To get innovation right, we must get regulation right
By Ravi Menon
In his speech during the release of MAS Annual Report 2017/18, Ravi Menon, managing director, Monetary Authority of Singapore, gave an update on the progress of the country’s financial industry transformation map.
- The finance and insurance industry grew an average of 3.3% in 2016 and 2017, supported by strong growth in the asset management, wealth management, corporate debt issuance and life insurance businesses
- The industry saw a net increase and close to projected growth in job creation, with more professionals being trained and re-trained amid an overall shortfall in IT talent
- MAS is on a learning journey and recognises the need for a pragmatic and flexible approach to facilitate innovation, at the same time ensure industry safety and soundness, and improve the management of “regulatory sandbox”
The Financial Services Industry Transformation Map (ITM) sets out strategies co-created by the Monetary Authority of Singapore (MAS) and the industry to make Singapore a leading global financial centre in Asia.
We have set ambitious targets over the 5-year period from 2016 to 2020 such as a value-added growth in financial services of 4.3% per annum and creation of 3,000 net jobs in financial services and 1,000 net jobs in fintech per annum.
We are now exactly at the half-way mark of the ITM; let me give a report card on how the industry has fared so far.
Financial services—defined as the finance and insurance industry excluding holding companies, slightly different from the DOS definition—grew an average of 3.3% per year during 2016 and 2017. This is below the 5-year target of 4.3% per annum. Financial services growth was very weak in 2016, at just 1.8%, reflecting slower regional growth and trade. Growth rebounded strongly to 4.9% last year, driven by the strong performance of the fund management segment and steady growth in financial intermediation. The growth momentum has been sustained in the first half of this year and we are looking at another good year for financial services. We remain confident of meeting the 5-year average growth target of 4.3%.
We saw a net increase of 7,800 jobs in financial services and fintech over 2016 and 2017, close to our ITM target of 8,000 jobs.
Job growth was mainly driven by the insurance and fund management industries, and to a lesser extent by the banking industry. Information technology has emerged as a key functional area driving hiring demand across financial services—some of the fastest growing job roles are in software development, cybersecurity, data analytics, artificial intelligence, and business process engineering.
Fintech alone is estimated to have contributed close to 2,000 of the net jobs created during these two years. MAS expects job growth in financial services this year to exceed the ITM target.
Let me now take stock of progress in each of the three pillars of the ITM: business strategies, jobs and skills; and innovation and technology.
Singapore continued to do well in asset management, with assets under management (AUM) increasing by an average 12.7% p.a. over 2016 and 2017.
Growth was robust across both traditional and alternative assets on the back of higher valuations and continued inflows to Asian markets.
We continued to anchor the operations of global asset managers in Singapore. For example, AIA set-up its first group-wide regional investment hub here. Efforts to grow the private financing market are also showing signs of promise.
Alternative AUM grew by an average 16.9% p.a. over 2016 and 2017, led by venture capital and private equity. There are currently about 220 VC and PE managers located in Singapore with the majority of PE managers focused on growth and buyout strategies. Around 85% of their investments are across Singapore and the region, targeting higher growth sectors such as consumer and retail, healthcare and IT.
We are also doing well in wealth management, with private banking AUM expanding an average of 6.6% per annum over 2016 and 2017. A growing number of Asia’s wealthiest families have set up Family Offices in Singapore to access investment opportunities in Asia. Singapore’s growth as a wealth management hub rests on its reputation as a clean and trusted jurisdiction. Singapore’s activation of a broad network of Automatic Exchange of Information (AEOI), relationships, reaffirmed its commitment to international standards of transparency and tax cooperation.
Singapore is emerging as a leading Asian bond market, with corporate debt issuance volumes rising by 22% p.a. over the last two years.
MAS’ Asian Bond Grant scheme has supported Asian companies to raise international capital in Singapore. Much of the increase in debt issuances here was by Asian issuers—mostly from China, Indonesia and India—raising debt capital in Singapore for the first time. Green bonds are also gaining traction, with local and foreign issuers issuing over S$2 billion of green bonds here.
The life insurance industry is doing well, with net premiums growing by 16% per annum over 2016 and 2017.
Growth was boosted by Asian consumers demanding more savings and investment products in search of yield.
Non-life insurance business is, however, facing structural challenges and weak growth. Net non-life premiums grew by just 2% per annum over 2016 and 2017. Business conditions have been challenging globally, due to excess capacity and downward pressure on premiums.
But Singapore remains attractive as the premier reinsurance hub in Asia. Global reinsurance players such as Swiss Re and Munich Re have recently set up their regional headquarters here. And we are making a push into alternative risk solutions such as risk pools and insurance-linked securities or ILS.
Foreign exchange trading declined last year although we remain the third largest FX centre globally.
Singapore’s average daily FX trading volume grew by 20.5% in 2016 but declined by 6.7% in 2017. This was mainly due to lower volatility in key currencies such as the Japanese Yen; and some temporary trading desk turnover which has since been filled.
We are making headway in our strategy to position Singapore as an e-trading hub for FX, facilitating better price discovery during Asian hours and better execution for players in the region. XTX Markets, a global FX liquidity provider, has announced its plans to set-up its pricing and trading engine in Singapore. We are working with other key banks and e-trading platforms in the pipeline.
Jobs and skills
More finance professionals are going for training and development. Some 27,000 financial industry professionals have benefited from SkillsFuture programmes during 2016-2017.
There remains, however, a shortfall of specialised talent in IT—which we are addressing in two ways: MAS, IMDA, the Institute of Banking and Finance and institutes of higher learning are working together to deepen the local IT talent pool at the entry level. IBF is engaging financial institutions on developing local IT talent through company-led training and professional conversion programmes (PCPs).
We have ramped up efforts to reskill and redeploy banking professionals into emerging roles.
Job roles are changing as banks pivot towards digital banking models over time. We must ensure that our banking professionals can take on these new roles.
More than 3,000 consumer banking employees will be reskilled through a PCP over the next two years, acquiring relevant skills in sales, product development, and digital engagement. PCPs are also in the works for two more areas in banking – wealth management (which is rapidly growing), and operations and support (which is undergoing disruptive change).
IBF will launch a dedicated career centre next month, to offer integrated support across career planning, skills development, and job placement. While the financial industry continues to create jobs on a net basis, there is a lot of churn and movement in the industry. Skills development, career pathways, and job placements need to be looked at holistically.
IBF will leverage on its strong network with financial institutions to help professionals navigate and make their career transitions. IBF will also work closely with partner agencies – e2i, NTUC and WSG – to support financial sector professionals looking to move into other sectors.
Innovation and technology
The third pillar of the ITM is innovation and technology.
Singapore has global mindshare today as one of the leading Fintech hubs in the world. Our fintech agenda is well known and there will be other occasions to talk about the various initiatives.
I want to emphasise the central role played by regulation in promoting innovation and technology.
To get innovation right, we must get regulation right.
This is a creative tension – managing risk while facilitating innovation. It calls for a pragmatic and flexible approach; there is no one-size-fits-all approach. Sometimes, it means not rushing to regulate so that we do not front-run innovation.
For example, in the case of blockchains or distributed ledgers where the technology is still evolving. Sometimes, it means updating regulation to take account of new technologies and new risks. Or in the case of cloud computing and robo-advisers, where we issued special guidelines.
Sometimes, it means being specific about the risks we want to address and taking a targeted approach to regulation. In the case of crypto assets, where we focus on the crypto intermediaries for anti-money laundering purposes rather than the crypto assets.
Sometimes, it means taking an activity-based approach to regulation, setting rules for specific activities rather than the entity as a whole. An example is the case of the proposed Payment Services Bill, where licensees will be regulated according to the activities they conduct because different activities pose different risks.
The trick is to identify the risks we are most concerned with and finding the most targeted way of regulating those risks so that the business has maximum latitude to innovate and grow.
Now, there is one more approach in MAS’ tool kit and that is the “regulatory sandbox”.
The regulatory sandbox facilitates live experimentation of innovative financial services and business models within pre-defined boundaries. MAS is probably the second jurisdiction in the world to introduce the regulatory sandbox and it is one of the most comprehensive ones around. It has attracted much attention here and abroad and I thought I will end off with a quick progress report on what has been happening in the sandbox.
The sandbox basically provides a conduit for both regulated and unregulated firms to engage MAS with innovative ideas and proposals. Since its launch in June 2016, MAS has provided guidance to more than 140 firms and individuals. We have received more than 40 sandbox applications, covering a broad range of financial services and technologies. The services offered include investment management, broking, crowd funding, cross-border funds transfer, insurance, and financial advisory. We see interesting applications of big data, distributed ledgers, machine learning and artificial intelligence, to increase efficiency or derive new insights.
Of the 40 over applications we received: Nearly half withdrew their applications for various reasons, exemplifying the fluidity of innovation and the natural volatility in the business of start-ups.
About a third proceeded without the need to be tested in the sandbox. We take this as a positive reflection of our existing regulations, which provide sufficient flexibility for innovative models while safeguarding against risks. It is not necessary that innovation needs to happen only in a sandbox.
The remainder of the applications—about one in five—were approved or are under review. To cite a few experiments in the sandbox: Kristal Advisors, is experimenting with machine learning to determine and recommend suitable investment portfolios for its customers. Thin Margin, a start-up that offers online money-changing at competitive exchange rates, is creating a hassle-free experience for its customers. LumenLab, is experimenting with distributed ledgers on gestational diabetes insurance, which can trigger claims payout automatically to the insured upon meeting certain conditions.
This has been a learning journey for MAS too and we have been trying to improve how we manage the regulatory sandbox.
We have streamlined our internal processes and made the sandbox application form more straightforward, reducing the processing time for sandbox applications. We are now exploring the idea of “pre-defined sandboxes” where firms can start their experiments more quickly without going through the rigorous review with the current case-by-case approach.
The global economy has had a good run so far and signs are that the rest of the year will be reasonably good. But as you know from following the World Cup, things do not always turn out as expected. The risks that could derail economic growth have heightened somewhat and bear close watching.
The financial sector has been doing well.
Not only growing in importance as a global financial centre, but also serving Asia’s economic development, and facilitating Singapore’s transition to an innovative and digital economy while creating good jobs for Singaporeans.
And Singapore has been able to do this, not only because of the strong partnership between the industry and MAS, but also the stability and trust that underpin the financial system.
Maintaining financial stability and trust are central to MAS’ mission.
The annual report summarises our many regulatory and supervisory initiatives – to make derivatives markets safer, to enhance cyber security, to promote a good risk culture in our financial institutions. The annual report also devotes two pages of infographics to the enforcement actions MAS has taken against those who breach our regulations or fail to meet our standards.
MAS does not tolerate: abuse of our financial system for money laundering or tax evasion; misconduct or manipulation in our securities markets; or mis-selling to consumers who place their trust and money in our financial institutions and their representatives.
But being a no-nonsense regulator does not stand in the way of being also business-friendly. For financial institutions who want to grow their business in Singapore, build up the skills of their employees, or want to innovate or experiment with new technologies, MAS is a happy partner and collaborator.
Keywords: Regulation, Fintech, AUM, AEOI, FX, Technology, Crypto Assets, Blockchain
Guest: Ravi Menon