The Benefits of Establishing Fund Management Companies in Singapore
By Grady Poon, Head of Financial Services, EisnerAmper Singapore
WHY ESTABLISH A FUND MANAGEMENT COMPANY IN SINGAPORE?
Singapore is a global innovation hub and ranked as the most innovative economy in Asia, and seventh in the world. According to the International Monetary Fund (“IMF”) statistics issued in October 2017, Singapore, a city-state with an estimated population of 6 million, has a gross domestic product (GDP) of US$316.87 billion, and the adjusted for purchase power (PPP) per capita is nearly US$55,230. Assets under management (“AUM”) in 2017 grew by 7% to $1.9 trillion. Globally, Singapore is also ranked fourth by the Global Financial Centres Index 22, which evaluates and ranks the competitiveness of financial centers based on 102 instrumental factors and supplemented by a survey.
Key Benefits of a Singapore Fund Management Company
- Positive growth outlook
- Sound regulatory and business environment
- Wide distribution channels
- Resources and government support
- Financial incentives and international cooperation
- Robust infrastructure and connectivity
POSITIVE GROWTH OUTLOOK
According to the IMF, Asia’s dynamic economies continue to lead global growth. In China, the world’s 2nd largest economy and Asia’s largest economy, growth is still expected to be strong. The report also cites the more favorable global environment with growth accelerating in many major advanced and emerging market economies—notably the United States and commodity exporters, as supporting Asia’s positive outlook.
In South East Asia, between 2002 and 2016, the Association of Southeast Nations (“ASEAN”) grew approximately at an average of 6% annually, compared with the global average of 4%. In 2015, the ASEAN Economic Community plan was implemented to enhance regional growth and development by integrating the region’s collective strength to create an impact in the global market.
Additionally, with a combined population in Asia of more than 4.4 billion (of which circa. 600 million are from ASEAN), there is potential to ride on the back of continued consumerism to drive growth.
As a global financial hub located in Asia, Singapore’s financial sector is well-positioned to take advantage of this economic expansion. Sensing such opportunities in the region, many global fund management companies have chosen Singapore to expand into Asia and many corporations in Asia have chosen Singapore as a base to better access global financial markets.
SOUND REGULATORY AND BUSINESS ENVIRONMENT
As Singapore’s fund management industry evolves and grows in terms of complexity and size, its underlying system is required to respond by enhancing the sophistication of its regulatory framework. The need for heightened supervision and enhancement of standards are considered vital for the industry ecosystem. Singapore’s industry regulator, the Monetary Authority of Singapore (“MAS”), has responded to growing concerns of investors by its recent enhancement to the regulatory framework for the Fund Management Companies (“FMC”) after elaborate public consultations. Industry players have welcomed the move as Singapore’s role in the regional fund management industry is developing and expanding quickly.
To enhance Fintech innovations so that promising innovations can be adopted in Singapore and globally, the MAS has recently launched a “regulatory sandbox,” so that Fintech firms can test their new products, technology, and business models in a controlled environment where some legal and regulatory requirements are suspended.
To further strengthen Singapore's position as a compelling hub, the MAS has also proposed a corporate and regulatory framework to facilitate the incorporation and domiciliation of investment funds across traditional and alternative fund vehicles.
MAS has also responded to the business environment and put in place different types of licensing requirements for the different needs in the asset management industries. They are namely, Licensed FMC - Retail, Licensed FMC - Accredited Investors (A/I), Registered FMC and Venture Capital FMC (“VCFM”). The below table summarizes the respective regulatory requirements.
