SECURITIES AND FUTURES (AMENDMENT) BILL

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SECURITIES AND FUTURES (AMENDMENT) BILL: Order for Second Reading read.

3.00 pm

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, on behalf of the Senior Minister, I beg to move, "That the Bill be now read a Second time."

The Securities and Futures Act (SFA) was enacted in October 2001. It seeks to provide a single comprehensive legislative framework for regulating the activities and institutions in the securities and futures industry. This round of amendments aims to achieve greater consistency in Monetary Authority of Singapore's (MAS) regulations and enable MAS to respond more quickly to new market developments. They also enhance the supervisory and enforcement powers of MAS.

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The MAS consulted the industry and the public on the proposed amendments and draft Bill in 2006 and 2007. MAS has incorporated feedback received into the Bill, where appropriate, and in line with MAS' regulatory objectives.

This Bill implements these amendments. In October, in response to questions by Members on the procedures to enhance safeguards for retail investors, I announced that MAS is conducting a separate review to examine the issues regarding the sales and marketing of structured products. Just now during Question time, I updated Members on the progress of this review so far. MAS will conduct public consultation on the proposals arising from this review in March and, therefore, these proposals are not covered in this set of amendments.

Mr Speaker, Sir, I will now go through the key amendments in the Bill. Let me begin with the changes to the rules on capital markets licensing and business conduct. There are five key changes in this section.

Capital markets licensing and business conduct

First, is to have a continuing licensing regime for corporate licence holders. Under the current SFA, capital markets services (CMS) licence holders have to renew their licences every three years. The Bill introduces a continuing licensing regime for these licence holders where licence holders will not have to renew the licences, to reduce their administrative burden. However, MAS will supervise licence holders on a continual basis, and have the power to revoke licences, if necessary. This brings the CMS licence holders in line with other MAS-regulated institutions, such as banks and insurance companies, which are already operating under a similar continuing licensing regime.

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Representative Notification Framework

Second change is on the introduction of a Representative Notification Framework. Currently, only representatives of CMS licence holders need to apply for a licence from MAS to conduct regulated activities. This is not a requirement for representatives of financial institutions exempted from holding a CMS licence, such as banks and insurance companies. This is not desirable as it creates distortion in the recruitment and retention of representatives. It is also difficult for consumers to check if an individual is allowed to conduct certain regulated activities.

To ensure that all representatives, regardless of the institution they work for, are placed under the same regime, the Bill introduces a Representative Notification Framework. This will apply equally to representatives of CMS licence holders as well as representatives of financial institutions exempted from holding a CMS licence. Under this framework, financial institutions will have to notify MAS when they intend to employ someone to conduct a regulated activity. The financial institution will be responsible for ensuring and certifying to MAS that their representatives are fit and proper. Financial institutions and their directors can be held liable for making false or misleading statements.

As part of this framework, MAS will maintain a public register of representatives on its website. This register will list information on their representatives, including the type of regulated activities they are allowed to conduct, which institution they work for, and any formal regulatory action taken against them by MAS. Consumers will be able to use the public register to check on the individuals they deal with. Financial institutions can also use this public register to conduct reference checks on potential employees.

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Control of take-over of CMS licence holders

The third change is on control of take-over of CMS licence holders. The Bill introduces a new requirement for potential controllers of a CMS licence holder. They will need to obtain MAS' approval before entering into arrangements that would give them effective control of such licence holders. A person has effective control when he acquires directly or indirectly more than 20% of a CMS licence holder's shareholding or voting power. Trust companies and insurance companies, which are regulated by MAS, are subject to similar requirements. MAS will also have powers under certain circumstances, to order people to relinquish effective control, or stop a person from being a party to an arrangement that could result in the person obtaining effective control. For example, MAS would be able to exercise these powers where a person is not, or ceases to be, a fit and proper person.

Prohibition order regime

The fourth change is on the prohibition order regime. Under the SFA, MAS can issue prohibition orders to CMS licence holders and their representatives. This is to help ensure that only suitable persons conduct regulated activities. However, there are gaps as MAS is not able to issue prohibition orders to other persons. This will be remedied under the Bill. MAS will be empowered to issue prohibition orders to the following additional persons:

(i) exempt financial institutions and their representatives;

(ii) persons previously licensed or exempted from holding a CMS licence by MAS;

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(iii) persons who were previously an appointed, provisional or temporary representative;

(iv) an officer or ex-officer of a CMS licence holder or exempt CMS licence holder; and

(v) persons convicted of conducting regulated activities illegally.

