New Digital Bank Licences in Singapore

New Digital Bank Licences in Singapore Option Digital Full Bank (DFB) Digital Wholesale Bank Restricted DFB DFB Eligibility Control Applicants must be Singapore-headquartered and controlled by Singaporeans. Joint ventures between Singapore and foreign companies are eligible if the joint venture meets the headquarter and local control requirement2 Applicants can be local companies or foreign companies New framework for Digital Full Banks and Digital Wholesale Banks Digital full banks will have to go through a two-stage licensing process to minimise risk to retail depositors – initially they will be treated as restricted digital full banks and will be subject to certain restrictions (in relation to deposit caps, business restrictions, and lower paid-up capital) before graduating to become full functioning digital banks with all restrictions lifted1 . By contrast, the licensing framework for digital wholesale banks will be implemented in a single phase. Set out in the table below are certain requirements and restrictions for the 2 types of licences. 1 The factors that the MAS will consider are: (i) business and financial performance; (ii) quality of loans, products and customer service; (iii) ability to serve needs of identified segments; (iv) risk management and compliance track record; and (v) general management and profitability of the business. 2 MAS will presume there is control if the Singaporean and/or his related parties hold the largest shareholding and have management control over the joint venture. Introduction On 28 June 2019, the Monetary Authority of Singapore (“MAS”) announced that it will issue up to 5 new digital bank licences comprising 2 digital full bank licences (permitted to deal with retail clients) and 3 digital wholesale bank licences (permitted to deal with SMEs and non-retail clients). MAS is working on implementation details and expects to invite applications in August 2019. The 5 new licences will be available to digital players who demonstrate an innovative and sustainable business model even if they have yet to establish a track record in banking – a strong move welcoming non-bank players to become digital banks in Singapore. This marks an addition to MAS’ existing regime which for more than two decades already allowed local banking groups to set up standalone digital banks under MAS’ internet-only bank framework. In this client alert, we provide an overview of the new licensing framework, as well as commentary on similar developments in Hong Kong. Option Digital Full Bank (DFB) Digital Wholesale Bank Restricted DFB DFB Eligibility (continued) Track Record Must have a track record in operating an existing business in their technology or e-commerce fields Value Proposition Clear on how it can serve existing unmet or underserved needs Sustainability Sustainable digital banking business model Safeguards Singapore Incorporation Incorporated in Singapore Minimum paid-up capital SGD15m SGD1.5bn SGD100m Deposit restrictions Aggregate deposit cap: SGD50m3 Aggregate deposit cap: None No SGD deposits from individuals except for fixed deposits of at least SGD250,000 May open and maintain business deposit accounts for SMEs and corporates Individual depositor cap: SGD75,000 Individual depositor cap: None Required to participate in the deposit insurance scheme provided by the Singapore Deposit Insurance Corporation Capital and liquidity rules Capital: Same as existing local banks Same as existing wholesale banks Liquidity: 16% minimum liquid assets Liquidity: Same as existing local banks Operational restrictions Only simple credit and investment products Banking operations in not more than two overseas markets Full banking functions To only conduct activities within the proposed business scope 1 physical place of business only No minimum account balance and fall below fees Compliance with unsecured credit rules No access to automated teller machines or cash deposit machines network Allowed to offer cashback services through electronic funds transfer at point of sale terminals at retail merchants 1 physical place of business only Exit Plan Must have a viable exit plan to facilitate an orderly wind-up if necessary 2 3 At entry point, banks can only accept deposits from limited scope of depositors. With progression, the entry cap will increase subject to meeting MAS’ criteria – wholesale deposits will not be subject to the aggregate deposit cap once the restricted full bank’s paid-up capital reaches $100m (in line with wholesale bank’s minimum paid-up capital). 3 Singapore Hong Kong Number of licences Up to 5 licences will be granted 8 licences have been granted in 2019 from the first batch of around 30 applications received by the HKMA as at the end of August 2018 Customers Retail and non-retail segments are covered The HKMA intends the regime to target primarily the retail segment, but virtual banks can also provide services to other segments Applicants Targeted at non-bank players Both financial and non-financial firms will be permitted to own and operate a virtual bank but non-financial firm’s ownership will be subject to certain conditions (e.g. control requirements) Nationality & Control of Applicants A digital bank must be incorporated in Singapore There are local control requirements for digital full banks A virtual bank must be incorporated in Hong Kong Where a virtual bank is owned by a nonfinancial firm, ownership must be through an intermediate holding company incorporated in Hong Kong which will be subject to supervisory conditions (e.g. capital adequacy, liquidity, risk management) Minimum paid-up capital Full Bank: SGD15m initially and SGD$1.5bn eventually Wholesale Bank: SGD100m HKD300m is applicable to all licensed banks including virtual banks Minimum Balance Requirements & Low-Balance Fees Not permitted for digital full banks Not permitted. Promoting financial inclusion is a key objective of the regime Commentary and International Developments This development is a welcome one, and forms part of Singapore’s wider focus on digital transformation initiatives over the years to boost business and encourage digital development. There remain matters to be clarified as MAS works through implementation details, for example in relation to parentage, physical presence, and operational restrictions on digital full banks in operating in multiple markets. There are also good lessons and strategic advantages to be gained from comparisons with other similar regimes. Hong Kong is the most relevant jurisdiction for comparison and it remains a little ahead of the digital bank game for non-bank players compared to Singapore – for an overview of the Hong Kong regime please refer to our May 2018 note. Set out in the table below are certain interesting comparison points between the Singapore and Hong Kong digital bank regimes. In all, the introduction of digital banking licences represents a significant change in the Singapore banking landscape and will pave the way for companies with a non-banking parentage to contribute to the development and growth of the banking industry. Based on our work supporting some of the successful digital bank applicants in Hong Kong, key issues to start thinking about now include, for example: > If you are an incumbent bank looking at this regime with interest, is there any non-bank that you could partner with in order to offer a new and innovative service? > If you are a non-bank player looking at this regime, where is the value-add in obtaining this licence and how will you go about preparing relevant systems and controls, as well as staffing arrangements, to be ready if you are successful? For further information, please reach out to any of your Linklaters contacts. 4 Key contacts Linklaters Singapore Pte. Ltd. One George Street #17-01 Singapore 049145 Tel: +65 6692 5700 / Fax: +65 6692 5708 linklaters.com This alert is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Linklaters Singapore Pte. Ltd. (Company Registration No. 200007472C) is a qualifying foreign law practice, incorporated with limited liability in Singapore. Linklaters Singapore Pte. Ltd. is affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC326345. Linklaters LLP is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. 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Sumit Indwar Partner, Hong Kong Tel: +852 2901 5626 [email protected] Adrian Fisher Partner, Singapore Tel: +65 6692 5856 [email protected] Annabella Fu van Bijnen Partner, Hong Kong Tel: +852 2901 5232 [email protected] Niranjan Arasaratnam Partner, Singapore Tel: +65 6692 5858 [email protected] Peiying Chua Partner, Singapore Tel: +65 6692 5869 [email protected]