Table: Summary of the Regulatory Requirements of FMCs:
|LFMC - Retail||LFMC - A/I||RFMC||VCFM|
|Type of investors||No Restrictions||Qualified investors||Not more than 30 qualified investors and AUM not more than S$250M||Qualified investors|
|Base capital||S$500K to S$1M||At least S$250||At least S$250K||No minimum capital requirements|
|Risk-based capital||Financial resources at least 120% of operational risk requirements||Financial resources at least 120% of operational risk requirements||No requirements||No minimum capital requirements|
|Investment restrictions||Not Specific||Not Specific||Not Specific||Unlisted securities|
|Risk management framework||Yes||Yes||Yes||Subjected to licensing conditions|
|Internal audit||Yes||Yes||Yes||Subjected to licensing conditions|
|Annual audit||Yes||Yes||Yes||Subjected to licensing conditions|
|Professional indemnity insurance||Yes||Encouraged||Encouraged||Subjected to licensing conditions|
|Frequency of periodic returns||Quarterly and Annually||Quarterly and Annually||Annually||Annually|
|Directors’ years of experience||10||5||5||Subjected to licensing conditions|
|Number of directors||At least 2||At least 2||At least 2||At least 2|
|Number of local representatives||At least 3||At least 2||At least 2||At least 2|
|Representatives’ years of experience||At least 5||At least 5||At least 5||Subjected to licensing conditions|
General requirements – FMCs should be Singapore-incorporated companies and have a permanent physical office in Singapore.
Competency Requirement – An FMC should ensure that the minimum competency requirements for its key personnel satisfy MAS that its shareholders, directors, representatives and employees, as well as the FMC itself, are fit and proper, and to ensure that the relevant individuals perform the regulated activities fairly and efficiently in the best interest of their shareholders.
Capital Requirement – An FMC shall at all times meet the base capital thresholds. The MAS further request all the LFMCs to comply with the risk-based capital requirement.
Compliance Arrangement – All FMCs should ensure they have adequate compliance arrangements that are commensurate with the scale, nature and complexity of their operations.
Risk Management Framework – FMCs must ensure adequate risk management framework to identify, address and monitor risks associated with the customer assets that the FMC manages. The risk management function should be subject to adequate oversight by the board and senior management of the FMC and must be entrusted to competent staff and separated from portfolio management.
Auditing requirements – FMCs must be subjected to adequate internal audit. The internal audit may be conducted by an internal audit function within the FMC, an internal audit team from the head office of the FMC, or outsourced to a third-party service provider.
An FMC shall meet the annual audit requirements and the MAS may direct the FMC to appoint another auditor if the appointed auditor is deemed to be unsuitable for the scale, nature and complexity of the FMC’s business.
Professional indemnity insurance – FMCs are strongly encouraged to maintain adequate Professional Indemnity Insurance (“PII”) coverage. PII may also be imposed as a requisite condition for licensing where the MAS deems it fit.
Independent Custodian – FMCs are required to entrust the AUM to independent custodians such as prime brokers, depositories and banks that are suitably licensed, registered or authorized in their respective jurisdictions.
Independent Valuations - AUM shall be subjected to independent valuation and reporting.
Conflicts of interest- FMCs shall minimize conflicts of interest and where one arises, it should be properly disclosed. Adequate disclosures should be provided at the inception of the fund, or at the point that the customer’s account is set up, along with proper disclosures involving changes that arise.
Disclosures - Relevant disclosures include investment and valuation policy; strategy and the associated risks; terms covering fees; terminations; payments and exits; aspects relating to leverage and information regarding third parties engaged and involved.
AML/CFT- All FMCs shall comply with Anti Money Laundering/Combating the Financing of Terrorism (“AML/CFT”) requirements and promptly report any misconduct and further, ensure that competent service providers are engaged.
WIDE DISTRIBUTION CHANNEL
Singapore is located within a six-hour flight to most cities in Asia, including Beijing, Shanghai, Tokyo, Seoul, Mumbai, Hong Kong, Taipei, Jakarta, Kuala Lumpur, Bangkok and Perth, among others. Strategically located in the heart of Asia, Singapore is a vibrant global financial hub.
The wealth management industry in Singapore has developed very quickly with increasing wealth generation capabilities in Asia. Some reports have even anticipated that Singapore could overtake Switzerland by 2020 to become the largest global offshore wealth centre.