Under the SFA, MAS may issue prohibition orders where MAS believes a person has contravened the SFA, or when a person has been convicted of an offence involving fraud or dishonesty. The Bill provides MAS additional powers for issuing prohibition orders. MAS will be able to issue prohibition orders to persons who have been ordered by the court, or who have entered into a civil penalty settlement agreement with MAS, to pay a civil penalty for market misconduct. Prohibition orders can also be issued to persons who have been removed, at MAS' direction, from the office or employment of a CMS licence holder. MAS will also be able to ban persons issued with prohibition orders from directly or indirectly managing or influencing the business of CMS licence holders or exempt CMS licence holders. For example, MAS will be able to prevent a person from acting as a director or being a substantial shareholder of these financial institutions. These amendments will better enable MAS to keep out unsuitable persons from the industry.

Regulatory assistance to foreign regulators

The fifth change is to provide regulatory assistance to foreign regulators. A number of the CMS licence holders and exempt CMS licence holders conducting SFA regulated activities are part of larger foreign corporate groups. Foreign regulators may wish to inspect them as part of their consolidated supervision. The Bill will clarify that a

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foreign regulator that wants to inspect such financial institutions in Singapore will have to obtain MAS' approval. This will align the SFA with the Banking Act which has a similar requirement.

Market misconduct enforcement framework

Mr Speaker, Sir, I would like to turn next to amendments related to the investigation framework for market misconduct. There are three key changes in this section.

First is the ability to transfer evidence between the Commercial Affairs Department (CAD) of the Singapore Police Force and the MAS. Currently, a market misconduct case is taken up by either CAD or MAS at the onset of an investigation, based on the prima facie evidence. The CAD investigates when criminal proceedings are likely, while MAS investigates cases when civil penalties appear appropriate. As the investigation progresses, it may sometimes be necessary for one agency to transfer the matter to the other, based on their preliminary findings. For example, during its investigations, if MAS finds that the case warrants criminal prosecution, MAS will transfer it to CAD. Similarly, CAD may refer cases where civil penalties are more appropriate to MAS. The Bill provides for transfer of evidence between CAD and MAS, so that the agency taking over the investigation does not have to expend resources to re-investigate the case all over again. This will eliminate duplication of efforts.

Corporate derivative liability

The second change is on corporate derivative liability. The Bill will introduce a new concept of attributed liability for market misconduct offences. Currently, a company may not be liable when its employees commit market misconduct. For example, if an employee of an asset management company engages in insider

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trading using company funds, the company would be liable only if the employee was a director or a secretary of the company, or a person employed in an executive capacity. A company may therefore avoid liability by delegating decisions to lower level employees. The amendments address this by making a corporation, partnership or limited liability partnership liable in certain circumstances. Where it is proven that the market misconduct by an employee, officer, partner or manager has been committed with the consent or connivance of an entity, the entity may be subject to criminal liability. Civil penalty liability would be imposed where the entity has, through its negligence, failed to prevent or detect the employee's market misconduct.

Disgorgement by persons who benefit from contravening trades conducted on their behalf

The third change is on disgorgement by persons who benefit from contravening trades conducted on their behalf. The Bill also introduces a new remedy for affected investors of trades that contravene the market conduct provisions of the SFA. A person who is not party to such illegal trades may sometimes benefit from the profits made. Let me explain with an example. A broker may have used a client's trading account without the client's permission to conduct insider trading. The profits from this illegal trade are credited to the client's account. The broker, as the contravening party, is liable to affected investors for losses incurred. However, he is not in possession of the profits made. It is the client that has made the profits. The client should not be allowed to keep the profits, even though he was not party to the market misconduct. To do so would mean depriving affected investors of an opportunity to recover their losses. The new remedy will allow MAS or affected investors to apply to court to order a person not privy to the illegal trade or

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market misconduct to disgorge any gains made from the illegal trades. The gains will be paid into the court. The court will then assess all affected investors' claims and distribute the sum equitably. However, a court will have the discretion not to order disgorgement if the court considers that the circumstances make it unfair to do so.

Notification of changes in shareholdings of directors, Chief Executive Officers and substantial shareholders and offers of investments

Mr Speaker, Sir, I will now go through the amendments related to changes in the shareholdings of directors, CEOs and substantial shareholders.

The legal obligations for reporting of interests by directors and substantial shareholders of listed corporations are currently found in both the SFA and the Companies Act. Under the Companies Act, directors and substantial shareholders are required to notify the listed corporation of their interests and changes in interests. Under the SGX listing rules, the listed corporation is in turn required to notify investors. The aim of these reporting requirements is to ensure that the market and investors are kept informed of any changes in shareholdings of directors and substantial shareholders on a timely basis. There are also obligations for directors and substantial shareholders under the Companies Act and the SFA to notify the Singapore Exchange Limited (SGX).

