Sponsored Q&A: Drew & Napier

1. Could you provide an overview of the licensing and registration requirements imposed by the Monetary Authority of Singapore for foreign financial institutions seeking to establish a presence in Singapore?

Foreign financial institutions looking to establish a presence in Singapore must consider a range of licensing and registration requirements based on their intended business activities. The Monetary Authority of Singapore (MAS) is the singular regulatory authority overseeing the financial services sector in Singapore, and regulates and supervises financial institutions and their operations in Singapore.

Financial institutions seeking to establish a bank in Singapore would need to be licensed under the Banking Act 1970 (BA). Under the BA, there are two types of bank licences; full bank licences and wholesale bank licences. Full banks may engage in the full range of banking business permitted under the BA, including deposit taking, cheque services and lending. Wholesale banks may engage in the same range of banking business as full banks, but may not carry out Singapore-dollar retail banking activities.

Apart from these bank licences, the BA also provides for merchant bank licences. In 2019, the MAS announced the issuance of digital full bank licences and digital wholesale bank licences, with a limited number of such licences granted to successful applicants. Foreign applicants seeking such digital bank licences in Singapore must form a joint venture with a local company and the joint venture must meet the MAS’ headquarter and control requirements.

Non-bank foreign entities interested in conducting money lending business in Singapore would require a licence under the Finance Companies Act 1967 or a licence or exemption under the Moneylenders Act 2008.

There are licensing frameworks for other finance-related activities as well. For instance, financial institutions involved in the provision of payment services (as defined in the Payment Services Act 2019) and conduct of regulated activities (as defined in the Securities and Futures Act 2001) including the provision of capital market services will require a licence or exemption from the MAS for the conduct of such activities.

2. What legal challenges might arise for UK companies engaging in cross-border financial transactions, and how can they be addressed?

Singapore’s legal system is based on English common law, with key areas like contract law, property law and private international law being largely judge-made. Singapore is also party to the New York Convention and the 2005 Hague Convention on Choice of Courts Agreement, so arbitration awards and foreign judgments obtained from member countries to these conventions are generally enforceable in the Singapore courts. Hence, for UK companies engaging in cross-border financial transactions in Singapore, the legal challenges may be less daunting.

Nonetheless, there may still be local law issues specific to the transaction in question to be considered, which may include the following:

• restrictions, regulatory approval or registration requirements, and the feasibility and timeline for obtaining and complying with such approval and/or registration requirements;
• stamping, registration and perfection requirements in relation to the obtaining of a guarantee or security from a local security provider, or over local assets, and the timeline for the compliance with such requirements;
• financial assistance implications, if any, on the proposed financing or provision of security; and
• preferred governing law and dispute resolution mechanisms.

Hence, it would be advisable to seek local counsel advice at the earliest opportunity to flag out the legal issues and challenges that may arise in connection with such cross-border financial transactions, so that these can be properly considered and addressed before parties proceed with the transaction.

3. What mechanisms are available in Singapore for resolving banking and finance-related disputes? How can UK general counsel best represent their company’s interests in such dispute resolution proceedings, considering potential cultural and procedural differences?

The usual dispute resolution processes, litigation and arbitration, and alternative dispute resolution processes, such as mediation and neutral evaluation, are available in Singapore for resolving banking and finance-related disputes.

Most banking and finance-related disputes are litigated through the Singapore courts, which are familiar with the usual banking terms and conditions. There is a well-established body of case law for such disputes in Singapore. Arbitration is sought when there are issues which require confidentiality, or if enforcement of arbitral awards is easier in a foreign jurisdiction than a court judgment.

The unique institutions in Singapore through which disputes are resolved include the Singapore International Commercial Court (SICC) and the Financial Industry Disputes Resolution Centre (FIDRec). The SICC would be of particular interest to UK companies engaging in cross-border financial transactions, and FIDReC would be of particular interest to UK companies looking to establishing digital banking services in Singapore. We elaborate briefly on each of these institutions.

The SICC is a division of the General Division of the High Court of the Republic of Singapore, created to deal with international commercial disputes. Two features of the SICC which makes it different from the other local courts are that:

1. the SICC’s panel of judges comprise specialist commercial judges from both civil law and common law traditions, including retired UK judges; and
2. foreign lawyers registered with the SICC may, in certain circumstances, represent parties before the Court.

The FIDReC was launched as part of an initiative by the Monetary Authority of Singapore, to create a one-stop centre for the resolution of retail banking disputes between consumers and licensed financial institutions. It offers a more affordable alternative dispute resolution scheme, where external counsel are not permitted to appear on behalf of the parties. There is a jurisdictional limit of S$100,000 per claim for adjudicated disputes, but there is no jurisdictional limit for mediated disputes. For an adjudicated dispute, the outcome is not binding on the consumer although binding on the financial institution.

