TRUST COMPANIES BILL

Column: 637

TRUST COMPANIES BILL: Order for Second Reading read.

The Minister for Education (Mr Tharman Shanmugaratnam): Mr Speaker, Sir, on behalf of the Senior Minister, I beg to

Column: 638

move, "That the Bill be now read a Second time."

Trust services are growing in importance globally, as part of the wide array of wealth management services offered by financial institutions. Private bankers often advise their clients to use trusts for investment and wealth planning purposes, such as for succession planning.

In Singapore, the trust services industry has expanded steadily in recent years along with the robust growth in the private banking and wealth management business. Singapore's standing as an internationally reputable financial centre has prompted global players to locate their trust administration business here.

There is currently no single set of internationally endorsed standards for the regulation of trust companies. But given the growth and increasing sophistication of the industry, there has been increasing pressure for trust companies to be regulated, so as to foster high standards of professional conduct and discourage illicit activities. The Financial Action Task Force, an international, inter-governmental body that recommends standards to combat money laundering and terrorist financing, has extended its recommendations to cover the trust services industry. The Financial Stability Forum, a grouping of regulators of major financial centres including Singapore, has recently expressed its concern that the migration of trust companies to unregulated jurisdictions presents significant risks.

MAS has also received feedback from reputable trust companies that a sound framework for the regulation of the trust services industry will attract top professionals and their clients to do more trust business in Singapore. It will give Singapore a premium. In other words, as in all other areas in the financial industry, good regulation leads to good growth.

Column: 639

Singapore does have a framework for regulating trust companies. However, no major changes have been made to the Trust Companies Act over the last two decades.

For the reasons I have just set out, MAS and the Ministry of Finance consider it timely to update and strengthen the regulatory framework for trust companies operating in Singapore. Regulation of trust companies will be transferred from the Accounting and Corporate Regulatory Authority (ACRA) to MAS. This transfer of responsibilities will allow a single regulator to supervise the complementary activities of trust services, private banking and wealth management.

MAS consulted the industry and public on the proposed new framework for trust companies and a draft of the Bill. We have considered and incorporated the comments received, where appropriate, into the Bill. MAS will also be holding consultations on the regulations, notices and guidelines required to implement the new regime for trust companies.

Scope of Trust Companies Bill, Trustees Act and Business Trusts Act

It may be useful to explain how the Trust Companies Bill relates to the Trustees Act and Business Trusts Act.

The Trustees Act is the centerpiece of trust law in Singapore. It provides the basic legislative framework for trustees of trusts established under Singapore law. The Trustees Act sets out the default powers, duties and obligations of trustees, the powers of the Courts and matters relating to appointment and discharge of trustees. The Trustees Act was extensively reviewed by the Ministry of Law and the MAS and amended by Parliament in October last year, to bring it in line with developments in trust law and the use of trusts in financial and business transactions.

Column: 640

The Trust Companies Bill likewise seeks to update and modernise the legislative and regulatory framework for companies that are in the business of providing trust services. The Bill applies to companies providing trust services in Singapore regardless of whether the trusts are established under Singapore law or other law. The Bill defines the business of trust services as comprising any of the activities of creating a trust, acting as a trustee, arranging for another person to act as a trustee, or providing trust administration services. For example, giving advice on how to set up a trust, and managing and distributing trust assets, are activities that would fall under the Bill. A company providing trust services in Singapore must adhere to the standards of governance set out in the Bill and the accompanying supervisory framework, just as financial companies providing wealth management or private banking services are required to meet appropriate standards of conduct.

On the other hand, the Business Trusts Act, which Parliament enacted in October 2004, introduced a specific governance framework for business trusts. Business trusts have the distinguishing feature of being engaged in the management of an operating business, for example, infrastructure services. The Trust Companies Bill will not apply to trustees of business trusts.

Mr Speaker, Sir, I will now go through the key provisions of the Trust Companies Bill.