This Bill streamlines and consolidates all notification requirements for directors and substantial shareholders in relation to their interests in listed corporations in the SFA. Directors and substantial shareholders will need to report their interests or changes in interests to the listed corporation, which in turn will inform

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investors of any such changes. The notification requirement is extended to any CEO who is also not a director. The current obligation for directors and substantial shareholders to separately report changes to the SGX will be removed. While these amendments streamline the current requirements, they will not reduce the amount of information disclosed to the market and investors. Similar amendments are also being made to the disclosure requirements for interests in listed business trusts and real estate investment trusts (REIT).

Lowering minimum investment threshold amount for prospectus exemption

The second key change is on the lowering of minimum investment threshold amount for prospectus exemption. Currently, offers of investment must be accompanied by a prospectus. The SFA allows offers to be made without a prospectus if the minimum investment amount for the offer is at least S$200,000. This means that each and every investor must invest at least S$200,000 for each transaction before the offer can be made without a prospectus.

In response to industry feedback, MAS will lower this minimum investment amount to S$100,000. S$100,000 is a very significant sum of money. MAS considers that a person who is willing to invest S$100,000 or more in a single transaction would possess, or have the ability to get access to, sufficient financial information to protect his own interests. The S$100,000 minimum investment amount is in line with thresholds set in other jurisdictions, eg, the European Union's threshold is set at EUR50,000, while Hong Kong's is set at HK$500,000.

Enhancements to the Real Estate Investment Trusts (REIT) Regime

The third change is on enhancements to the Real Estate Investment Trusts

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(REIT) regime. I now turn to the enhancements being made to the REIT regime. Singapore's REIT market has developed substantially in recent years. Amendments are being made to ensure appropriate rules are in place to govern mergers and privatisations of REITs. With these amendments, the Takeover Code will apply to REITs. The Bill will also allow an offeror making a general offer for units in a REIT to compulsorily acquire the units of the dissenting minority. The offeror can do so if he has obtained acceptances of 90% or more of the units offered. Minority unitholders will also be able to require an offeror to acquire their units if the offeror has acquired 90% or more of the total units in the REIT. Similar amendments will be made for business trusts in the Business Trusts Act. These provisions being introduced mirror the compulsory acquisition provisions in the Companies Act.

The Bill also introduces a new provision to protect REIT unitholders. A REIT unitholder will be able to apply to court for an order to seek judicial redress in cases of oppression, unfair discrimination or prejudice. This remedy is currently available in the Companies Act and the Business Trusts Act, and should similarly be afforded to REIT unitholders.

Markets and clearing facilities

Sir, let me now turn to the amendments that deal with Singapore's markets and clearing facilities.

Approved exchanges and designated clearing houses are systemically-important parts of our financial system. Any failure or disruption in these markets and clearing facilities would undermine financial stability and public confidence. Following a general review of its powers to deal with emergencies across the financial sector, MAS has assessed that it is important to extend its existing emergency powers under the SFA to deal

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with events that would impact approved exchanges and designated clearing houses.

First, MAS will be allowed to appoint statutory advisers. These advisers are to provide advice to an approved exchange or designated clearing house on the proper management of its business. The power to appoint statutory advisers can be triggered in emergency circumstances. One such circumstance would be where the exchange or clearing house is likely to become insolvent. Another would be where the entity is being mismanaged to the detriment of MAS' regulatory objectives.

Second, MAS will be given powers to obtain information from any person in emergency circumstances to maintain the safe and efficient operation of a designated clearing house. For example, MAS may require information necessary for it to order the liquidation of positions held with a clearing house. This will complement MAS' existing powers in respect of approved exchanges.

Regulatory flexibility to deal with market innovation

Sir, allow me now to turn to the final category of amendments to the SFA. This touches on enhancing regulatory flexibility.

The definitions of "securities" and "futures contracts" are being amended. MAS will have the power to prescribe or exclude products as securities. The power to prescribe products as securities, in particular, will allow MAS to bring new products within its regulatory ambit under the SFA in a timely manner. MAS currently has the power to prescribe new contracts as "futures contracts". The proposed amendments will give MAS the power to also exclude contracts from the definition of "futures contract". These amendments will enable MAS to act more efficiently on market developments.

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Mr Speaker, Sir, to conclude, the financial landscape is constantly changing. Good regulation is about balancing the needs of the financial markets and the investing public. MAS will keep our regulatory regime under review to ensure that the transparency and integrity of Singapore's financial system is upheld.

Sir, I beg to move.

Question proposed.

