With the repeal of the Registered Fund Management Company (RFMC) regime, all Fund Management Companies (FMCs) are now under the Capital Markets Services License (CMSL) regime. This is broken down for Retail Investors, and Accredited/Institutional Investors. There is also a specific light-touch regime applicable for Venture Capital Fund Managers. With this transition, the need for FMCs to ensure that they have adequate risk management measures in place has become even more important.
The Monetary Authority of Singapore (MAS) has updated its existing Guidelines on Licensing and Conduct of Business for Fund Management Companies [SFA 04-G05] as part of the regulatory enhancements. This enhances investor protection, tightens compliance, and enables FMCs to demonstrate substantive control over portfolio management, including investment strategies and asset allocation. This is particularly important when dealing with digital assets like cryptocurrencies, a key focus area.
The updated guidelines require FMCs to implement a more comprehensive Risk Management Framework (RMF). This provides a more integrated, top-down approach to risk oversight. This is also a requirement as spelt out in accordance with regulation 13B(1)(a) of the Securities and Futures (Licensing and Conduct of Business) Regulations.
The following measures are minimally what FMCs should have in place to ensure that their risks are appropriately mitigated.
Governance, Independence and Competency of the Risk Management Function
It is vital for the risk management function to remain appropriately independent from the portfolio management function. This avoids conflicts of interest from profit-driven decisions, and ensures proper segregation of duties when assessing and managing risk. The risk management function should also have the necessary knowledge and expertise, aligning with best industry practices and MAS expectations.
Identification and Measurement of Risks Associated with Customer Assets
FMCs must establish systems for identifying and measuring risks specific to customer asset classes and types. The updated Guideline recommends that FMCs use advanced, specialised tools and metrics for real-time monitoring insight into risk exposure. This is based on different investment strategies. The systems should also tailor the risk measures according to the size and nature of the assets under management rather than adopting a “ one size fits all”-approach.
One component of the overall risk management framework is Liquidity Risk Management (LRM). This is a form of control to ensure sufficient liquidity in the Funds managed. It allows FMCs to meet their financial obligations. FMCs can make use of metrics (e.g.Liquidity Coverage Ratios and Redemption Coverage Ratios) as part of their assessment for LRM monitoring. Scenario Analysis Tools are also useful for identifying and pre-empting potential liquidity shortfalls across various economic and market scenarios. These scenarios facilitate better asset-liability management.
Enhanced Focus on Cybersecurity and Technology Risks
Digital assets are increasingly present in the financial industry, alongside a growing threat of cyberattacks. As a result, risk management measures now place greater emphasis on cybersecurity protection. FMCs must address not only traditional investment risks, but also the risks associated with managing digital assets. Under the updated requirements, FMCs that manage digital assets must have appropriate systems in place to deter cyber threats. Regular training is also strongly recommended to keep employees abreast of potential cyber tactics. This helps maintain integrity and confidentiality of both customer and corporate financial information.
Timely Monitoring and Reporting of Risks to Management
Prior to the last updates, responsibility for managing and overseeing risks primarily rested with Senior Management and the Board of Directors (Board). However, the current requirement expands the scope of responsibility. It now mandates direct involvement of the Chief Executive Officer (CEO). The updates also require continuous monitoring and timely escalation, rather than relying on periodic risk reporting alone. The CEO’s direct involvement provides more accountability and ensures timely intervention of critical risk. It becomes a key focus area of the day-to-day operations of the FMC as well. This facilitates clearer escalation procedures, so risk exposures reach management continuously and promptly.
Documentation of Risk Management Policies, Procedures and Reports
Under the new guideline, FMCs must maintain comprehensive records for all policies, procedures, and reports. This entails full transparency and accountability across all levels of the organisation. FMCs should ensure the Board and Senior Management review and approve internal controls regularly. These controls should remain consistent with the nature, complexity, and materiality of the company’s operations. This is crucial not just for internal control purposes, but also to ensure records remain readily available for compliance checks, internal and external audits, and regulatory inspections.
To conclude, the requirements focus on a substantively more comprehensive risk management process. This process takes into accord governance, timely risk escalation, and a deeper integration of risk management into the operations of FMCs. These changes are essential for maintaining a more structured approach to managing risks, especially as digital finance becomes more prominent in an increasingly complex investment landscape.
By implementing these enhanced risk management practices, FMCs can safeguard both their operations and investor interests, helping them be well prepared for market volatility and technological advancements.
What does this mean for you?
As a Regulated Financial Institution in Singapore, incorporating MAS’s updated risk management requirements into your operations is essential for maintaining regulatory compliance. These updates signal critical shifts in how FMCs must handle risk management and compliance.
Curia Regis has a dedicated team in Singapore providing regulatory and compliance support to fund management companies. These companies strive to meet MAS requirements across diverse strategies and business models. With extensive experience in this field, we help ensure your compliance frameworks align with MAS standards. These frameworks are tailored to be solution-oriented, reflecting the size and type of your business.
Contact us here or email us at admin@curiaregis.com to know more and follow our LinkedIn page for updates in the regulatory space.
