On 3 November 2021, the Monetary Authority of Singapore ("MAS") issued a consultation paper inviting public comments on proposed changes to the complex products regime, which generally requires capital markets products to be classified as either an Excluded Investment Product ("EIP") or a Specified Investment Product ("SIP").

To recap, EIPs are generally investment products which MAS considers to be well understood amongst retail investors, whereas SIPs are investment products that are more complex, particularly by reason of them involving the use of derivatives.

MAS is now proposing to update the regime by modifying the current classification of certain products and the safeguards that apply to the distribution of SIPs.

1. Proposed Changes to Classification of Certain Products

a. Collective Investment Schemes

Presently, only collective investment schemes that invest in simple underlying products or use derivatives solely for the purpose of hedging or efficient portfolio management are classified as EIPs. As a result, a collective investment scheme where the fund manager has a residual discretion to invest in underlying products that are outside the limits of the EIP conditions would have to be classified as an SIP, even though they are in substance broadly similar to a collective investment scheme that is classified as an EIP.

MAS is now proposing classify as EIPs all collective investment schemes that are authorised or recognised in Singapore, as well as all feeder schemes that invest in such schemes. This is because collective investment schemes are generally well-regulated products and subject to the Code on Collective Investment Schemes. Hence, MAS considers that expanding the range of schemes that can be classified as EIPs would be beneficial in providing retail investors with more investment options.

As an exception to the above, however, collective investment schemes that deploy advanced investment strategies that are traditionally associated with hedge funds, or that involve leveraged and inverse products, will continue to be classified as SIPs even if they are authorised or recognised in Singapore. This is on the basis that such schemes are considerably more complex and would not be suitable for retail investors.

b. Debentures

Presently, with the exception of asset-backed securities and structured notes, all other debentures are classified as EIPs. As a result, debentures which are convertible, or which do not make regular interest payments solely on the basis of a fixed or floating rate, are still permitted to be offered to retail investors.

MAS considers that such features may not be fully appreciated or understood by retail investors because most retail investors would expect debentures to be instruments that promise regular interest payments along with an eventual return of the principal. Being concerned that many retail investors may be unable to differentiate between such riskier debentures and the more traditional debentures, MAS is proposing to classify as SIPs, debentures that are convertible or that do not make regular interest payments solely on the basis of a fixed or floating rate.

c. Perpetual securities and preference shares

Perpetual securities are debentures that the issuer may redeem at its discretion (or not at all), but that do not have a specific redemption or maturity date and also confer the issuer the discretion to defer or skip interest payments.

While these are currently classified as EIPs, MAS feels that the features and risks of perpetual securities may not be well understood by retail investors. As such, MAS is mulling over several options to regulate the distribution of perpetual securities to retail investors.

The first option is to classify them as SIPs such that the distribution safeguards for SIPs would now apply to perpetual securities. The second option is to maintain their current classification as EIPs, but to also require marketing and disclosure documentations to be enhanced. Such enhancements would include disallowing perpetual securities to be described as bonds and requiring marketing materials to clearly highlight key features and risks.

As regards preference shares, MAS noted that these instruments share similar features with perpetual securities, such as the right of an issuer to redeem, the absence of an obligation to repay the principal, and the discretion to skip making dividend payments. Preference shares are presently also classified as EIPs.

Because of the similarity between perpetual securities and preference shares, MAS is also proposing to regulate them in the same manner.

2. Distribution Safeguards

MAS Notice FAA-N16 on Recommendations on Investment Products (the "FAA Notice") sets out the distribution safeguards which apply to the sale of SIPs by financial advisors ("FAs"). Presently, FAs are required to assess a customer's investment knowledge and experience before allowing the customer to transact in an SIP, either through the Customer Account Review ("CAR") for listed SIPs or the Customer Knowledge Assessment ("CKA") for unlisted SIPs.

Under the FAA Notice, FAs are to offer to provide advice even if the outcome of the CAR or CKA is positive, such that the FA can allow the customer to transact in the SIP. Conversely, FAs will be required to provide advice if the outcome of CAR or CKA is negative but the customer still wishes to transact in the SIP. Significantly, the FAA Notice does not currently bar transactions by the customer that go against the FA's advice.

As such, regardless of whether the customer passes the CAR or CKA, the customer is still able to proceed to transact in an SIP so long as the FA has first given the customer advice. Consequently, if it were intended from the outset that the FA would be giving the customer advice on a SIP transaction, the conduct of the CAR or CKA would become inconsequential. Hence, MAS is now proposing to dispense with the requirement for FAs to conduct a CAR or CKA in circumstances where they will giving advice to a customer concerning a transaction that involves an SIP.

However, FAs must continue to take into consideration the customer's knowledge or experience in transacting in SIPs when it gives advice or makes recommendations concerning SIPs. The FA's senior management would also continue to be required to give approval to proceed with the customer's request, where the customer chooses to transact in an SIP against the FA's advice.

3. Impact Assessment

In relation to collective investment schemes, MAS has highlighted that under the proposed changes, whether a particular collective investment scheme is authorised or recognised would be the key factor in determining whether units of that collective investment scheme would be classified as EIPs. However, it should also be noted that pursuant to section 305(2) of the Securities and Futures Act, it is possible for a retail investor to acquire units of a restricted scheme, so long as these units are acquired for a consideration of not less than S$200,000.

As such, it remains unclear whether restricted schemes which are marketed to retail investors at ticket sizes of not less than S$200,000 would still have to comply with the existing EIP conditions applicable to collective investment schemes, or whether such restricted schemes would be regulated in the same manner as authorised or recognised schemes, and likewise be considered EIPs so long as they do not deploy advanced investment strategies that are traditionally associated with hedge funds, or involve leveraged and inverse products.

4. Closing Date of Consultation

The consultation closes on 15 December 2021 and a copy of the MAS consultation paper can be obtained here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.