3.20 pm

Mr Inderjit Singh: Mr Speaker, Sir, I support the Bill.

This Bill comes during the time of great turmoil in the global financial markets. World financial systems have failed and today no one knows what the right financial model will be for the future. Sir, this Bill is about two years in the making, and I am sure many of the changes proposed already need changing for us to be able to manage the financial markets in the future. We learned many lessons not only from the failure of Wall Street and other major financial markets of the world but also close at home where the sale of structured products in our financial institutions demonstrated some weaknesses in the Securities and Futures Act, the issue that we discussed during Question Time just now. I therefore urge the Minister to as quickly as this Bill gets passed start the review process of the next set of changes. We hear that MAS is already doing this, and I hope that he can come back and implement them as quickly as possible.

Sir, the one area the public will demand of us and which deserves special scrutiny is on whether there is sufficient oversight over the products on sale and the people that they are sold to. There is a strong view among people on the

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ground that we need to tighten the regulations surrounding this. Many unsuspecting or vulnerable people got sold products that they should not have been sold. In this Bill, among the things we are doing is altering the definition of “securities” (in section 239) and “futures contracts” (in section 2) of the Act. In this change, MAS is given the ability to prescribe products as securities and the power to exclude certain products from the list of securities or futures contracts. To give this change meaning in the present context, we need to ensure that the regulator is vigilant and takes the initiative to review the products out there, as well as the institutions selling them, instead of just scrutinising new products that institutions intend to place on the market. So we should review all the current products that are already out there.

Sir, I would like to move now to the comments on this Bill. I have some specific and some general comments.

The replacement of the licensing regime for representatives under the SFA with a notification regime is achieved by the amendments (and consequential amendments proposed) by clauses 17 to 39 of the Bill.

My comments are, first of all, the Bill modifies the current requirement of renewing a Capital Markets Services licence every three years, which poses some administrative and compliance pressure on the industry. The switch to a perpetual licensing scheme makes this compliance much easier and is a positive move to assist the financial institutions at a time when institutions are under pressure on the business side and as competition heats up around us, and as we try to grow ourselves as a financial centre.

It is also good because it is similar to the perpetual licensing regime that

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governs banks and insurance companies and rationalises the systems governing the different parts of our financial infrastructure. So they were different in the past and I am glad that we are rationalising right now.

Sir, in the recent structured products saga, we have heard from members of the public who feel that they have not been well served by financial advisers or people who have persuaded them to invest in the instruments. We must remain vigilant that once licensed, there is some continuing oversight over these professionals. We must balance the reduction in oversight with mechanisms that allow the public to have better information about the licence holders and their backgrounds and competence, an accessible means to raise concerns about the licence holders, and the ability on the part of MAS to investigate and suspend or revoke the licence as appropriate. It should not be that once it is perpetual, we do not come back and review the licence holders.

Sir, MAS can collect information on licence holders and the activities to which their licences relate (as proposed in the re-enacted section 94) and also publish this information (as proposed in the new section 94(2)). In the age of the Internet, and given the important end of protecting the public by giving them information about the licence holders, I would like to recommend that MAS consider, as a best practice, publishing at least the basic information about licence holders and their allowed fields of activity, on a page linked to main website, MAS website, and that this information be accessible by the public without charge. Also, where a representative has had a prohibition order made against him, it would be important to have this information publicly accessible.

The proposed new section 99C(1) also provides for collection of information on

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the representatives. This will ensure that the financial industry professionals who have a record of action taken against them will not be able to continue acting with impunity and harming the financial interests of members of the public and the institutions that deal with them. I would suggest that, as a best practice, the MAS make it a practice of publishing the information collected pursuant to its powers in section 99C(1), which it is allowed to do under section 99C(2).

Sir, having information that is easily publicly accessible will add teeth to the requirement imposed by the proposed new regime of all representatives having to be registered. Knowing that your status can easily be checked will be a sure way to incentivise people from becoming legitimate licence holders.

The move to make all representatives here subject to licensing requirements (as proposed by the new section 99B, as amended in clause 36 of the Bill) is a positive one that will simplify matters not just for professionals wanting to work in the financial industry in Singapore but also for members of the public who deal with them. The provision allowing a person to be licensed as a temporary representative (which is proposed under section 99F) would in theory allow talented financial practitioners from other countries to come here and work for short periods of time on a limited assignment basis. I would caution, however, that in the current period of job losses, particularly in Wall Streets and other European financial markets, we are likely to see an inflow of financial practitioners seeking their fortunes here while they ride out the downturn elsewhere. The MAS should therefore exercise strict control on the practitioners it allows to practise here as temporary representatives, and push them as far as is practicably possible to make them committed to become at least provisional representatives (under the

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proposed section 99E) pending their sitting for the examinations to become appointed representatives as proposed under section 99D.

