On November 3, 2021, the Monetary Authority of Singapore (MAS) issued a consultation paper to seek feedback on proposed revisions to the complex products regime (Consultation Paper), a regime to aid retail investors to understand the features and risks of a complex investment product.
This Update focuses on the proposals of the Consultation Paper insofar as they affect Singapore fund management companies (FMCs) and distributors that market collective investment schemes (CIS) offered to retail investors.
Current Complex Products Regime
The complex products regime was introduced in 2012 following the global financial crisis to enhance retail investor protection.
Under the current complex products regime, investment products may be classified as either Excluded Investment Products (EIP) or Specified Investment Products (SIP). EIPs are products that are well established in the market and have terms and conditions generally understandable by the market. SIPs are investment products that do not fall within the prescribed list of EIPs.
A set of enhanced distribution safeguards apply to the sale of SIPs to retail investors, including the requirement for distributors to conduct a Customer Account Review or Customer Knowledge Assessment based on certain prescribed criteria before allowing the retail investor to invest in a SIP.
Currently, only CIS that invest in simple products such as shares or gold and use derivatives solely for the purpose of hedging or efficient portfolio management are classified as EIPs.
Other CIS that have been authorized or recognized by MAS for offers to retail investors (Authorized or Recognized CIS) but that do not meet the investment restrictions for EIP classification are not classified as EIPs but as SIPs. Consequently, the enhanced distribution safeguards apply to the sale of such Authorized or Recognized CIS to retail investors.
Proposed Revision to Classification Criteria for CISs
The MAS proposes to reclassify all Authorized or Recognized CIS as EIPs, save for a small group of more complex funds.
The reclassification is meant to allow retail investors easier access to a wider choice of diversified and professionally managed funds in their investment portfolio.
The SIP classification will be retained for a small group of more complex Authorized or Recognized CIS (Complex Funds). Such Complex Funds are less familiar to retail investors and include CIS that use alternative investment strategies, or embed unique features not typically encountered in traditional funds, such as
- funds that use advanced investment strategies traditionally associated with hedge funds, including market directional, corporate restructuring, convergence trading, or opportunistic strategies
- leveraged/inverse products that have a daily reset feature that differentiates them from long-only exchange-traded funds (ETF), effectively resetting their exposure offered to the underlying index on a daily basis; the implication is that over time, such an ETF does not necessarily give investors the cumulative return of the long-only ETF, which seeks to replicate the returns of the underlying index
As a result, FMCs and distributors who market Authorized or Recognized CIS will no longer be required to conduct a Customer Account Review or Customer Knowledge Assessment prior to selling any Authorized or Recognized CIS that are not Complex Funds.
The Complex Funds will remain classified as SIPs and be subject to enhanced distribution safeguards, and a customer account review or customer knowledge assessment (as the case may be) will still need to be conducted on a retail investor who wishes to transact in a Complex Fund.
Invitation for Comments
Please refer to the Consultation Paper for full details on the proposed revisions to the complex products regime. The deadline for comments and feedback to be submitted to the MAS is Wednesday, December 15, 2021.
We are collating comments from clients and industry participants for submission to the MAS. If you have comments on the proposals that you would like us to submit on your behalf, please contact any of the lawyers listed below.
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