In 2014, Singapore, Malaysia and Thailand launched the ASEAN Collective Investment Scheme (“CIS”) framework which allowed participating countries to distribute their fund products across the border without significant cost on regulatory requirements. Continuing the framework, Singapore, Australia, South Korea, Malaysia, Indonesia and Thailand then launched the Asia Fund Passport in 2014 which allows the participating country to distribute their products across different jurisdictions. Under the auspices of Asia-Pacific Economic Cooperation (APEC), these initiatives will widen the opportunities for investors and fund managers locally within Singapore and globally.
RESOURCES AND GOVERNMENT SUPPORT
The Singapore Ministry of Manpower’s statistics show that the workforce in financial services represent 5.7% of the Singapore total workforce, excluding the foreign workforce of approximately 2.5%.
Improving the talent pool in the financial services sector across different classes is essential to ensure there is sufficient manpower supporting the industry. The SkillsFuture programme, launched by the Singapore government in Oct 2016, aims to help the financial sector workforce build world-class skills and maintain a strong Singapore Core that will complement the business strategies and innovation agenda.
The Future Economy Council (“FEC”) in Singapore has also launched the financial sector SkillsFuture Study Award that provides financial support to individuals seeking to upgrade their knowledge in compliance, data analytics, cybersecurity and investment management. The Award encourages individuals to develop and deepen specialist skills needed by future economic growth sectors or in areas of demand, including those who already have deep specialist skills to develop other competencies. The Institute of Banking and Finance (“IBF”) has also developed future-oriented, skills-based competency standards to keep pace with financial sector transformations.
FINANCIAL INCENTIVES AND INTERNATIONAL COOPERATION
In order to continually grow Singapore’s asset management industry, the government has extended and refined tax incentive schemes for qualifying funds. Additionally, Singapore has economic and tax treaties with over 70 countries, giving it a substantial advantage over other traditional choices.
This, coupled with a low income tax and zero capital gain tax regime, has made the country attractive to fund managers by design.
Singapore is also committed to international tax and regulatory cooperation. Singapore’s financial institutions are required to comply with requirements in the Foreign Account Tax Compliance Act (“FATCA”), the Common Reporting Standards (“CRS”) developed by the Organisation for Economic Co-operation and Development (“OECD”) and the Alternative Investment Fund Management Directive (AIFMD) requirements.
Fund managers can sleep soundly knowing that they are operating in an attractive and supportive and well-regulated jurisdiction.
ROBUST INFRASTRUCTURE AND CONNECTIVITY
Singapore boasts world-class infrastructure with top-notch transportation facilities. The country has also benefited from its strong infrastructure network with close proximity to China and Australia.
Singapore has built up and maintained its strong links with its immediate ASEAN members while developing and building up stronger links with countries in Asia such as China, Australia, India, Japan and Korea.
The Singapore government has always been encouraging global companies to establish their Asia headquarters in the city-state. Many multinational corporations have set up their regional or global headquarters here to build their Asian markets, conduct R&D, and deploy regional strategies. In fact, in 2015, global bank HSBC was considering relocating its global headquarters to Asia, and Singapore was one of the places under consideration.
In Singapore, there are 40 international fund administrators, 80 brokers, 150 banks, 60 licensed trust companies, and more than 15 audit firms to support the financial services industry. Industry associations for financial services such as Investment Management Association of Singapore (“IMAS”), constantly engage their members to provide feedback to the MAS to discuss regulatory and industry issues. The MAS utilizes industry feedback to develop the financial services industry in Singapore.
The Singapore government understands that an innovative regulatory framework is needed to address the sophisticated fast changing business environment. The government has also been looking at the regulatory and business environment to make it more conducive to innovation, without compromising safety and stability.
The MAS intends for Singapore to continue to deepen its venture capital and private equity capabilities and establish itself as a vibrant enterprise financing hub to support the next generation of Asian growth companies.
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