Thursday, February 11, 2010

HK and Singapore structured finance reforms compared

Original posted on the International Financial Law Review by Andrew Malcolm:

Following the release of Singapore’s reforms to structured finance at the end of January (and a new consultation paper on further changes) we can now see how Singapore’s approach compares to that taken by Hong Kong so far.

What’s clear, and what we hope is encouraging from Hong Kong’s perspective, is that the Monetary Authority of Singapore (MAS) seems to be listening to the feedback and responses it’s received. It’s even changing its position in response to some of the comments.

For example, MAS has dropped its definition of “complex investment products”. This sounded similar to the structured products definition that the Securities and Futures Commission (SFC) came up with in Hong Kong but MAS has dropped it following feedback that its definition would capture too many deals and would be too difficult to delineate. Comments like this have also been made to the SFC on its definition, so it’s quite telling that MAS has been confident enough to move away from this proposal and adopt a different approach.


The notion of a “customer knowledge assessment” seems to be quite similar to the Hong Kong idea that derivatives knowledge would need to be assessed. However, the Singapore policy seems to be cleaner and simpler. Although we’re still waiting for details, Singapore would require an independent assessment of this knowledge and assessments would be driven by the kind of product (i.e. the fact that it’s not on a list of simple products that don’t need an assessment).

Instead, in Hong Kong, we’ve got an awkward and confusing division between product-specific regulation and that of intermediaries. In Hong Kong, the intermediary supervision (of which the derivatives knowledge test would be a part) doesn’t focus on particular products. So there’s awkward overlay in Hong Kong which the Singapore proposals appear to have sidestepped.

Trustee protection

Singapore’s approach to trustees is also quite a lot more prescriptive, but the fact that MAS is contemplating legislation to protect trustees if they exercise discretions is interesting. One of the major problems with Hong Kong minibonds was the fact that the trustees – although meant to act on behalf of investors – were (probably rightly) so concerned with their liability if they made the wrong choice that they froze.

We do need some kind of clarity about the standard to which the trustee will be held and some explicit protection against claims if they have acted properly. So the Singapore proposal to protect trustees that make decisions in good faith was quite interesting.

Key facts vs product highlights

There are some similarities between Hong Kong and Singapore’s approach to a summary of key facts from the prospectus, but the divergences are most interesting. While in Hong Kong the SFC has been at pains to say that the key facts sheet is a part of the prospectus, in Singapore, MAS has said that this is a freestanding document.

Legally speaking, this sets off a lot of alarm bells. One concern we had before the SFC consultation was exactly that, that the SFC would want a four-page freestanding document. The problem then is that you can’t set out all the information that would be relevant to an investment decision, but an investor might not read anything else.

So could issuers be liable for the omission of useful information or for misleading investors because the information is presented more colloquially and may not match up with the fine print? It's unclear how this will be resolved under the Singapore system. Somehow liability has to be framed in a way that takes account of the fact that this statement is a shorter, more straightforward introduction to the product, not the full picture.

A robust approach from the regulators and the courts is needed, so that if something does blow up, there is a realistic approach to what needs to be disclosed and what information investors can be assumed to know even though it was not listed as risk number one.

In the wake of the minibonds incident, the concern is that, if anything goes wrong, regulators and legislators will tell investors to sue the banks to deal with the public outcry. There needs to be a point when investors are made to accept responsibility for their investment choices and that should be dealt with when drawing the line about liability regarding information in these key fact statements.

Influence on Hong Kong

The SFC isn’t giving any indication of when it will release its response, although I initially hoped we’d see something soon after Chinese New Year. The market is slightly on hold waiting for the outcome so a date at least would be helpful.

The Hong Kong and Singapore regulators are certainly following separate paths but I’m sure they are reading each other’s output with some attention. It’s likely the SFC will be looking at Singapore’s response, particularly relating to the dropping of the complex products definition but less likely that Singapore will really influence the SFC’s timetable.

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