Key measures under the new regulatory framework and Bill

Mandatory licensing

A key policy change in the new framework is the shift from voluntary registration to mandatory licensing. Under the current Trust Companies Act,

Column: 641

registration of trust companies is voluntary. Under the new regulatory framework, licensing will be mandatory for anyone engaging in trust business. Mandatory licensing will foster high standards of probity, professionalism and business conduct across the entire industry.

Exemptions

As the trust business is defined broadly, however, the Bill and the Regulations that will accompany it will contain exemptions from licensing, or will have lighter regulation, for certain companies. The exemptions will be granted where the risks of abuse or inadequate professional standards are low, or to avoid duplication with other regulations. For example, private banks, which are regulated by MAS, will be allowed to carry on trust business without needing an additional licence as long as they do not act as trustees themselves, advise on trusts or make significant decisions affecting a trust. They can, for example, arrange for a third party to act as trustee, explain the features of a trust, and facilitate the execution and completion of relevant documents, as part of their private banking services without requiring an additional licence under the Trust Companies Act.

MAS will also work out exemptions from licensing or lighter regulation for other entities in the forthcoming Regulations. These will include lawyers and accountants; private trust companies, which act as trustees for a single private group, typically a high net worth family; and overseas persons visiting Singapore.

The enabling provisions for these exemptions are provided in the Bill, but the scope of the exemptions will be set out in the forthcoming Regulations. The Regulations will include conditions that will apply on exempted entities, the

Column: 642

limitations on the types and extent of trust services they can conduct, and how due diligence with regard to anti-money laundering has to be conducted. MAS will consult the industry and public on these Regulations and consider their comments before finalising them.

Exclusions

The Bill will also provide exclusions for entities that technically fall within the scope of the Bill, such as advisors on wills, executors and administrators of the estates of deceased persons, bare trustees, and managers and trustees of business trusts. The Bill is not intended to regulate these entities, as the trusts involved are not actively used for investment and wealth planning purposes.

Requirements for resident managers

The Trust Companies Bill requires licensed trust companies to obtain MAS' approval for the appointment of their resident managers. MAS intends to set out in Regulations that a licensed trust company has at least two resident managers. Requiring the managers to live and work in Singapore ensures that the persons managing the affairs of the company are in the position to exercise effective day-to-day control of the business. The requirement for at least two managers is also a useful check against a single individual engaging in undetected illicit activity.

MAS' approval for directors and significant shareholders

The Bill also requires a licensed trust company to obtain MAS' approval for the appointment of directors and for persons and entities wishing to become significant shareholders, since they are in a position to influence the management of the licensed trust company.

Column: 643

Financial soundness requirements

The Bill gives MAS powers to prescribe minimum financial requirements for a licensed trust company. The aim is to ensure that each licensed trust company is of sound financial standing, with sufficient capital to operate smoothly and to serve as cushion against unforeseen events. It should also have adequate insurance to cover negligence claims. This is just as we have prudential requirements for other providers of financial services such as fund managers. Licensed fund managers have to satisfy a minimum capital requirement of $250,000 if they conduct fund management on behalf of accredited investors. MAS is considering similar capital requirements for licensed trust companies. We will decide on the financial soundness requirements for licensed trust companies after consultation on the Regulations.

Supervisory powers

The Bill will give MAS supervisory powers over licensed trust companies similar to those it has over other financial institutions. MAS will require licensed trust companies to submit annual audited accounts and other information for supervisory review. MAS will conduct regular inspections and have powers to investigate when needed. MAS will also have powers to restrict the operations of a licensed trust company, revoke its licence, or petition the court for its winding-up.

Anti-money laundering and countering the financing of terrorism

MAS will set out in a notice the measures that licensed trust companies have to take to counter money laundering and terrorist financing. The measures would be similar to those imposed on other financial institutions, which are in line with recommendations by the Financial Action Task Force.