Local counsel advice would be helpful to UK general counsel, particularly on issues concerning procedure and jurisdiction of the above-mentioned institutions to hear the dispute. Ideally, such advice should be sought before contracts are entered into, so that the available dispute resolution mechanisms are properly considered, and suitable mechanisms are adopted by the parties. When engaged in dispute resolution proceedings, local counsel advice would also be helpful to navigate potential procedural pitfalls. Their industry knowledge, including their familiarity with the relevant regulators, will be helpful to UK general counsel looking to best represent their company’s interests.

4. What legal considerations should UK companies be mindful of when collaborating with Singaporean fintech partners or establishing digital banking services in Singapore?

First, UK companies should ensure that their Singapore partners have all necessary licences from the MAS and that their collaboration would not infringe any licence conditions. Generally, the provision of payment services (as defined in the Payment Services Act 2019), regulated activities (as defined in the Securities and Futures Act 2001), and the conduct of banking business (as defined in the Banking Act 1970) will require a licence or exemption from the MAS.

Second, UK companies should be aware that Singapore takes a very strict approach to AML/CTF, and fintech companies are not exempted. Parties should clearly delineate their respective roles and responsibilities in relation to AML/CTF compliance. More generally, foreign companies should be aware that fintech regulation in Singapore is evolving rapidly and they should prioritise staying up to date.

Third, the collaboration agreement should set out clearly and comprehensively the scope of the collaboration. Careful drafting of the commercial terms (including intellectual property provisions) is strongly recommended. UK companies should also address any personal data, data privacy, and cyber security issues that may arise under the Personal Data Protection Act 2012.

Fourth, UK companies should note that the MAS considers certain types of contracts to be contracts for ‘outsourcing’ of business activities to service providers. If their Singapore partners are regulated by the MAS, the partners may require the insertion of a comprehensive set of clauses in order to comply with the MAS Guidelines on Outsourcing.

5. How does Singapore address anti-money laundering (AML) and counter-terrorism financing (CTF) requirements for financial institutions? What role should general counsel play in ensuring their organisation’s compliance with these obligations?

The Monetary Authority of Singapore (MAS) operates as the principal AML/CTF watchdog in Singapore, providing guidance and issuing AML/CTF notifications, guidelines and guidance to financial institutions outlining their responsibilities concerning AML/CTF requirements which include risk assessment and mitigation, ‘know your customer’ (KYC) (including beneficial owners) due diligence checks, record keeping and suspicious transaction monitoring and reporting.

The MAS also engages industry players on emerging risks, evolving criminal typologies and industry best practices. This is exemplified by COSMIC (Collaborative Sharing of Money Laundering/Terrorism Financing (ML/TC) Information & Cases), a digital platform that the MAS has proposed to establish and maintain to enable secure information sharing among major banks to identify potential financial crime concerns in customers displaying multiple ‘red-flags’. This is set to be rolled out in phases, starting from the second half of 2024.

Additionally, the MAS expects financial institutions to stay updated with AML/CTF information releases on high-risk jurisdictions and guidance papers by international bodies, including the global Financial Action Task Force.

The Financial Services and Markets Act 2022 (FSMA) was recently enacted in Singapore as an omnibus legislation for the sector-wide regulation of financial services and markets. Under the FSMA, the MAS can issue regulations to discharge Singapore’s international obligations binding on Singapore by virtue of a decision of the UN Security Council, as well as regulations on prevention of money laundering and terrorism financing. Non-compliance with the MAS regulations under FSMA can result in fines of up to S$1m per offence or revocation of licence issued under certain legislations such as the Banking Act 1970. Financial institutions must also adhere to anti-terrorism financing obligations outlined in the Terrorism (Suppression of Financing Act) 2002.

Given that breaches of the MAS’ AML/CTF regulations can lead to hefty fines and even licence termination, general counsel should ensure that they keep up to date on the latest AML/CTF regulations published on the MAS’s website, and work closely with the management teams of financial institutions to ensure that stringent internal controls and processes are in place to enable the financial institutions to comply such AML/CFT regulations, and ensure that there are proper AML/CTF audit and training provided to the employees. Clear criteria for escalating issues to management, along with proper documentation and tracking, will ensure effective discharge of these obligations.

6. In light of the growing importance of sustainable finance and ESG considerations, what are the unique ESG-related regulations and expectations that UK companies operating in Singapore’s financial sector should be aware of? How can general counsel support their company in integrating ESG principles into their operations?

UK companies in Singapore’s financial sector should be aware of the following ESG-related guidelines and regulations. General counsel, alongside management teams, can support integration of ESG principles through stakeholder engagement and employee training.

MAS guidelines

The MAS has issued the Environmental Risk Management Guidelines across the banking, insurance, and asset management sectors. These guidelines set out the MAS’ expectations on environmental risks management, and cover governance and strategy, risk management and disclosure of environmental risk information across all these sectors, with additional focus areas for the insurance sector (being underwriting and investment) and asset management sector (being research and portfolio construction, and stewardship).

