Regulating Fintech: The Case of Singapore

Financial Technology (FinTech) generally refers to new technologies that seek to improve and automate the delivery and use of financial services. More specifically, it has been used to describe technological penetration in various financial areas, including the four main areas of (1) payments, (2) lending, (3) savings and (4) insurance. FinTech investment has increased exponentially in recent years, both globally and in Asia. KPMG’s 2018 figures suggest global FinTech funding rose to US$111.8 billion in 2018, up 120 percent from US$50.8 billion in 2017. FinTech investment in Asia rose to a record high of US$22.7 billion in 2018.

In line with its vision as a hub for global trade and finance, Singapore has undertaken to create a financial ecosystem that is facilitative of the digitalisation of its economy and the development of FinTech. Developing the FinTech sector is part of Singapore’s ‘Smart Nation’ initiative. Furthermore, Singapore’s financial regulator, the Monetary Authority of Singapore (MAS), has undertaken various initiatives to solidify Singapore’s status as a regional ‘FinTech’ capital. Singapore’s effort in building a FinTech sector seems to have borne fruit, resulting in FinTech investments in Singapore for the nine months ending 30 September 2019 jumped 69 per cent to US$735 million from US$435 million in the same year-ago period.

My forthcoming paper entitled ‘Regulating FinTech: The Case of Singapore’ seeks to fill the literature gap by examining Singapore’s experience in regulating and facilitating the growth of the FinTech sector. Based on empirical data, this article discusses how Singapore has encouraged financial innovation and mitigated new risks brought by FinTech through institutional and regulatory measures: (1) regulatory reforms to encourage financial innovation (such as the Regulatory Sandbox); (2) improving the integration of regulatory infrastructure (such as the establishment of the FinTech & Innovation Group); (3) issuing regulatory guidelines and passing laws to provide regulatory clarity in response to the evolving FinTech sector (such as the issuance of the Digital Token Guide); and (4) law reforms (such as the enactment of the Payment Services Act). The article also identifies potential regulatory limitations and challenges, and distils the methods to handle them. This article seeks to provide valuable lessons to other countries on how best to improve the regulatory environment for FinTech.

Parts II and III of the article detail the various important ways in which Singapore has facilitated financial innovation and mitigated new risks associated with FinTech. Part II focuses on institutional improvements such as the establishment of an innovation office and regulatory sandbox to promote financial innovation, before moving on to how Singapore harnesses technology to improve regulatory frameworks and combat emerging risks. Challenges and impediments faced by regulators are also identified in the course of the discussion. Part III examines the various legal and regulatory reforms.

Part IV offers the lessons that can be learnt from Singapore’s experience. First, lack of regulatory capacity in terms of adequate resources, staff, expertise, and tools is a major challenge faced by FinTech regulators. Moreover, regulatory support in the form of sandboxes and innovation offices may also not be feasible in certain jurisdictions due to a lack of financial capacity. A top-down approach to engineering the FinTech sector may be impracticable if countries lack the budget to properly execute developmental initiatives in large countries; in this respect, Singapore is unique in how it is a small yet wealthy city-state.  Second, Regulatory Sandbox may be unnecessary in certain jurisdictions where the regulators have the power to interpret existing laws and rules, which are in any case not so uncertain as to deter innovation. This may be contrasted with Singapore, where MAS generally does not have any inherent powers to interpret legislation, and therefore requires recourse to the courts to interpret the limits placed on financial innovation by existing legislation. The result is that where there is uncertainty as to whether a new financial product service or process complies with existing legal and regulatory requirements, financial institutions (amongst others) are deterred from pursuing innovation. In Singapore’s case, the operation of a Regulatory Sandbox, which allows MAS flexibility to, among other things, test the functioning of regulations, is important to facilitating innovation. Given Singapore’s unique circumstances, it must be borne in mind that establishing sandboxes may not always be the ideal or optimal option, since the success of taking this step depends on the country’s specific circumstances.

The article concludes that in seeking to grow a robust FinTech sector, a number of elements need to be simultaneously maintained and integrated effectively. These are: (1) infrastructure to support innovation, such as innovation offices and regulatory sandboxes; (2) entrepreneurs who are willing to set up start-ups and employees willing to work in those start-ups; (3) venture capitalists who can add value to the start-ups; and (4) an ecosystem where there is sufficient venture funding and a healthy exit environment. However, regulators must also mitigate the new risks brought by the development of FinTech and to achieve the regulatory objectives of financial stability, integrity and consumer protection. The case study of Singapore shows that these can be achieved through: (1) statutory reforms and rule-making, issuing regulatory guidelines to provide greater regulatory clarity; and (2) issuing regulatory warnings and strengthening enforcement actions to mitigate the risks of new technological applications.

Lin Lin is an Assistant Professor of Law at National University of Singapore.