Column: 644

Systems and processes for good business conduct

MAS will also require trust companies to install systems and processes for good business conduct in areas such as record-keeping, compliance with regulations, complaints-handling and continuing professional development.

Conclusion

Sir, to conclude, the new regime for trust companies is an important new piece in the framework for regulation of financial services in Singapore. It will position Singapore as a leading global trust domicile, and contribute to the growth of the private banking industry. It will help us stay in the forefront as a sound, well-regulated and internationally competitive financial centre.

Sir, I beg to move.

Question proposed.

Mr Andy Gan Lai Chiang (Marine Parade): Mr Speaker, Sir, I stand in support of the Trust Companies Bill 2005.

The Trust Companies Bill extensively revamps the present Trust Companies Act (TCA), and the proposed new provisions of the Trust Companies Bill (TCB) strengthen the present regime of the TCA by giving it

a purposive and compulsory regulatory framework, which aims to provide better security and safeguards against potential abuse and proliferation of monies entrusted to the trust companies, as explained by the Minister.

Trust business in Singapore

As pointed out by the Minister, trust business has grown in Singapore in tandem with wealth management and private banking industry in Singapore.

Column: 645

Trust business can be lucrative. The Bermudas, Guernsey, Jersey, the Cayman Islands and the British Virgin Islands, for example, are well known for having financial services providing trust business.

Singapore, however, is well placed to attract trust businesses for the following reasons:

(i) we have an excellent legal framework and infrastructure for trusts to be created and for any disputes to be speedily and efficiently dealt with by the courts;

(ii) we have excellent accounting practices where trust companies may be assured of correct practices; and

(iii) we have major local and international banks for which the trusts may be banked with.

With such advantages, we must be mindful that too much regulation should not be allowed to hamper or hinder any interested potential trust companies from wanting to set up shop in Singapore. While regulation as a means of transparent control is good, the MAS has to weigh the rigours of regulation and that of incentive measures to make Singapore an attractive financial hub for trust companies to park.

Apart from Hong Kong, Singapore is the other significant country that is well poised to handle trust businesses and, given our existing financial services infrastructure, Singapore can become a trust business hub in Asia.

With this in mind, I would like to raise some matters of concern on the TCB.

Scope of TCB

Firstly, I am concerned about the scope of the TCB as set out. Please let me elaborate.

Column: 646

Clause 3(1) of the TCB provides that, subject to certain exempted persons as specified in the Second Schedule, no person shall carry on any trust business or hold himself out as carrying on any trust business in or from within Singapore unless that person is a licensed trust company.

A licensed trust company is defined as "a corporation holding a trust business licence". By virtue of clause 5 of the TCB, a trust business licence can only be granted to a company incorporated under the Companies Act or a foreign company duly registered under Division 2 of Part XI of the Companies Act.

Next, "trust business" is defined in the TCB as follows:

(i) the provision of services with respect to the creation of an express trust;

(ii) acting as trustee in relation to an express trust;

(iii) arranging for any person to act as trustee in respect of an express trust; and

(iv) the provision of trust administration.

In comparison, the Labuan Trust Companies Act defines "trust business" as the "business of carrying on any economic activity by a company as a trustee, agent, executor or administrator pursuant to the objects of the company ...".

Section 9(3) of the Trusts (Regulation of Trust Business) Act 2001 of Bermuda defines "trust business" as the "provision of services of a trustee as a business, trade, profession or vocation."

The Vanuatu Trust Companies Act defines "trust business" as the "business

Column: 647

of acting as trustee, executor or administrator".

Given the wideness of the definition of "trust business" as set out by the TCB, it appears that the following persons may be adversely affected by the implementation of the TCB when it becomes law:

(a) the family trust type of trust companies that were specifically formed for the purpose of creating a family trust; and

(b) lawyers and accountants who, as part of their professional practice, may be instrumental in the creation of trusts or the arrangement of persons to act as trustees.

