The proposed law will allow foreign fund houses to bypass the current feeder fund structure and sell their wares directly to investors, giving them access to Singapore’s solid savings base.
If enacted in its draft form, the Securities and Futures Act (SFA) will see a wave of new retail products hit the market. Local fund operators and those foreign ones that have already set up feeder structures will see competition for their products, while trustees and fund administrators will lose some business as these functions move offshore.
In another move, the SFA defines investments as a “collective scheme”, leading market commentators to speculate that the approval of a raft of new product structures will include multi-manager fund of funds, closed-end investments and offshore hedge funds.
The SFA and the Financial Advisers Act have been on the government’s to-do list for over six months, but until Thursday, commentators were unsure which way the government was going to go. The draft legislation, now awaiting public comment, makes Singapore’s domestic fund management environment look more like that of Hong Kong’s, removing some cumbersome hurdles.
As always with MAS legislation, however, the draft laws do not explain exactly how the system will work. This will be determined after the law is passed through a series of MAS-issued guidelines and directives. “It may be that foreign firms will still be required to set up a local office and acquire a local licence but they won’t need to use feeder funds,” says fund consultant Peter Douglas, commenting on the announcement.
For those foreign firms with feeder funds already in operation, the new laws might warrant a rethink on how their products are structured. Douglas says the feeder funds will eventually come under fee pressure. “ For these funds you usually have one layer of fees at the offshore level and another layer of fees at the local level. This will throw the cost of these feeder funds under the spotlight.”
One of the radical elements of the draft legislation is shifting the regulation of unit trusts from under the Companies Act into the SFA. The protracted process will be complicated, but could eventually streamline the way fund managers promote and sell their unit trusts. “In the insurance business there is very little legislation governing the promotion of insurance policies which makes it a fairly cheap and easy process,” says Douglas. “By putting unit trusts under the SFA it will change the way prospectuses are written, how they are distributed, and how the fund managers do their advertising.”
The Financial Advisers Act creates an industry of independent financial advisers to market fund products and will have wide implications for the distribution of mutual funds in Singapore. Douglas says the legislation is focused at the level of promotion and sale, and does not differentiate between securities, life assurance and unit trusts.
Both Acts are expected to be passed in the third quarter of this year.
