Securities and Futures (Amendment) Bill – Speech by Leon Perera

(Delivered in Parliament on 9 January 2017)


Madam Speaker, the Securities and Futures Amendment Bill seeks to update and broaden the regulations that apply to the trading of capital market products, the operation of approved exchanges, the disclosure requirements for certain types of trades and so on.

On the whole, these changes are positive and in fact overdue.

While I do not oppose the bill, I would like to seek clarifications on some aspects of the bill and make some comments on gaps that remain unaddressed.

Madam, it is crucial that our business eco-system for the trading of securities, derivatives, fixed income and other financial products achieves several things.

It must be seen to be progressive and advanced, taking into consideration global best practices and leading edge developments in technology and business models. This is necessary to attract investment and create jobs in our financial services industry. It is also necessary to broaden investment options for Singaporeans.

At the same time, our eco-system must be seen to be fair and transparent. We should never allow it to be seen as a rigged game where rich insiders can exploit unfair advantages that they have over smaller players or retail investors. To allow this is to risk weakening the viability of our financial services industry and indeed weakening our social fabric. We have seen in other countries how there can be a public backlash against traders and market movers who can make personal incomes of up to $100m a year or more, seemingly by not creating anything of  value to society.

So we need to get the balance right. Too much regulation and we risk strangling business, investment, job creation and wealth creation. Too little regulation and we risk feeding the perception that the markets are a rigged game. The right balance is smart regulations.

I would like to speak on two areas. Firstly, on our capabilities and safeguards for the enforcement of these and other FSI regulations. And secondly, I have some queries on the changes to the Accredited Investor definition which I fear is insufficiently prescriptive.

Complex regulations are only as good as the regulators ability to enforce those regulations, lest they become, in Shakespeare’s words, rules more honoured “in the breach than the observance.” Insider trading is a good example of this. Insider trading crimes are difficult to prove in Court and require strong expertise and capabilities on the part of investigators and prosecutors.

Given this widening of the scope of our securities and futures regulation, I would like to ask the Ministry what steps are being taken to beef up the enforcement capabilities of the MAS to proactively enforce adherence to these new rules. Of course no regulator and no policing regime can be perfect. But what measures are being put in place to ensure a reasonably robust regime for detecting possible breaches, investigating them and, where warranted, bringing them to the Courts?

It took several years for the authorities to bring charges in the case of the penny stock saga. That episode, which saw share prices see saw, has unnerved retail investors.

In my grassroots work, I met a retired resident who lived in a 3 room flat but invested small amounts of money in the local stock market. Referring to the penny stock incident, he was very concerned that insufficient enforcement would lead to retail investors like him losing money to rich market movers who may be breaking the law.

I recently filed a PQ on this. DPM Tharman replied that the resources that Singapore has devoted to investigating market misconduct offences are commensurate with the market capitalisation and number of listed companies in our securities market, and comparable with other developed markets such as Hong Kong and Australia. However numbers were not cited for the level of resources we invest in enforcement, either in terms of budget or staffing.

Specifically I would like to ask a few questions.

Firstly, will resources be expanded to cope with the expanded scope of the legislation and how will this be done?

Secondly, is the number of civil penalty actions and prosecutions under this Act (which were cited in the DPM’s reply to my PQ) commensurate with what is seen in other developed cities with a large stock exchange like London, New York, Hong Kong, Chicago and Frankfurt?

Thirdly, does the MAS monitor the ratio between the number of incoming leads for possible breaches of the Act on the one hand – from suspicious transaction reports, electronic meta-data analysis, public feedback and so on – and the number of staff analysing those leads on the other hand? Is this ratio commensurate with what we see in other enforcement agencies like the British Serious Fraud Office or the American Securities and Exchange Commission? The reason I ask this is that good systems for generating intelligence will be useless if the staff who have to sift through that data are overwhelmed.

Lastly, on this subject, I would like to pose a question about the robustness of our enforcement regime. What steps are being taken to prevent conflicts of interest between the regulator and the industry?  Specifically, are there rules in place to control the ease with which government employees with financial industry oversight responsibilities can join financial institutions immediately after they leave government service?  Are there rules in places which require such employees to exercise a cooling off period before they can join industries that they used to help regulate?

In other countries, this has been a subject of some debate. The concern fuelling such debates is easy to see. If a tendency takes root whereby regulators often leave their civil service jobs to take up positions in the industries they used to regulate, sometimes with the express responsibility to manage communications with government, there is the possibility that serving regulators may be subject to “industry capture.” What this means is that regulators may tend to keep one eye on the interests of the industry they are regulating, knowing that they may one day, sooner or later, join the employ of that industry. For example – and this example does not relate to the financial services industry or indeed to regulation per se but the principle is the same –  on 9 Dec 2016, US President-elect Donald Trump floated the idea that US military procurement officials should be banned for life from ever joining defence contractors.

Next I would like to query the changes made to the definition of an accredited investor or AI.

With the passage of this bill, the wealth criteria for an individual to qualify as an AI will be 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 an AI if they have S$1 million of financial assets (net of any related liabilities). Individuals whose wealth is concentrated in their primary residence and have little liquid assets otherwise will no longer qualify as AIs.

The aim of this change seems to be to ensure that AIs have at least S$1m in liquid assets, ie financial assets net of the property they reside in, which is a reasonable intent.

I would like to ask a few questions about how these definitions will be operationalized so as to realize this intent.

Firstly, does the $1m financial asset threshold include the value of insurance policies? If so, how is this value calculated? By virtue of total premiums paid, maturity value of the policy or some other criteria?

Secondly, should mark-to-market prices be used to determine the value of the property as well as the value of the more liquid assets? At the moment, some banks depend on investors’ self-declaration in form-filling. Will financial services institutions (FSIs) be required to ascertain mark-to-market prices for the properties and financial assets of investors? If so, this may saddle FSIs with higher compliance costs, costs which may get passed on to their customers to some extent.

As these questions demonstrate, it may be necessary for the MAS to be more prescriptive about how these legislative changes to the definition of an Accredited Investor will, in practice, be operationalised.

Thank you.