An important provision to safeguard the public is the proposed new section 99H, which requires principals to lodge documents certifying that they think their proposed representatives are fit and proper persons for the appointment in respect of the regulated activity, as defined in section 99H(1)(b). Although there is a requirement for the institutions to keep records of documents on the basis of which they certify such representatives as fit and proper, the issue might be that this certification is very subjective because it is done by the financial institutions and this certification may not be standardised across the industry. The certification is also a one-time certification.

I therefore have three suggestions for improvements here. First, I would suggest some kind of periodic confirmation of certification. Although the legal effect would be the same as the initial certification, the periodic certification would keep the importance of responsibility operating in the minds of the leading executives at the financial institutions about the importance of the certification.

Second, I suggest that MAS be given the power to audit the certification to see whether the institutions have a process in place and exercise proper judgment when certifying representatives.

My third suggestion relates to the examinations. Under the proposed amendments, representatives have to take an examination before they can become approved. My question is: is MAS involved in the setting of the curriculum for these examinations or at least having an oversight of it, and reviewing the

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stringency of the examinations? I also suggest that as in other professions, such as the legal profession, a compulsory ethics component be included in the examinations, in addition to the product knowledge and rules and regulations components which are the requirements right now. These will make the examinations and curriculum in sync with what the current context demands of us. MAS could even consider footing some of the cost for the training and examinations in the interest of upholding standards. So we can support institutions that do these examinations by funding them.

In particular, where the representative that is being certified has worked with institutions that hit troubled times due to improper market conduct or dubious sales practices, the financial institutions employing and certifying them should be cautioned to take extra care when reviewing their status and in certifying them. MAS, perhaps, should get involved in cautioning them.

The powers of MAS under the proposed sections 99M and 99N are comprehensive and should provide comfort to the public that the regulator has the teeth to keep representatives straight. The powers in section 101A in particular and their effect as set out in the proposed section 101B are also important in this regard.

The extension of the prohibition order regime to institutions that were exempt under the Act (as stated in clause 39, in the proposed new section 101A (1)(b)) is also welcome, as it aligns the regulatory oversight role over all such institutions and also levels the playing field.

In the current financial meltdown, we have seen that many of the culprits of the problems caused in the US operated with near impunity and outside of effective regulatory oversight. This amendment, I hope, will prevent such a lax regime from developing here. The ability to make a

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prohibition order against a person who has been ordered to pay a civil penalty is a useful pressure mechanism against such a person as well as a protective mechanism for the public, as in the proposed section 101A(1)(f).

The power of MAS to make prohibition orders under the new section 101A, with the powers to revoke or suspend a licence holder's licence if such an order is in force (under the new re-enacted section 95(2)(h)), is an important power and I am glad to see this included in the amendments.

I would suggest that if a Prohibition Order has been made, this also be reflected in the publicly available information on licence holder – the suggestion that I made earlier. I also note that from the proposed section 101A that there may exist an interim period between the making of a Prohibition Order under that section, and the revocation or suspension of the licence holder's licence. In that interim period, and after, it is critical that the public has this information so that they can take steps to protect themselves. It may also be that a Prohibition Order does not lead to revocation or suspension of the licence under the proposed re-enacted section 95, as the MAS would have to give the licence holder the right to be heard before doing so (as stated under section 95(4)). In that event, there may be a situation of some loss of reputation to the licence holder or to the institution because of the revelation of the information. However, I think it would be best to err on the side of protecting the public. Licence holders will just have to be that much more careful before exposing themselves to situations where their licences are threatened.

Sir, I also note that the Prohibition Orders seem to be perpetual. From the Bill, there are a variety of situations where the Prohibition Orders can be made. I suggest that the Prohibtion Orders be

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time-based, with the possibility of an extension where appropriate. Further, where the infraction is less severe, these Prohibition Orders should be treated differently from those where there have been offences of dishonesty and fraud leading to the Prohibition Orders. For both of these categories, especially for the former, I would suggest some process of rehabilitation and re-admission as a representative. This will allow us to keep our talent base here.

So, on the issue of fund raising, while I generally support the changes under clause 67 which amends section 240, I would like to ask the Minister why clause 73, which amends section 275 to reduce the minimum investment amount required for offers made to certain accredited and other persons from $200,000 to $100,000, is necessary. I worry that this reduction may open up a pool of unsophisticated customers that representatives may be tempted to target. We have seen from the recent structured product saga, particularly the Lehman Minibonds, there were those that we called "vulnerable customers" who had invested more than $100,000. One of my residents invested $110,000, and I consider them as not in the know. I think reducing from $200,000 to $100,000, at this point of time, does not seem to be a right move. Can the Minister please explain the reason for lowering this floor amount?

