I’ve recently been looking into the regulations surrounding setting up a formal fund management company in Singapore. There have been a number of proposed changes to the regulatory framework recently, which will limit new fund managers who want to set up shop in Singapore. While these regulations won’t stop a majority of fund managers setting up, I’m unsure whether they’ll have their intended consequence – increasing investor confidence and reducing the impact of a macro shock – in the current form. A more finessed version would be a more appropriate remedy for an industry that has been chewing on a bitter pill for the past couple of years.
In late September 2011, the Monetary Authority of Singapore (MAS) issued a consultation paper entitled “Proposed Enhancements and Draft Legislative Amendments to Give Effect to the Regulatory Regime for Fund Management Companies.” Specifically, this will impact Exempt Fund Managers (EFM), who were subject to limited regulations previously. While the draft legislation hasn’t been enacted yet, the MAS is expecting any new funds to either already meet the regulations or have plans in place to be able to meet them. There will be no grandfathering (i.e. allowing funds that meet existing requirements but will not meet the new requirements to continue to operate).
EFM will be classified into 3 key categories following the change: Notified FMC, Licensed Accredited/Institutional Investors (AI/II) FMC, and Licensed Retail FMC. The latter category will likely be subject to existing Capital Market Services license requirements.
There are other requirements that I haven’t outlined here. See the below documents for more information:
While this might give more credibility to the fund management industry in Singapore, it’s going to limit the amount of entrepreneurial fund managers that are able to start up. Financial markets rely on entrepreneurial people attempting to exploit inefficiencies in the market and as a result help to provide the efficient allocation of capital. A couple of years ago commentators were suggesting there were too many hedge funds opening in Singapore now it will seesaw the other way. There will only be room for larger operations because of the new regulations.
This will have 2 key implications: 1) Singapore will attract more investors who want to invest in a safer environment. However, a lot of the funds that are operating in Singapore will be investing in other countries with less regulation. This will make Madoff style incidents less likely to occur but won’t stop the Sino-forest incidents. 2) Singapore will become a hub for large asset managers. Hedge fund managers, will tend to go offshore to take advantage of lower capital requirements. The investors who are looking for a little extra sambal in their chicken rice will follow them. This will likely see another jurisdiction experience a boom in their hedge fund industry and less investors looking at Singapore, why go through the bother of having to deal with two sets of regulations and two tax jurisdictions when one will suffice. In the end Singapore could become more reliant on the bigger asset managers and in turn more susceptible to macro economic events.
I’d propose a middle ground, whereby; hedge funds that are currently operating can be grandfathered into the new regulations while given additional time to meet the new requirements and the oversight of smaller hedge funds is increased, through a new branch of the MAS. The new regulations go halfway by creating the new schemes (Licensed AI/II and Licensed Retail) with oversight still provided by the same technocrats that would be overseeing the larger Asset Managers. I agree that something needs to be done to the regulatory environment but believe that it should be done with a little more finesse opposed to wielding an authoritarian axe down on an already brittle industry.