MAS to tighten rules on gold buyback and landbanking schemes

Singapore

SINGAPORE will regulate investment schemes such as gold buybacks and collective landbanking after 2016, making it harder for providers of the controversial products to reach retail investors.

The regulatory changes, which will be tabled in parliament next year, will be based on the existing Securities Futures Act, the Monetary Authority of Singapore (MAS) announced on Tuesday.



Precious metals buyback schemes are essentially a form of collateralised borrowing by the product sellers, MAS said. They will thus be treated as debentures, which will require sellers to register prospectuses if they want to sell to retail participants

MAS will also amend the definition of collective investment schemes to close a loophole used by certain landbanking or pooled real estate investment programmes to exclude themselves from regulation. Whether a product is a collective investment scheme will no longer hinge on whether contributions enter a common pool, as long as investors have no day-to-day control of the assets, the investment property is managed as a whole, and the effective purpose of the product is as a collective investment scheme.

Collective investment schemes may not be sold to retail investors without MAS authorisation, and will be restricted to investments in securities or other assets that are liquid, such as precious metals, or which have stable income, such as completed real estate.

The new rules will require financial institutions to treat new accredited-eligible investors as retail investors by default; this means that such investors would be deemed unsuitable for certain complex investment products without first having been offered licensed financial advice. Qualifying investors, however, can opt to change their status to "accredited".

An accredited individual investor is a person with net personal assets of at least S$2 million and whose annual income is at least S$300,000. The MAS is also planning to limit to S$1 million the amount that a person's primary residence can contribute to the assessment of his or her net worth.

The changes received largely positive feedback from investor advocates and industry professionals.

Elaine Chan, co-head of financial services regulatory at WongPartnership, said the new rules are timely, given the proliferation of innovative financial products which are structured so as to fall outside the strict definition of capital markets products regulated under the Securities & Futures Act, but which exhibit essentially the same characteristics as these products."

Brian Lan, managing director of gold dealer GoldSilver Central, went further, likening many gold buyback programmes to ponzi schemes that depended on money from new clients to maintain returns that could neither be guaranteed nor sustained.

He pointed out, however, that dishonest purveyors might try to relocate to nearby jurisdictions or look for other ways around the rules.

"It's definitely a good move in terms of limiting what they can do, but I think they'll continue to try to find some loopholes," he said.

Financial adviser Matthew Dabbs, who is also chief executive of AAM Advisory Financial Services, said that clamping down on potentially shady operators would help the financial advisory and fund management industry as a whole.

"It puts the market on an even keel," he said. "We're regulated, so we have to do a lot of things, like we have to pay professional indemnity insurance and so on, and a lot of these guys are just doing a lot of hit-and-runs."

He also welcomed the opting-in framework for investors to be considered accredited.

"It's a wise move. Just because you're wealthy doesn't mean you're knowledgeable about financial services.

We do have clients who can be considered as accredited investors, but who say: 'Please treat me as a retail investor because that's exactly my knowledge in this situation'." Christopher Tan, chief executive of fee-based financial advisory firm Providend, said that the regulations require sellers and advisers to offer financial advice to retail investors who are keen on complex products. The effectiveness of the regulations thus depends in large part on the professionalism of advisers.

"They'll have to go through a financial adviser, which is the lesser of two evils," he quipped. "There was a time in which they were selling anything that could make them money. Now that financial advisory is regulated, whenever they prescribe these products, it follows a certain process, so it's better today." 

David Gerald, president of the Securities Investors Association of Singapore (Sias), said MAS could go even further and regulate "investor educators" as well. He said in a statement: "Many foreign so-called educators fly in and attract our citizens through advertisements promising high returns without any liability whatsoever, and with no registered office in Singapore, leaving Singaporeans with no recourse."