The new section 236L, which is introduced by clause 61, allows MAS to apply to the Court for an order for disgorgement of benefits. Under sub-section 4, it is proposed that the Court will not make such an order if the party against whom it is sought is innocent of knowledge and did not have a reasonable suspicion that the benefit he gained was due to a contravention such as specified in section 236(1). And then there is the word "and" – and if he has changed his position after receiving the benefit. This cumulative requirement of innocence

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and change of position is not rational to me. If someone is innocent of such a knowledge, then why should we require that his position be changed before we make an order for disgorgement? Similarly, if he is not innocent of such knowledge, why should it matter that he has changed his position after that? I would recommend therefore that the requirement be limited to innocence of knowledge of contravention only, without the additional requirement of change of position.

Sir, on balance, I support this Bill, although I hope the Minister will respond and, if necessary, make modifications to the Bill as I have outlined, in view of revelations of the fragility of the financial infrastructure that have come out as a result of all the recent events in the financial industry. And as I have mentioned, I hope that we will quickly follow with another amendment to put in place all the lessons that we have learnt in the recent saga.

Mr Siew Kum Hong: Mr Speaker, Sir, thank you for allowing me to join in this debate. The Minister has explained that this Bill does not address the issues raised as a result of the structured product issue. Even so, I hope that this House will bear with me as I point out some of the changes that I think should have been included in this Amendment Bill.

The Securities and Futures Act (SFA) was enacted in 2001, to introduce a disclosure-based regime. The idea is that such a regime will empower investors to make informed decisions. I think it remains undisputed that, on the whole, this is preferable to a merit-based regime, where the regulator decides on the products that may be offered on the market. But that is the general rule. There are, of course, exceptions – situations where rigid insistence on the disclosure-

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based regime could be more due to dogma than merit, where even the most transparent of disclosures would not be adequate.

This idea of an exception is not radical. The SFA itself permits a differentiated approach for products that are limited to so-called "accredited persons" under the Act, which includes high net worth individuals – meaning individuals with net personal assets exceeding $2 million or annual incomes exceeding $300,000. So, at one end of the spectrum, we have different treatment for sophisticated investors. Why should we also not have different treatment at the other end of the spectrum, to protect unsophisticated investors as well? Indeed, logic dictates that at the margins, a one-size-fits-all approach is likely to be inadequate, and that differentiated treatment is likely to be required.

And let us go further, beyond the ambit of the SFA. Let us look at the CPF Investment Scheme, for a very clear example of a regulator adopting a differentiated approach in terms of products that are deemed to be too risky for investment. This House recently debated the limits on Town Councils' powers to invest their sinking funds in high-risk products. We make all these decisions for Singaporeans. So, why is the regime under the SFA so different? While we should seek to preserve the maximum investment freedom of individuals under the SFA, that cannot be at the price of suitable protections. So, the question is really about the limits of the disclosure-based regime, about where we should draw the line. I would frame the question thus: are there products that are inherently unsuitable for sale to retail investors over the counter, regardless of the level of disclosure made?

There are really two aspects to this question. Firstly, are there investment products that are so complex, that it

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would never be possible to have meaningful disclosures to justify their sale to retail investors. Disclosures have to be meaningful for the disclosure-based system to work. As one Mr Ng Kwong Yee pointed out in his letter to the Straits Times Forum on 14th October 2008, "It seems the current disclosures serve more to indemnify financial institutions than inform investors in their very complicated and technical method."

Indeed, the Hong Kong Monetary Authority, in its report on Lehman-related structured products, explicitly recognised that "investors will not read and understand copious documentation, which is often designed more for the protection of the issuer than for the enlightenment of the customer." Surely we also need to recognise this simple fact of life and then address it, instead of continually asking investors to read the documentation and make informed decisions, knowing that the documentation is such as to make that realistically impossible for most or almost all retail investors.

In any case, disclosures, as they are presently made, are really a one-size-fits-all approach to complying with the SFA's requirements. But most 70-year-old retirees will have a lot of trouble understanding credit default swaps, reference entities and credit events. They can all be disclosed. They can all be written in bold on the front cover of the document, but would the retiree understand? Would even a 30-something working professional understand? I, for one, am quite sure, I would not.