Clause 15 of the TCB exempts specified persons from obtaining a trust business licence but is nonetheless regulated by the provisions of the TCB. As it stands, only banks licensed under the Banking Act and merchant banks approved as financial institutions under the Monetary Authority of Singapore Act are exempt from obtaining a business trust licence.

The family trust

I would now like to touch on family trust. Under the present regime of the TCA, a family who wishes to set up a family trust could do so by incorporating a private limited company, with themselves as directors and for the company to hold monies and/or property on trust for their children.

They could seek advice from their lawyers who, more often than not, would draw up the necessary documentation and set up the appropriate trust to suit the purposes of the family. The pecuniary amounts to be held on trust could range from small to large. Likewise with the size of immovable property. The cost for

Column: 648

setting up such family trusts was also not prohibitive.

These family trust types of trust companies do not have to submit themselves to be registered under the TCA, as the TCA only provides for public companies to voluntarily submit themselves for registration, if they meet the registration criteria as provided for in section 3 of the TCA and if they comply with the objects set out in section 8 of the TCA.

With the advent of the TCB, the existing family trust type of trust companies may find it difficult to obtain a trust business licence for the following reasons:

(a) The family trust type of trust companies may not be able to meet the minimum financial requirements imposed by the MAS.

(b) The directors of the family trust type of trust companies may not satisfy the MAS in terms of their financial standing, educational qualifications or experience.

(c) The requirements on control of voting powers and shareholdings imposed by Part III of the TCB may render the companies or directors incapable of obtaining the requisite approval, given the obvious familial connections and relationships of the shareholders and directors.

With the advent of the TCB becoming law, the common people wishing to set up family trusts will have no alternative but to turn to licensed trust companies, banks or merchant banks to avail themselves of such services. Given that these licensed trust companies, banks or merchant banks are commercial entities (as opposed to family trust types of trust companies), a family who wishes to set up a family trust may find the cost of engaging or hiring a licensed trust

Column: 649

company to be prohibitive. It is noted that nowhere in the TCB are limits or ceiling set on remuneration to be paid to the licensed trust companies. It is not inconceivable that these commercial entities will levy a fee or charge for services for the creation of trusts, the appointment of trustees, cost for administering the trust, miscellaneous administrative charges and other charges like photocopying charges, correspondence charges and consultation charges. An example of control in this regard may be seen in section 22(29) of the Labuan Trust Companies Act 1990 which empowers the court to review all commissions, fees, charges or expenses levied by a trust company and, if necessary, to reduce the same.

There may be concern that such family trust type of trust companies may engage in undesirable activities such as money laundering or terrorist financing or that some of the directors or officers may misuse the funds entrusted to them without the safety net of a regulatory network. It is suggested that the type of trust companies be exempted from licensing but have regulations tailored to govern their activities, eg, a requirement that they notify the MAS of the extent of their activities, the members of the company and its directors and officers. Conditions for exemption may include limiting the family type of trust companies to hold moveable properties not exceeding a prescribed amount, eg, S$100,000 in cash and/or to limit their holding of immoveable properties of values not exceeding S$500,000. An example of this may be seen in section 11 of the Bermuda Trusts (Regulation of Trust Business) Act 2001 which allows for limited and unlimited trust licences, where limited trust licences authorise the licensee to hold trust assets up to a specified amount and not to act as sole trustee.

Column: 650

Without an exemption for these family trust type of trust companies, the present family trust type of trust companies may have to be wound up, resulting in the ordinary people not being able to create family trusts to benefit their children.

Lawyers and accountants

Next, I would like to touch on lawyers and accountants. The other difficulty concerns lawyers and accountants whose practice may include arranging for trustees or in the creation of trusts. These types of work are done by either lawyers or accountants as incidental to their practice.

