MAS's new Accredited Investor Definition will require Documentation and System Change

This article was first published in Thomson Reuters' Regulatory Intelligence and is republished with permission.

Dec 22 2016 Patricia Lee, Regulatory Intelligence 

Singapore-based financial institutions can expect a degree of change to their documentation, systems, and policy and procedures following recent refinements to the definition of accredited investors at the first reading in parliament last month.

The refinements to the definitions of accredited investors (AIs) and institutional investors (IIs) were part of the Monetary Authority of Singapore's proposed changes to its capital markets regulatory framework and followed a consultation paper issued on July 21, 2014.

The second reading in parliament is expected to take place sometime this month or January 2017.

The Securities and Futures (Amendment) Bill 2016 seeks to better reflect categories of non-retail investors identified based on their wealth or income and financial knowledge.

Under MAS's existing capital markets regulatory framework, regulatory safeguards have sought to protect primarily retail investors. Intermediaries have so far been exempted from certain requirements if their customers are non-retail investors considered to be investment-savvy.

Shift in Regulatory Thinking

Under the proposed definition of AIs, the wealth criteria has been tightened such that the net equity of the individual’s primary residence can only contribute up to S$1 million of the current S$2 million net personal assets threshold.

Alternatively, individuals will be able to qualify as AIs if they have S$1 million of financial assets (net of any related liabilities). Individuals whose wealth is largely based on their primary residence with little liquid assets will no longer qualify as accredited investors.

Nizam Ismail, Head of Regulatory Practice at RHTLaw Taylor Wessing in Singapore, said the regulatory thinking is that AIs were previously considered to be able to look after their interests by virtue of their wealth but such thinking has now shifted. Even if an investor meets the net asset or income test, he or she will no longer be automatically treated as an accredited investor unless they actively opt in to be one, in which case, they will lose protection from the regulatory safeguards accorded to retail investors.

Reassessing customers, reviewing processes, policy and procedures

What is most striking about the new accredited investors opt-out regime is that financial institutions, in particular, private banks, fund managers and wealth managers, can expect a good amount of work to be done, including re-assessing existing customers who are accredited investors and reviewing internal processes, policy and procedures to align them with the new requirements, said Hemali Mehta, senior consultant at Bovill in Singapore.

Accredited investor reassessments will cover a number of areas including product suitability, risk profile and financial conditions. "For these financial institutions, they have to re-assess their existing AI clients to find out whether these clients want to be considered AIs and they have to notify them that they have the option to opt out of the accredited investor status. Full disclosure will have to be made to these investors that certain safeguards may not be available to them if they remain accredited investors," she said.

Retail investor status as a baseline for new customers

Mehta also pointed out that some financial institutions which are only licensed to deal with accredited and institutional investors may face the prospect of having to exit the relationship if some existing customers chose to opt out of becoming accredited investors.

New AI-eligible customers whom financial institutions are onboarding for the first time will be treated as retail investors as a baseline unless they want to be treated as accredited investors, in which case they will have to opt in, she said. Mehta said MAS has been considerate and will not expect financial institutions to unwind past transactions involving products previously offered to customers when they were treated as accredited investors. MAS' proposals to introduce the enhanced safeguards under the new AI regime, she said, was a good move and was in line with similar regimes adopted in Europe and Hong Kong.

AIs investing in Singapore dollar bonds

MAS' proposed changes to the definition of accredited investors also took into consideration past instances where Singapore dollar bonds were sold to such accredited investors, said Lim Sin Teck, director, Morgan Lewis Stamford LLC in Singapore.

While there have been no major issues so far, a number of bond issuers from the shipping and oil and gas sectors were known, in recent months, to be having difficulty making principal and interest repayments to their bondholders or otherwise in breach of certain covenants.

"A substantial number of the accredited investor bondholders in the Singapore dollar bond market are individuals who find themselves stuck with defaulted bonds and are having difficulty recouping their investment. Accredited investors are meant to be investors with the ability to understand and, if acceptable to them, withstand and take on the investment risk, but in many cases, their investment evaluation process is at the level of retail investors and so they may not have the investment appetite nor investment sophistication that expected of such high-risk bonds," he said.

Lim said some retirees, who may not necessarily be wealthy but own high value property, may seek high returns from their investment, but they may not be able to appreciate the risk in such bonds. MAS has therefore proposed to refine the definition of accredited investors and to limit the value of the primary residence of investors when financial institutions determine whether the former falls within the scope of accredited investors.

• Patricia Lee is South-East Asia editor at Thomson Reuters Regulatory Intelligence in Singapore. She also has responsibility for covering wider G20 regulatory policy initiatives as they affect Asia.