External asset managers (EAMs) in Singapore had one more ingredient to add to the alphabet soup of regulations in 2017: AI.
Short for ‘accredited investor’, the regime covers individuals in Singapore who have net personal assets of more than SGD 2 million or who had income of no less than SGD 300,000 in the preceding 12 months.
However, last January, Singapore’s parliament ruled that of the minimum SGD 2 million, less than half can be net equity from from the individual’s primary residence.
The amendment to the Securities and Futures Act also includes an opt-in regime for accredited investors. The clause will require all financial institutions to treat new customers who are AI-eligible as retail investors by default, unless they opt in.
Retail investors are given additional regulatory safeguards as they are considered more vulnerable. Existing customers will be treated as AIs unless they declare otherwise.
Wave of change
While the implementation date has not yet been set, after which the Monetary Authority of Singapore (MAS) has proposed a two-year transition period, these changes are expected to vastly change the EAM industry, which only holds licences to deal with accredited investors. It will also entail a loss of freedom of choice for those who no longer qualify.
The regulator aims to implement the new criteria in 2018, and EAMs are waiting with bated breath. ‘A knowledgeable person, such as a CEO working in the investment field, has the right to engage an EAM using a private banking platform to access open architecture products,’ said Anthonia Hui, co-founder of external asset manager AL Wealth Partners.
‘In a retail bank you are restricted to certain products. For example, retail funds come with higher subscriptions and other costs, which actually reduce the flexibility and economies of scale for clients to make investments. They will likely be frustrated.’
When contacted, a MAS spokesperson said: ‘MAS has proposed other extensions to the AI-eligibility criteria, and will provide for an appropriate transition period before removing the private banking exemptions.
‘These should enable a large proportion of existing private banking clients to be AI-eligible and for private banks to rely on AI exemptions when serving them (assuming they opt in to AI status), hence minimising any adverse impact to the private banks’ businesses.’
MAS has extended the changes beyond individuals to AI-eligible corporations, which includes trusts. The new AI criteria will potentially include not only a trust where the total value of property and rights exceeds SGD 10 million, which is part of the current regime, but also those trusts where all beneficiaries are AIs.
It could also include certain trust structures where a settlor retains some equitable interest in the trust assets after the constitution of the trust.
The Association of Independent Asset Managers (AIAM) in Singapore wants to see a change in the SGD 10 million threshold as part of its feedback to MAS, which began consulting private banks and EAMs back in 2014. AIAM met them in late 2016 and submitted detailed responses in June 2017.
‘EAMs and private banks that currently look after clients’ portfolios in either a private family discretionary trust and/or through a private investment holding company to hold their bankable assets must have SGD 10 million to be qualified as AIs,’ said Hui.
She added that clients are often multi-banked, especially in the aftermath of the 2008 financial crisis, and thus, each mandate or bank account could fall below the AI-corporate criteria.
'This would not be practical as clients may have personal net worth exceeding SGD 10 million but the financial assets mandated to financial institutions often fall below the SGD 10 million threshold,’ she noted.
Many EAMs also consider the new clause that requires due diligence on trust beneficiaries to gauge their AI eligibility as an impractical exercise.
‘Practitioners cannot accurately ascertain the DDC/KYC [Due Diligence Checks/Know Your Customer] as well as investment suitability, as often these beneficiaries are either unborn, or they are not aware that they are being named as beneficiaries to the trust that holds the corporate entity that enters into investment relationship with the bank or EAM,’ Hui said.
The wide-ranging amendments to the AI definition are not sudden. They are a late fall-out from the 2008 crisis, when Asia’s high-net-worth individuals loaded up on structured products such as accumulators indiscriminately, leading to significant losses.
Add to that the bad debt from the oil and gas sector which was sold to private banking clients in Singapore as part of the ‘search for yield’, and one can see the clear need for further regulation.
However, considering the negative impact on the wealth management industry, which is part of Singapore’s ‘global hub’ ambitions, and the frustration of AIs who no longer qualify, MAS is mulling some exemptions and has retained the ‘expert investor’ (EI) classification, which it was earlier considering removing. This includes persons who may not qualify for the AI or institutional investor status, but are nonetheless capable of protecting their own interests.
This includes individuals whose business involves the acquisition and disposal, or the holding, of capital markets products, whether as principal or agent; trustees of certain trusts prescribed by MAS, when acting in that capacity; and certain other individuals prescribed by MAS.
‘The re-introduction of EI by MAS would be a positive step, balancing the need to regulate and protect the more vulnerable investors but allowing those who prefer to take charge of their own investments the flexibility to choose their providers and investment options,’ Hui said.
This article appeared in the November issue of the Citywire Private Wealth magazine.