Much has been said about a statement in bold printed on the front cover of High Notes and Minibonds prospectuses, stating that investors may lose all of their investments. But this bold statement, in and of itself, cannot be adequate to satisfy the obligation for adequate disclosure, without being accompanied by either a quantification of the risk of total

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loss, or an explanation of the ways in which such loss may occur. A mere disclosure cannot be enough – it must be a meaningful disclosure. And when investment products are being sold over the counter to retail investors, and disclosures are put in documents that run into the hundreds of pages, can it ever be possible to have a meaningful disclosure for products as complicated as these structured products were?

No less than Prof. Ivan Png, a former Nominated Member, has confessed to not being confident that he fully understands the Minibonds, in his newspaper articles on the subject of structured products. And Dr Oliver Chen from the NUS Risk Management Institute and Dr Anand Srinivasan from the NUS Business School have stated:

"A key consideration in deciding whether such structured products should be marketed to retail investors should be whether the risks involved can be readily understood. Some structured products, whose risks are very difficult to understand, may never be suitable for retail investors."

Let me just repeat that – "some structured products, whose risks are very difficult to understand, may never be suitable for retail investors."

Both Dr Oliver Chen and Prof. Png are far more learned and know much more about financial matters than I can ever hope to know. If even the experts find these structured products complex and difficult to understand, what hope is there for common people like me, much less the retiree uncles and aunties who have always kept their money in fixed deposits? Can disclosures, however transparent, ever justify the sale of such complex products to retail investors over the counter?

The second aspect is this. Can investment products that are so high-risk

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or so unfair to investors that they should not be sold, especially to retail investors over the counter, regardless of the disclosures made? On 31st October 2008, the Straits Times carried a report on a forum organised by DBS for High Notes 5 investors the day before. DBS reportedly admitted at the forum that the product was not high-risk, that on a scale of 1 to 10, 10 being the highest risk, the product should be between 8 and 9. That makes High Notes 5 an immensely high-risk product. It should not have been sold to investors then.

As for unfair products, Minibonds are a striking example. Minibond investors had essentially insured the issuer, Lehman Brothers, against the risk of a credit event by the reference entities. So not only did Lehman Brothers make money from structuring and selling the Minibonds, it also insured itself against its own investment risks, a state of affairs that was not explicitly disclosed as such in the pricing statement or prospectus. Given the potential returns from the Minibonds, in the range of a few percentage points, was this wholesale transfer of risks to investors justifiable? Was it fair? Should such products ever be permissible for sale to retail investors over the counter? In the case of the Minibonds, the disclosures were not clear. But even if they had been transparently clear, should that make a difference to the issue of whether to allow the Minibonds to be sold to retail investors over the counter, given how inherently unfair they are?

My views should be clear. I do believe that some products can be so complicated that the disclosures can never be adequate for over-the-counter sales to retail investors, and that some products can be so high-risk or so unfair that they should not be sold over the counter to retail investors. Just look at the Minibonds. They are an extremely clear case in point.

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I am sure that some people will say that investors need to take responsibility for themselves, that if they do not understand a product then they should not buy it. I think this is too simplistic a view, and also smacks of hubris. I myself have never bought structured products, because I did not understand them. I did not understand where the money was being made, and I did not know who was making the money and so I concluded – perhaps cynically, but certainly correctly – that it would not be the investors who are making the money. But I thank my lucky stars for my good fortune and my relative risk averseness to have been spared. I certainly do not put it down to any special intelligence on my part.

The role of regulation is not so much to protect people like the Members of this House, whom I am sure are intelligent and sophisticated enough to take care of ourselves, but to protect the gullible, the unsophisticated, the vulnerable. We can and must maintain a balance between maintaining a flexible regulatory regime that as a rule does not substitute the regulator’s decision for individuals’ decisions, and building in sufficient differentiated treatment to protect those who need such protection. We cannot veer too much to either end, whether for ideological or other reasons.

I have chosen my words carefully – overly-complex, overly-risky and overly-unfair products should be prohibited from over-the-counter sales to retail investors. I am not advocating an outright prohibition, but rather that such products be disqualified from over-the-counter sales to retail investors. A retail investor who really wants to purchase such products should still be permitted to do so through other channels. This would preserve freedom of choice and mitigates the problem of moral hazard, while preventing repeats of the structured products saga, or at least making them rather more unlikely.

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Over the past two decades or so, we have seen that the ingenuity of financial engineering knows no bounds. The financial crisis would have curtailed the excesses of financial institutions in creating products that were once praised as being innovative, but are now clearly reckless and exploitative. But rest assured, the financial engineers will return, and we absolutely need to make sure that our regulatory regime is able to guard Singaporeans against their worst abuses.

The Bill currently before this House does not address these issues. I certainly hope that MAS will draw the correct lessons from this structured product debacle, and do what needs to be done to protect consumers.

