Consultation Paper on Proposed Changes to Complex Products Regime

On December 21, 2023, the Monetary Authority of Singapore, MAS, has launched a response paper to its public consultation on the complex product regime. Under the regime, all investment products are classified based on their characteristics in terms of risk as either „simple“ investment products, also called Excluded Investment Products (EIPs) or „complex“ investment products, also called Specified Investment Product (SIPs). Products classified as SIPs may only be offered to retail clients after a comprehensive assessment of their know-how and corresponding experience has taken place.
#### The consultation
As MAS is regularly reviewing the classification and the regime altogether due to developments in the financial markets and the introduction of new products, it proposed back in November 2021 targeted amendments to the regime which included the following:
(1) a reclassification of all authorized and recognized collective investment schemes (CIS) as EIPs with the exception of a small number of funds with alternative investment strategies or with „unique features not typically encountered in traditional funds“ (e.g. hedge funds, funds with leveraged or inverse products with daily reset features);
(2) a reclassification of convertible debt securities and those whose interest payments are not only based on a fixed or floating rate as SIPs; and
(3) the removal of the requirement for a Customer Knowledge Assessment (CKA) and a Customer Account Review (CAR) for SIP transactions that involve customer advice by a financial adviser, as the financial adviser must already take into consideration the knowledge and experience of the customer.
Also, MAS is sought input from the public on how to best classify perpetual securities (callable by the issuer) and preferred stock and was requesting ideas on what to include in the so-called cautionary statement for investors as regards such securities. In this context MAS also sought to know whether or not additional disclosures should be made about those products and whether or not there should be any additional safeguards regarding the sale of these instruments other than those already in place for SIPs.
#### Feedback
In its response paper now, MAS states that nearly all respondents welcomed the reclassification of most CIS as EIPs. In the context of this reclassification proposal, many respondents also sought MAS to remove some of the restrictions for a CIS to be classified as an EIP, namely, that
– security lending and repurchase transactions of the CIS are only performed for purposes of „efficient portfolio management“;
– the total value of securities lending and securities repurchase transactions does not exceed 50% of the CIS’ net asset value at any given time; and
– a CIS classified as an EIP and thus available for retail investors can only invest in SIP securities / instruments for „efficient portfolio management or hedging“.
As far as the reclassification of convertible debt securities and those securities whose interest payments are not only based on a fixed or floating rate as SIPs and the classification of callable securities are concerned, there were mixed views. Respondents only consented on the fact that each of these products should come along with comprehensive disclosures on their risks and product features irrespective of their classification as SIPs or EIPs (for retail investors).
The removal of the requirement for a CKA and a CAR for SIP transactions that involve customer advice by a financial adviser was strongly supported by respondents.
#### Way forward
As a consequence to the feedback provided, MAS will take forward the broadening of the scope of collective investment schemes to be classified as simple products (EIPs). In addition and unlike proposed, it will also remove the above noted restrictions as regards securities lending, repurchase transactions, and SIP investments by simple funds to classify as an EIP. Therefore, MAS will make corresponding amendments to the Schedule to the Securities and Futures (Capital Markets Products) Regulations 2018.
In view of the mixed feedback on the (re)classification of the other products, MAS notes that it would like to put this issue on hold along with the removal of the CKA and CAR requirements for adviser-assisted investments. In fact, it will review its entire „classification“ regime and launch a corresponding consultation to comprehensively reassess the functioning of the regime. The consultation will be forthcoming in the first quarter of 2024.