Regulators seek to expand market connectivity for wealth management products and enhance financial institutions’ environmental risk management.

This blog post summarises key regulatory developments in Hong Kong and Singapore during June 2020, including:

• The announcement of a new “Wealth Management Connect” mutual market access project to link Hong Kong, Macao, and mainland China’s Greater Bay Area (GBA)
• Amendments to the Hong Kong licensing regime for activities relating to over-the-counter (OTC) derivatives
• Consultations on environmental risk management for Singapore financial institutions
• Revisions to Singapore’s exemption framework for cross-border business arrangements of capital markets intermediaries

Hong Kong

1. Announcement of Wealth Management Connect

On 29 June, the Hong Kong Monetary Authority (HKMA), the People’s Bank of China (PBoC), and the Monetary Authority of Macao announced a new cross-boundary “Wealth Management Connect” (WMC) pilot scheme in the GBA.

The WMC pilot scheme is the latest initiative to connect Hong Kong and mainland markets — this time in relation to the distribution of wealth management products. Similar to the existing Stock Connect and Bond Connect models (connecting Hong Kong and mainland Chinese equity and bond markets), the WMC project will have southbound and northbound components, depending on the investors’ residency.

Under the southbound WMC model, residents of the mainland cities in the GBA will be able to invest in eligible investment products distributed by banks in Hong Kong and Macao by opening designated investment accounts with these banks.

Under the northbound WMC model, residents of Hong Kong and Macao will be able to invest in eligible wealth management products distributed by mainland banks in the GBA by opening designated investment accounts with these banks.

The WMC scheme will be governed by the respective laws and regulations on retail wealth management products applicable in Hong Kong, Macao, and the GBA. There is still work to be done to consider and finalise a number of important regulatory factors relating to the implementation of the WMC scheme, including:

• Investor eligibility
• Mode of investment
• Scope of eligible investment products
• Investor protection
• Handling of disputes and enforcement

As a next step, the PBoC and mainland China’s financial regulatory authorities (the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission) together with the State Administration of Foreign Exchange, the HKMA, the Securities and Futures Commission (SFC), and the Monetary Authority of Macao will discuss and agree on the outstanding issues identified above.

Financial regulatory authorities in mainland China, Hong Kong, and Macao will enter into a memorandum of understanding on supervisory cooperation to establish robust supervisory cooperation arrangement and liaison mechanism in order to protect investors’ interests and maintain orderly and fair trading.

The WMC scheme will be formally launched once relevant rules and systems are implemented. The date of the formal launch and implementation details will be announced in due course.

2. SFC issues proposals to refine OTC derivatives licensing regime

On 10 June, the SFC published its consultation conclusions (Conclusions) on proposals to modify the scope of certain regulated activities (i.e., activities that require a licence from the SFC) that will apply to dealing in, advising on, and providing clearing services for OTC derivatives.

The Conclusions set out the SFC’s final proposals to refine the scope of regulated activities in relation to the OTC derivatives licensing regime by implementing various amendments, clarifications, and carve-outs to the scope of applicable regulated activities.

Importantly, the SFC has confirmed that non-financial groups using OTC derivatives as part of their corporate treasury activities will not need to be licensed (i.e., creating a hedging exemption).

Similarly, the SFC licensing regime will not cover providers of multilateral portfolio compression services (i.e., services facilitating the modification, early termination, or replacement of OTC derivative transactions among multiple participants to reduce the notional amount of outstanding OTC derivative transactions and/or the number of OTC derivative transactions, and therefore decrease risk).

The Conclusions also confirm that the framework for assessing whether an individual is competent to be licensed under the expanded licensing regime, and the ongoing continuous professional training (CPT) requirements that apply to individuals once they are licensed, will be consistent with the competence and CPT frameworks that currently apply to individuals licensed to conduct other regulated activities.

The proposals to refine the scope of the regulated activities will require amendments to the Securities and Futures (Amendment) Ordinance 2014, the Securities and Futures Ordinance, and the Clearing Rules. The SFC will work with the Hong Kong government to finalise the necessary legislative changes and introduce them into the Legislative Council.

A more detailed explanation of the proposed amendments to the OTC derivatives licensing regime is available in a separate blog.

Singapore

3. MAS consults on environmental risk management guidelines for financial institutions

The Monetary Authority of Singapore (MAS) has issued three consultation papers on its proposed Guidelines on Environmental Risk Management (the Guidelines) for banks, insurers, and asset managers.

As part of MAS’ Green Finance Action Plan to become a leading global centre for green finance, the Guidelines aim to enhance financial institutions’ resilience to environmental risk, and strengthen the financial sector’s role in supporting the transition to an environmentally sustainable economy, in both Singapore and the wider region.

The Guidelines, co-created with financial institutions and industry associations, set out MAS’ supervisory expectations for banks, insurers, and asset managers in the following areas:

• Governance: Boards and senior management of financial institutions are expected to incorporate environmental considerations into their strategies, business plans, and product offerings, and to maintain effective oversight of the management of environmental risk (e.g. if an environmental risk is deemed material to a financial institution, the institution should designate a senior management member or a committee to oversee this risk).
• Risk Management: Financial institutions should put in place policies and processes to assess, monitor, and manage environmental risk (e.g. financial institutions should monitor and assess their exposures to environmental risk, such as exposures to geographical areas and sectors with higher environmental risk, using scenario analyses, stress-testing and forward-looking data).
• Disclosure: Financial institutions should make regular (at least annually) and meaningful disclosure of their environmental risks to enhance market discipline by investors. Disclosure principles set by relevant international bodies, including the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, should be adhered to

The MAS has reminded financial institutions that environmental issues pose clear challenges for economies and financial systems, and that a good understanding of environmental risk and an improved resilience against environmental-related events are important elements of business and risk management strategies.

The consultations will close on 7 August 2020. The MAS will then respond to industry feedback, and the Guidelines will take effect on a future date as determined by the MAS.

The MAS proposes to allow a 12 month transition period following issuance of the Guidelines so that financial institutions can phase in their compliance with the Guidelines incrementally.

The consultation papers are available here: banks and finance companies; insurers; and asset managers.

4. MAS confirms revisions to the exemption framework for cross-border business arrangements of capital markets intermediaries

On 5 June, the MAS confirmed that it will streamline the exemption framework for business arrangements between financial institutions in Singapore and foreign related corporations (FRCs) (the FRC Arrangements) by moving from the current approval-based regime to a notification-based regime (the New Framework).

The New Framework will allow FRCs to provide cross-border services to customers in Singapore without having to be licensed by the MAS. Currently, FRC Arrangements must be approved by the MAS on a case-by-case basis.

Under the New Framework, the following financial institutions in Singapore (the Singapore Entities) will be able to enter into business arrangements with their FRCs:

• Licensed capital market intermediaries
• Licensed financial advisers
• Exempt capital market intermediaries
• Exempt financial advisers
• Exempt futures brokers
• Exempt over-the-counter derivatives brokers

Under the New Framework, MAS will impose a number of conditions (Boundary Conditions) on a Singapore Entity that wishes to enter into an FRC Arrangement.

• Notification requirement: The Singapore Entity must notify the MAS at least 14 days before the commencement of the FRC Arrangement (or 14 days before any material changes are made to an FRC Arrangement).
• Regulatory status of the Singapore Entity: While the MAS adopts a facilitative approach to FRC Arrangements, the MAS does not intend to allow the establishment in Singapore of shell entities or entities with minimal business presence, or arrangements that could undermine regulatory integrity, or pose a risk to financial stability and market confidence. For FRC Arrangements involving product financing or the provision of custodial services, the Singapore Entity must be licensed or authorised to deal in capital markets products for the same classes of products.
• Regulatory status of the FRC: FRCs must be licensed, authorised, regulated or supervised by a regulatory body in the foreign jurisdiction in which the FRC is operating. FRCs must be operating in a jurisdiction that is supervised for compliance with anti-money laundering and countering the financing of terrorism requirements consistent with the standards set by the Financial Action Task Force.
• Permitted Clientele: FRC Arrangements are restricted to non-retail customers (i.e., accredited investors, expert investors, and institutional investors).
• Internal controls over FRC Arrangement: Singapore Entities must implement policies and procedures to oversee the conduct of FRCs under the FRC Arrangements, including policies relating to record-keeping, customer due diligence, and complaints handling.
• Annual reporting requirements: The Singapore Entity must submit an annual certification from its external auditors that the Boundary Conditions have been satisfied.