Sir, with that, I support the Bill.

Mr Lim Hng Kiang: Mr Speaker, Sir, I thank the two MPs for supporting the Bill. Let me try and explain the changes and respond to the queries raised.

First, on Mr Inderjit Singh's query on widening the definitions of "securities" and "futures". This allows MAS to respond to the classes of products that come into the market, but not to review individual products. So our general regime still remains the same. As Mr Siew Kum Hong says, it is a disclosure-based regime, and we think that that is fundamentally the right approach. But we have different classes of products that come into the market and therefore MAS needs the power to be able to define them whether they are "securities" or "futures". In response to Mr Inderjit Singh, this is not intended to review specific individual products but classes of products, eg, new types of warrants being classified as part of the "securities" that we will regulate.

Second, is the perpetual licensing regime. I am glad Mr Singh supports this

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because it reduces administrative costs. I would like to reassure him that a perpetual licensing regime does not mean that MAS will not regulate the system. It is not just giving an individual a licence and we forget about him. There will be continuous licensing, regulation and monitoring.

Here, let me explain. There are two categories. One is the licence holders which are really the entities. I take his suggestion that there ought to be some kind of disclosure of what kind of regulator activities the licence holder can be involved in, and I am sure that is somewhere in the website. If it is not, we will put it out there. The second group is really the representatives. These are the individuals and, as I explained in my Second Reading speech, we have this register which will be publicly available. The things that Mr Inderjit Singh talked about, disclosure and letting people know the person is qualified to act as a representative, are taken into account. For the public register, whether there are prohibition orders or black marks against these people, these will all be in the register. The prohibition order is made public. That is the intention. It is time based, usually it is for five years, but the period will be indicated. This is a balance between making it public so that people know the record but, at the same time, giving a chance for people to be rehabilitated and go back into the system.

On the definition and certification of "fit and proper", the whole idea of having this continuous system and having this public register is to put the onus on the entities – the licensed holder or the financial institutions – so that when they employ the representatives, they have to be responsible, and the onus is on them to make sure that they are fit and proper. MAS, together with the stakeholders, of course, has a guideline of what are the

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criteria for deeming people fit and proper. And I would like to assure Mr Inderjit Singh that this is a continuous system. It is not that when an institution employs somebody, it makes an assessment, but we expect the institution, in certifying that the person is fit and proper, to do so on a continuous basis.

Mr Inderjit Singh also talked about temporary representatives. I think this is the flexibility we have so that qualified professionals can work in Singapore for short periods for projects or for certain deals. And then if they want to be here on a more permanent basis, then of course they become provisional or permanent. Again, the onus is on the entities who employ them. They cannot just come on their own. They are likely to come in being an employee of an institution. So they would be assessed and certified by the institution.

On the question of the minimum investible sums coming down to $100,000, as I explained in my Second Reading speech, this is a relaxation in line with other jurisdictions but, at the same time, it is quite an onerous requirement, because what we are saying is every individual investor must invest no less than $100,000. So, it is not like the Minibond case where we have a range of investors, like some of your constituents may have invested more than $100,000, but others may have invested $50,000 or $20,000. So that will not qualify and therefore a prospectus is needed. For prospectus that is not needed, each and every investor must invest more than $100,000. So it is quite an onerous requirement.

On the point about disgorgement, I think we want to have a fair system where people who have benefited from it, even though they are not directly involved in illegal trade, should disgorge the

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proceeds of the illegal trade. Even though a person may not know of the trade, because the profits are the proceeds of an illegality, he should not be allowed to retain the profits unless there has been a change of position such that it is unfair to make him disgorge the profits. So that is the reason why there is the word "and" and not "or".

Let me respond to Mr Siew Kum Hong's points. Essentially, as I mentioned in my Second Reading speech, these amendments do not take into account what MAS is doing in reviewing the risk assessment and the sales process of structured products, the issue that he is very concerned with. I am sure we will come back to the House again when we make changes in the risk classification and the sales process of structured products.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Lim Hng Kiang].

Bill considered in Committee.

Mr Lim Hng Kiang:

The Chairman: The citation year "2008" will be changed to "2009", as indicated in the Order Paper Supplement.

Clauses 1 to 120 inclusive ordered to stand part of the Bill.

Bill reported without amendment; read a Third time and passed.

Mr Speaker: Order. I propose to take the break now. I suspend the sitting and will take the Chair again at 4.15 pm.

Sitting accordingly suspended

at 3.57 pm until 4.15 pm.

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Sitting resumed at 4.15 pm

[Mr Speaker in the Chair]: