LICENSE APPLICATIONS – THE PASSAGE OF TIME AND THE EXPECTATION TO UPDATE A REGULATOR
For a capital markets services license application, the Monetary Authority of Singapore (the “MAS”) has stated that it expects to take up to six months to review applications.(1) For some FIs that have applied for a license under the Payment Services Act, 2019 (the “PS Act”), applications have been pending resolution for between 16 and 22 months.
Because of how quickly businesses and markets can move, the information that a FI originally submits to the MAS in its license application can become out of date due to the passage of time. For example:
- Three-year revenue and profit projections provided by a PS Act license applicant can become inaccurate due to:
- changes in expected prices of digital payment tokens (“DPTs”) in fiat terms. For example, if a FI’s revenue forecasts are based on an exchange rate of 1 bitcoin to US$50,000, a material decrease in the actual price of bitcoin could materially impact the FI’s financial projections;
- industry, technology and regulatory trends can change a FI’s expectations with respect to onboarding new customers (2), offering its services in new markets or the number of transactions such customers effect; or
- changes in management strategy, due to changes in fundraising plans or otherwise.
- Staffing, headcount projections and reporting lines may change in the event of any restructuring within a FI or its corporate group, including any decision to have non-Singapore customers face an affiliate outside Singapore.(3)
- Any new products and services offered, the cessation of any products and services, or changes in the way transactions are effected could have material qualitative and quantitative consequences to a FI’s business model.
We advise, and believe, the MAS expects license applicants to promptly and proactively share material updates with the regulators.(4) The MAS uses a single risk assessment system – Comprehensive Risk Assessment Framework and Technique (“CRAFT”) – to assess the risks of a FI. (5) MAS risk rates FIs based on an assessment of inherent risks and control factors, of oversight and governance arrangements and of financial strength factors.(6) As a prudential matter, we believe adverse updates are more critical to be disclosed as they are more likely to increase the MAS’ risk rating of a company.
RISK MANAGEMENT
In recent weeks, the digital asset sector has gone through significant turbulence which has included the de-pegging of algorithmic stablecoin, terraUSD (UST), with the U.S. dollar, certain digital asset firms suspending withdrawals and transfers of digital assets and the liquidation of collateral with respect to a “large client” that failed to meet its obligations on an overcollateralized margin loan.(7) Asa result of the foregoing, we have generally reminded clients about the importance of ensuring that they have a robust risk management framework in place.
The board of directors (the “Board”) of a FI is responsible for overseeing the governance of risk in the FI. Pursuant to the MAS’ Guidelines on Risk Management Practices – Board and Senior Management (the “Board Risk Guidelines”), the MAS expects that senior management of a FI will provide the Board with information on “all potentially material risks facing the institution, including those relevant to the institution’s risk profile, capital and liquidity needs. Information should be comprehensive, accurate, complete and timely.”(8)
As a result, we recommend that senior management of FIs, particularly DPT service providers, consider taking the following measures in light of the current market environment:
- Review its risk assessments to see if previously identified risks have exacerbated or new risks have come to light;
- Consider its customer or counterparty concentration risks;
- Consider its financial position and cash flow forecasts generally, as well as exposure to and limits with borrowers and lenders;
- Consider whether its disclosures adequately explain the risks of its products and services;(9)
Consider what information the Board or regulators may ask for given current conditions and ensure that such information would be readily available if requested;
- Consider arranging risk management training for the Board;(10) and/or
- Consider calling a special meeting of the Board to discuss current market conditions, especially if the Board has not met recently, is not scheduled to meet for a prolonged period of time or includes non-executive directors who may not be aware of the change due to not being involved in the day-to-day operations.
Regardless of the specific measures ultimately taken, we believe it is important to document the seriousness with which a FI considers its risk profile.(11) It is foreseeable that the MAS could ask a FI to evidence the risk assessments and measures it has taken in light of the current market environment.
CONCLUSION
We believe recent market events in the DPT sector may raise new issues for the MAS to consider as part of the PS Act license application. Such issues could make the robust Singapore licensing process even more rigorous and time-consuming. Regardless, implementing appropriate corporate governance and risk management practices is required for all companies in order for the Board to discharge its duties properly and protect itself, and the company that the Board oversees, from regulatory and shareholder liability.
Through its team, Holland & Marie has approximately 50 years of experience advising FIs and their Boards on legal, regulatory, risk and corporate governance matters. In a turbulent market, it is critical for a FI’s senior management and Board to ensure their house is in order. We stand ready to assist.
For further information, contact:
Chris Holland: Partner | Holland & Marie | 201802481R 7 Straits View, Marina One East Tower, #05-01 Singapore 018936
Disclaimer: The material in this post represents general information only and should not be relied upon as legal advice. Holland & Marie Pte. Ltd. is not a law firm and may not act as an advocate or solicitor for purposes of the Singapore Legal Profession Act.
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(1) See MAS’ Capital Markets Services (CMS) Licence – What is the processing time required.
(2) For example, a DPT service provider focused on the retail segment could have its customer growth projections impacted due to the MAS’ Advertising Guidelines.
(3) In addition, a new license received by an affiliate could justify an update based on a PS Act license applicant’s original response to question 5.4 of Form 1.
(4) We note that any material changes to an applicant’s business plan or other key documents submitted as part of a license application will likely have a bearing on the application timeline.
(5) See the MAS’ Framework for Impact and Risk Assessment of Financing Institutions, 1 April, 2007
(6) CRAFT also takes into account the policies, procedures and controls that institutions have in place to manage and mitigate money laundering and terrorism financing risks. A four-point rating scale is used to rate all components. After which, the MAS assesses the financial institution with a final overall risk rating (reviewed periodically) of High, Medium High, Medium Low or Low.
(7) See Coinbase-Backed Digital Asset Lending Firm Says It Liquidated One ‘Large Client’ Amid Epic Crypto Market Crash, The Daily Hodl,17 June 2022
(8) See Paragraph 2.1.3 of the Board Risk Guidelines, 1 March, 2013
(9) In particular, we think it is important to review the disclosures of borrowing, lending, staking of farming products and services.
(10) Pursuant to Paragraph 1.2.6 of the Board Risk Guidelines, the Board should receive regular training from time to time.
(11) For example, in the MAS’ Information Paper of April 2022 on Strengthening AML/CFT Name Screening Practices, the MAS flagged not merely failures to conduct adequate name screening, but also failures to adequately document such name screening.
