What does “Compliance” comprise of – for Fund Management Companies in Singapore?
Fund Management Companies (FMCs), being an example of Financial Institutions (FIs) in Singapore are tightly regulated by virtue of the business that they are a part of. The Monetary Authority of Singapore (MAS) imposes strict compliance requirements and regulations on FMCs for them to carry out investments, advisory, etc. in order to ensure adequate risk mitigating measures and practices are in place, to protect investors. This is so that the industry remains sustainable, and in turn market’s Singapore as the financial hub of Asia.
These requirements comprise of compliance with prevailing laws and regulations. The laws in question are made up of stipulations and limits, some of which are statements by way of regulatory filings, for the following types of FMCs:
- Registered Fund Management Companies (RFMC) have annual filings which consist of the submission of Forms 25A & B, the first of which would be in relation to the internal arrangements and Assets Under Management (AUM) of the RFMC, and the second to be the Auditors report with the RFMC’s audited Financial Statements; and
- Fund Managers that hold a Capital Markets Services License (CMSL) have more stringent requirements that entail quarterly reporting of Forms 1 & 2, as well as annual reporting of Forms 1, 2, 3, 4, 5, and 6. Forms 1 & 2 are to do with the Assets and Liabilities, and Financial Resources, Total Risk Requirement & Aggregate Indebtedness of the CMSL. Forms 3 & 4 relate to the Accounts and Supplementary Information of the CMSL.
- Venture Capital Fund Managers (VCFM) though considered Fund Managers under the CMSL regime, are subject to their own requirements which are less onerous than the other two RFMC & CMSL regimes above and have to submit their annual filings under Form 25A which is similar to that used by an RFMC.
The requirements above are merely one facet of the constantly evolving regulatory framework in Singapore faced by Fund Managers and other FIs. Change is the only constant when it comes to this regulatory environment and the ongoing Anti Money Laundering (AML)/ Countering the Financing of Terrorism (CFT) & Client Due Diligence (CDD) measures adopted by FIs has to encapsulate this change. We see the introduction of more prescriptive requirements that call for expanded ongoing monitoring and analysis. FIs are also beginning to take a careful look at their legacy AML systems with an eye toward expanding automation, improving performance, standardizing processes and increasing transparency in order to have better efficiency, fewer errors, and a complete level of oversight when handling Compliance issues specific to the business.
The industry is waking up to the fact that strong ethics and core values are no longer “nice to have,” but a necessity. Failure to take responsibility in times of crisis can take an irreparable toll on the trust that companies have worked so hard to build with employees, partners and customers. So many brands are still getting it wrong, and the consequences are real — public boycotting, massive fines, fired CEOs and falling stock prices. This shift is an ethical transformation — the application of ethics and values across all aspects of business and society. We are entering, or we can say we have entered, an era in which every single company has to go from self-protective, “check-the-box” compliance to a long-term focus on ethics, values and compliance. Companies need to start making that shift now, if they haven’t already. The first step to this is acknowledging ethics and values as important, and making the decision to prioritize it above the bottom line. Make it part of everything that’s being done: Write it on the wall, make values the first slide in every deck, talk about it at every meeting, go beyond check-the-box policy training, encourage employees to speak up when they see something. It’s not an overnight change. It takes time, effort, technology, trial and (lots of) errors. That’s why FIs have to start it now.
Rising Costs of Compliance
Big FIs are increasing budgets and spending large amounts to ensure compliance with the regulations. It’s time for smaller FIs as well to be creative in their approach to ensure governance of regulations set while achieving the financial goals of the institutes. Particularly, after the 2007 meltdown, banks and big FIs have learnt the lesson and importance of being compliant. This is to ensure these institutions don’t get into the issue of non-compliance, and since then, institutionalizing compliance has been a priority and budget allocation for these departments have been increasing. Opimas, a research and consultancy firm, found that global spending by banks alone on Compliance had increased to $100 billion in 2016, equivalent to an escalation from 15% to 25% annually over the past 4 years. “Banks have been forced to hire hundreds and even thousands of compliance and risk professionals to fulfill their regulatory obligations pertaining to data management, activity monitoring, transaction reporting and such,” the report said. On top of this, banks often employ external consultants to ‘patch up’ areas of the organisation that are at risk of being incompliant with regulations.
Why outsource compliance?
Demands on compliance functions are rapidly increasing and so are the risks associated with failing to meet these demands. Due to the extent of compliance needs, many organizations maintain large and growing compliance functions that increase their overall operational costs. The increasing number and complexity of regulations, continuous shortage of talent, and constant pressure from shareholders to reduce operating costs, make this a good time to consider alternative sourcing strategies.
The decision to outsource is usually driven by one or more of the specific challenges that compliance functions currently face, including coping with talent shortages, sub-optimal compliance processes, investing in technology infrastructure, addressing global compliance needs, and increasing operating costs. To get into further granularity, keeping abreast of Investment Management Agreement/Private Placement Memorandums that stipulate parameters clearly enough will have to be monitored on an ongoing basis. Couple this with the ongoing checks on the potential Conflicts of Interest of appointed representatives, Internal Trades as well as Proprietary Trading of the FI, Gifts Giving (and Receiving), Complaints – which all form one, non-exhaustive, list of issues to be dealt with regularly, and finally with the trading mechanism of the front end staff, for fair and equitable distribution to all accounts, or even to ensure appropriate financial advise is given to clients with an unbiased perspective, would be tantamount to the FI ensuring its ongoing compliance.
It is on this basis that it would be easy to conclude the difficulties faced by lean organisations that are also bootstrapped for funds. Outsourcing the Compliance function to a provider such as Argus, would actually assist with managing the abovementioned, as we provide the expertise and experience in managing all compliance matters, all at a very cost-effective, yet tailored & customised approach.
Feel free to get in touch with us if you have any questions or queries regarding this article.