Futures Act (Cap 289) were passed by Parliament last year, to provide MAS with greater flexibility and powers to bring non-conventional investment products within MAS’ regulatory parameters. This was after MAS had observed that a number of non-conventional products, such as buyback arrangements involving gold or silver, and plantation schemes, were deliberately structured to fall out of MAS' regulatory framework.

It is an offence to operate a fraudulent or deceptive scheme. There are many channels by which MAS and other law enforcement agencies receive information on such suspicious investments, such as from members of the public, the financial industry, and other regulatory and enforcement agencies, local as well as overseas. Where the information received suggest a breach of laws, the relevant authorities will investigate and will take appropriate action.

Mr Gan also asked about the number of complaints against fund managers. The number of complaints has been relatively low, on an average of 13 complaints per year against fund managers over the past five years. These complaints generally relate to the closure of funds, fund performance or service matters, such as short notice given for submission of voting, collection of personal information, failure to receive statements of holdings.

We recognise, however, that no amount of regulation can prevent fraud. Ultimately, investors still need to exercise caution and evaluate the risks and features of any investment product or schemes offered, taking into account information available on these products or schemes, before making an investment decision. I strongly encourage investors to deal only with entities regulated by MAS, and to consider the additional potential risks of dealing with investments and entities which are not regulated by MAS.

MAS aims to safeguard the interests of consumers by ensuring that they are provided with adequate information to make more informed investment decisions and are dealt with fairly by financial intermediaries. MAS has developed a number of resources on its website and through MoneySENSE, the national financial education programme, to share with the broader public common red flags of investment scams and that investors should be alerted to. MAS will continue to work with industry, schools and other Government agencies to enhance financial literacy among Singaporeans so that they can make sound financial decisions.

Mr Deputy Speaker, let me conclude, the new VCC corporate structure is a game changer which will help position Singapore to be a fund domiciliation hub and enhance the value proposition to fund managers. It will attract more funds to domicile here, and provide new business opportunities for lawyers, accountants, fund administrators and fund custodians. It will enhance our international competitiveness as a leading fund management hub and financial centre, while providing safeguards to maintain Singapore’s reputation as a clean and trusted hub.

Mr Deputy 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. – [Ms Indranee Rajah].

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