On 24 Oct 2023, the Monetary Authority of Singapore (MAS) launched a public consultation (which will close on 31 Dec 2023) to streamline the regulatory framework for fund management companies (FMCs). The existing Registered Fund Management Companies (RFMCs) regime will soon be repealed, and qualifying existing RFMCs will be approved as Licensed Fund Management Companies (LFMCs) upon application, albeit still restricted to serving only accredited investors and institutional investors (AI/II) (as defined in the Securities and Futures Act 2001).
We believe the unannounced RFMC regime repeal date (R Day) should be sometime in 2024, or early 2025. With effect from 1 Jan 2024, the MAS will no longer accept new applications for RFMCs, so all aspiring fund management companies must apply to be LFMCs. The transition process, timeline and granular details will be announced in due course.
- Rationale
The RFMC regime was introduced in 2012, following the repeal of an earlier regime for Exempt Fund Managers (EFMs) to facilitate the transition of EFMs into a fully regulated regime. The RFMC regime was not meant to be permanent and the pool of FMCs (including the pool of RFMCs) was smaller back in 2012.
Fund management aspirants may have misunderstood that the RFMC regime is a lighter touch with lower regulatory hurdles and lesser requirements with shorter approval timing compared to the LFMCs. This is a fallacy. In our firm's experience with more than 100 successful licence/registration applications for LFMCs and RFMCs over the years, the approval process and timing and regulatory requirements for RFMCs and LFMCs (that serve only AI/II) are in fact very similar. The substantial differences are (i) the frequency and granularity of reporting and risk-based capital requirements imposed on the LFMCs, and (ii) the limit on number of clients and size of managed assets of the RFMCs.
- Impact on FMCs
As of 31 Oct 2023, there are 751 CMS-FMs and 178 CMS-VCFMs (collectively, the LFMCs) and 283 RFMCs. We anticipate there will be little or no impact on the LFMCs. In fact, some FMCs may welcome the proposed changes that will force cessation or consolidation of some RFMCs, which will in turn shrink the pool of competitors in Singapore. Prior to R Day, existing RFMCs can continue operating as usual during this transition process and they will have to comply with the current regulatory requirements applicable to RFMCs.
MAS has proposed a simplified process for RFMCs that wish to apply to become LFMCs. These RFMCs must submit a prescribed form during a prescribed application window. The form requires certain information including details like the size of managed assets, proportion of client and proprietary assets, proportion of discretionary and advisory mandates, proportion of sub-management mandates. The RFMCs must also provide declarations and confirmations required by the MAS, including declarations that their personnel are fit and proper. The RFMC must also confirm that they will be able to meet the regulatory requirements imposed on LFMCs. Judging from the set of information, and declarations and confirmations required by the MAS, it is highly likely that MAS will scrutinise these carefully to “screen” or “pre-qualify” the applicants.
MAS will respond to all applications from RFMCs within a month. This is not the actual approval, but a “green light” to proceed with the formal licence application. Those that do not receive the “green light” will need to bridge the gaps, remediate the issues, look into mergers and acquisitions with other FMCs, or surrender their RFMC status.
MAS will retain the limit of S$250 million on the managed assets of RFMCs that transition to become LFMCs. After the transition, it is possible to apply to MAS to uplift this limit. The usual application fees will be waived when RFMCs transition to LFMCs, thereafter the usual fees will apply (on a pro-rated basis during the first year of transition).
- Challenges for RFMCs
Some RFMCs had received notices from the MAS on issues to be dealt with. Such RFMCs must deal adequately with these outstanding issues to ensure that their application for the LFMCs will not be adversely affected. RFMCs must assess if they wish to continue in the fund management business and if the answer is yes, they have to assess the regulatory requirements (including the Compliance Toolkit for LFMCs) and the ongoing requirements and costs of operating as a LFMC. They should also consider if there are alternative options, that may be more cost effective or that may be a better business strategy in the long term. From now till R Day, the RFMCs must continue to comply with the current regulatory requirements imposed on all RFMCs.
If the RFMCs believe that there might be significant issues or concerns, especially if it might cause a delay or have a negative outcome on their transition to be a LFMC, they should seek professional advice as soon as possible to adequately eliminate or mitigate these issues and present the correct picture to the MAS.
- M&A of FMCs
If for any reason, the RFMCs decide that the best solution to remain in business under the LFMC regime is to consolidate by merger or acquisition, there are still a number of issues to consider.
Should the RFMC buy another RFMC or sell to another RFMC/LFMC?
Should this take the form of shares sale or asset sale? Is there a fit in terms of culture and strategy?
Are there potential conflicts of interest?
Are there cost savings or redundancies?
How will the clients react?
How do you engage the staff, the clients and the MAS?
How much due diligence, legal documentation, representations and warranties are required?
What is the correct or fair valuation?
Needless to say, good and experienced advisers might be required to advise on this process, key issues and risks, prepare all the relevant legal documentation, advise on the handling of staff, clients and the MAS.
- Immediate next steps
Firstly, if you are an RFMC, determine if you are able to qualify for the LFMC. Second, determine if you wish to become a LFMC. Thirdly, determine what the issues or gaps are, and how you can address them adequately, devise a strategy for the process forward.
If required, speak to good and experienced advisers who have been there and done it many times successfully. Even if half of the 283 RFMCs, i.e.. 141 RFMCs apply for the LFMC during the transition, there is still going to be a big traffic jam. It bodes well to think and plan early and start work early.
- Who We Are
Shook Lin & Bok is the sixth largest Singapore law firm with more than 150 lawyers. We have more than 100 years of history in legal practice. We have one of the largest and most experienced dedicated specialist team of asset and wealth management lawyers (who are bilingual in English & Chinese) who have handled hundreds of licence/exemption applications, hundreds of funds including more than 100 VCCs, and numerous EAMs, IAMs, MFOs and single-family offices projects including fund formation, Sections 13O & 13U tax incentives application. We have engaged with industry and the regulators for a few decades and assist our clients to navigate the unpredictable and sometimes hazardous minefield to get our clients to the end destination safely and smoothly.
- Closing
In closing, we believe that with the phasing out of the RFMC regime, Singapore can become an even more respected and desired international asset & wealth management centre. This is good for fund managers and investors. It puts Singapore at the right place at the right time, making Singapore's star shine even brighter. On a lighter note, let's see RFMCs as being Ready For More Conquests.
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.