Given the wideness of the definition of trust business, if they are not included as specified persons in the Second Schedule to which the TCB will not apply or included as exempt persons under clause 15 of the TCB, lawyers and accountants may be excluded from performing these types of work which they have been doing as work incidental to their practice. In order for them to render any advice on the creation of express trusts or to arrange for trustees, they would have to incorporate a company and obtain a business trust licence. The obligation to set up a company and to submit themselves to the rigours of licensing may mean that it may not be worth their while to engage in trust law advice. The danger then is that only commercial bodies, such as banks or trust companies, would be the only parties who would be able to advise and execute express trusts, as lawyers would not be able to render any legal advice in respect of the creation of an express trust or the legal issues in the appointment of a trustee. Accountants would not be able to advise on monetary and tax issues in relation to the creation of trusts.

It is noted that in the original draft TCB of 2004, clause 15 specifically

Column: 651

exempted lawyers and accountants from the requirement to hold a trust business licence. This was fortified in the Explanatory Brief on the TCB 2005 by the MAS issued on 25th January 2005. It is suggested that, for the sake of efficacy, lawyers and accountants be included as exempt persons under section 15 of the TCB.

Some practical considerations

Clause 5(2) of the TCB provides that a trust business licence shall only be granted if the applicant meets such minimum financial and other requirements as the MAS may prescribe. Presumably, the minimum financial and other requirements would be set out in the subsidiary legislation, regulations or directions.

It is noted that unlike the TCA, the requirement to place securities with the Accountant General has not been incorporated into the TCB. It is suggested that this requirement be included for the practical reason that if monies belonging to the trust have been misused, misappropriated or pilfered, then there is some measure of recovery by the beneficiaries against the licensed trust company.

It is also noted that unlike section 25 of the TCA, the present TCB has no provisions to limit or regulate loans to directors. It is suggested that there be regulations governing such loans to directors. It is noted in the draft TCB 2004, Part V, clause 27 provides a comprehensive regulatory framework for such loans.

In conclusion, Sir, the Bill presented to Parliament ought to be complete in the sense that all material regulations must be stated in order for the Bill to be properly debated. By having material omissions to the Bill, the public is left to second guess what these regulations would be.

Column: 652

It is noted that underlying the changes to the TCA, protection of the beneficiaries and social conscience is apparent. Given the foregoing, it is suggested that unless the aims of the TCB are to benefit all persons, a change to the TCA with the implementation of the TCB may not be useful to the wealth management sector of our economy.

Mr Tharman Shanmugaratnam: Sir, I shall try to answer the Member's questions quickly. First, the reason why the Bill only specifies exemptions for banks and merchant banks is because these are the clear-cut exemptions. They are already regulated by the MAS. We intend to exempt a range of other players through regulation. There is no intention to limit exemptions only to banks and merchant banks and to limit this business only to these large institutions. For instance, lawyers, accountants, private trust companies, a range of other exemptions will be provided for, but there will not be categorical exemptions across the board.

Mr Andy Gan raised a common example where a family trust is being set up - father sets it up for the son, gets the uncles and aunts to act as directors. They are not in the business of providing trust services, so they will not fall under this Act. The lawyer who advises them could potentially be in the business of offering trust services, and that is where the exemptions will come into play. These exemptions are best set out in regulations rather than the Act. That will enable us to finetune them as we go along, consult and get feedback from the industry over time, to see whether there is a need for changes to regulations. Lawyers are a group of players who already have a traditional trust law business, and there is no intention of stifling that. Lawyers who are providing trust services that are incidental to their trust law business will be exempted.

Column: 653

Those who are providing the full range of trust services, but on a limited scale, will be provided with limited exemptions. We are consulting the Academy of Law and the Law Society before setting on the details.

It will be unwise though to have a categorical exemption because not all players in these affiliated industries have the necessary skills to be able to do due diligence for anti-money laundering and other regulatory requirements. Even exempted entities will have to follow certain procedures specified in this Bill, in particular for anti-money laundering requirements.

As for loans to directors, MAS will restrict loans to directors just like for officers and employees. These are unsecured loans. We will restrict unsecured loans to directors, officers and employees to no more than one year of emoluments.

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 Tharman Shanmugaratnam].

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