Sustainability reporting standards

From the regulation perspective, UK companies listed on the Singapore Exchange (SGX) must disclose their ESG-related practices and performance in sustainability reports. From 2023, per the recommendations of the Task Force on Climate-related Financial Disclosures, the SGX will progressively tighten reporting practices. Sustainability reports by listed companies operating in the financial sector must now include climate reporting on a ‘comply or explain basis’. Moving forward, the ‘comply or explain basis’ will be removed and climate reporting will become strictly mandatory.

Others

ESG considerations involve engaging stakeholders (eg, shareholders, customers and the community), and UK companies should have strategies for meaningful engagement on ESG matters. Separately, ESG infrastructure can be set up within the company for capacity building and training on sustainability knowledge and market practices. General counsel should stay updated on any additional sector-specific ESG-related regulations, sustainability principles and guidelines and aligning legal documents with industry expectations.

7. What is Singapore’s position on transition finance, and is there currently any regulatory framework to develop and govern such transition finance in Singapore?

Singapore is supportive of transition financing, but there is currently no specific regulatory framework to promote or govern such transition financing which remains a nascent area of development. The MAS has, however, launched the Finance for Net Zero (FINZ) Action Plan 2023 which sets out the MAS’ strategies to mobilise financing to catalyse Asia’s net zero transition and decarbonisation activities in Singapore and the region. Through the plan, the MAS seeks to achieve the following outcomes:

• Data, definitions and disclosures: A promotion of consistent, comparable, and reliable climate data and disclosures to guide decision making by financial market participants, and safeguard against greenwashing risks.
• Climate resilient financial sector: Engagement of financial institutions by fostering sound environmental risk management practices and deepening climate scenario analysis and stress testing to identify climate-related
  financial risks by incorporating evolving international best practices in the supervision of financial institutions’ transition planning.
• Credible transition plans: To support financial institutions’ adoption of science-based transition plans, the MAS will engage international partners to support the development of credible regional sectoral decarbonisation pathways.
• Green and transition solutions and markets: A promotion of innovative and credible green and transition financing solutions and markets in support of decarbonisation efforts and climate risk mitigation.

Following on from the above, the MAS announced in June 2023 its intention to set supervisory expectations to steer transition planning processes of financial institutions (FIs) to facilitate credible decarbonisation efforts by their clients. The guidance on transition planning will cover FIs’ governance frameworks and client engagement processes to manage climate-related financial risks and enable transition in the real economy towards net-zero. A consultation paper is expected on this later this year.

The MAS, together with the financial industry, also intends to establish the Singapore Sustainable Finance Association (SSFA) to build a vibrant ecosystem for green and transition finance. The SSFA will initially focus on initiatives to scale voluntary carbon markets, transition finance and blended finance.

The MAS is also in the process of establishing the Singapore-Asia Taxonomy to, among others, encourage the flow of capital to support the low carbon transition needed to avoid catastrophic climate change.

8. What is the role of the Singaporean courts and regulatory bodies in overseeing the banking and finance sector? How can UK general counsel effectively engage with these entities to ensure their company’s interests are protected and advocated for within the Singaporean legal system?

In Singapore, the MAS is the primary regulator for the banking and finance sector. Its role encompasses overseeing the banking, insurance and capital markets sectors, and striving for a robust financial industry through supervision and developmental initiatives. The MAS focuses on the overall financial system’s stability and the health of individual financial institutions. Through collaboration with stakeholders, including financial institutions and their boards and managers, the MAS aims to manage and mitigate risks effectively in Singapore’s finance sector.

The MAS regularly consults with, and seeks feedback from, industry players, the public, lawyers and general counsel. For instance, in 2019, the MAS sought feedback on revising risk-based capital and leverage ratio requirements to align with Basel III reforms. More recently in 2021, the MAS issued a consultation paper to financial institutions, law firms and financial companies seeking feedback on a proposed regulatory framework for financial institutions to share risk information to combat financial crimes through a secure digital platform named COSMIC. These insights shaped the proposed 2023 Financial Markets and Services (Amendment) Bill setting out the legal groundwork for the establishment of this digital platform while seeking to safeguard banking secrecy and protect the interest of legitimate bank customers.

Singapore courts work in tandem with the MAS by ensuring the laws and regulations relevant to Singapore’s banking and finance sector are enforced in accordance with Singapore’s legislature’s intent, with the overriding principle of upholding Singapore’s rule of law.

Therefore, the constant opportunities for open dialogue with regulatory authorities in Singapore through feedback sought from time to time promotes a culture of meaningful engagement and candour that UK general counsel should capitalise on to ensure that their company’s interests are well protected and advocated for within the Singaporean legal system.

The authors would like to acknowledge directors Ron Cheng, Priscilla Wang, May Ng and associate director Yap En Li for their contributions to the responses in this article.

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