Financial Requirements for Fund Management Companies

Singapore is widely regarded as a top financial center in the world. Maintaining trust in its capital markets and strong protection for investors, the MAS requires fund management companies (FMCs) to comply with strict regulations which include meeting financial resources standards. As a result of these requirements, owners of licensed businesses must ensure they have adequate capital to handle their tasks and unexpected problems.

In this piece, we look at the financial resources needed by fund management companies in Singapore, highlight the differences by license, discuss capital requirements and give an overview of measures to help fund managers comply with rules.

Why MAS Financial Resources Criteria Matter

Part of MAS’s regulatory system requires financial resources to be assessed. They have a number of very important roles:

• Operational resilience means fund managers must have the funds necessary to maintain operations when difficulties occur.
• Helping sound risk management: Enough resources discourage weakly-capitalized firms from taking too many risks.
• Investor protection: It is very important for investors that their fund managers are financially and morally reliable.
• Protecting the stability of markets: Having capital requirements helps prevent big problems when firms that are not managed properly fail.

As a result, MAS sets minimum capital requirements, minimum capital adequacy ratios and various financial duties depending on the type of license and operating business model an FMC has.

Types of Fund Management Licenses in Singapore

Before we talk about capital requirements, let’s talk about the three main fund management structures approved by MAS.

1. Registered Fund Management Company (RFMC)
   • Can keep and invest money for up to 30 qualified investors.
   • We can only manage up to S$250 million in assets.
   • Usually, this plan is appropriate for both new and boutique fund managers.
2. Licensed Fund Management Company (LFMC)

There are two separate categories within this discipline:

1. A/I Local Fund Markets Contracts
2. Retail LFMCs

1. Venture Capital Fund Manager (VCFM)
   • Only manages venture capital funds and enjoys a simple regulatory approach.

Each type of license requires different amounts of funding.

MAS Capital Requirements Singapore by License Type

MAS licensing requirements for fund managers Singapore include a base capital requirement for each category of FMC. Base capital consists of settled ordinary shares and unallocated earnings, not including preference shares or similar securities unless approved by MAS.

1. Registered Fund Management Company (RFMC)

• The base capital that a CA firm needs is at least S$250,000.
• While RFMCs do not have a Capital Adequacy Ratio (CAR), they are required to hold enough capital to cover both their firm’s and clients’ financial factors.

2. A/I Licensed Fund Management Company (A/I LFMC)

• The base capital you need to start a company must be at least S$250,000.
• The Capital Adequacy Ratio (CAR) calls for capital reserves of at least 120% of the bank’s required operational risk, determined by the method from MAS.

3. Retail Licensed Fund Management Company (Retail LFMC)

• Aspiring film companies must have $1,000,000 in base capital.
• To comply with CAR, a bank must gather financial resources amounting to no less than 120 percent of its total risk requirement, considering operational, credit and market risk.

The responsibility of helping the general public with their money makes Retail LFMCs subject to the highest capital requirements.

4. Venture Capital Fund Manager (VCFM)

• The minimum base capital you must have is S$250,000.
• Although there is no required capital, MAS expects VCFMs to have done so.

Understanding Capital Adequacy for Fund Managers

In addition to the main capital MAS requires, specific FMCs are obliged to have enough financial resources to cope with risk-based capital standards. To determine this, a system considers many things, including:

• This requirement explains risk that is caused by actions, systems or employees of an organization.
• Key Risk: This comes from the shifting prices in the market.
• Credit Risk Requirement: Counterparties could cause a default and resulting losses.

The Capital Adequacy Ratio (CAR) formula is as follows:

CAR (%) = (Financial Resources / Total Risk Requirement) × 100

According to MAS, special accounts must exceed 120% as safety funds at all times. If a bank fails to meet this standard, it should report it immediately to MAS and follow necessary corrections.

What Qualifies as Financial Resources

Examples of financial resources are:

• Ordinary shares for which the full subscription amount has been paid
• Retained earnings
• MAS must approve subordinated loans before they can be arranged.
• Part of our investments are reserves and less liquid assets.

They do not account for intangible assets, deferred tax assets or assets that are put up as security.

Additional MAS Licensing Financial Requirements

1. Professional Indemnity Insurance (PII)

Most of the time, MAS does not force FMCs to keep PII, but a few such as retail LFMCs, could be made to maintain it. The FMC and the investors are insured against losses arising from negligence, errors or fraud by this insurance.

PII acts as risk management which in turn supports banks’ ability to remain stable.

2. Liquid Asset Maintenance

MAS also urges FMCs to always have enough liquid assets to pay their short-term debts. These means cash itself, cash equivalents and securities that can be quickly sold in the open market.

FMCs are advised to project cash flow often to make certain they have sufficient funds.

MAS Filing and Compliance Obligations

Every year, fund management companies must file documents to MAS for MAS to understand their financial status. These include:

• Financial statements that go through an annual audit
• Capital adequacy returns for every quarter
• The way to get these differs by license, whether on a monthly or quarterly basis

The foundation may visit institutions to ensure all financial responsibility requirements are fulfilled.

A lack of capital assets may lead to:

• Taking away or suspending a driver’s license
• Monetary penalties
• Tighter regulations are being applied.
• Reputational damage

Common Mistakes in Managing FMC Financial Requirements

Fund managers may encounter these common difficulties and know how to deal with them.

1. Underestimating Operational Risk

When entrepreneurial FMCs are just starting, they often overlook how expensive operations can be. To have enough resources, you should precisely forecast technology, human resources and compliance expenses.

2. Relying Only on Minimum Capital

There are FMCs that think as long as they meet the basic capital requirement, they are safe. MAS hopes firms will hold more funds than simply the threshold amount.

Be sure to store at least 20–30% more in capital than the minimum, in case something unexpected happens or you lose money.

3. Poor Recordkeeping

Overlooked documentation of capital, expenses and reserves may cause MAS to identify compliance issues during an audit or inspection.

Note: Bring in qualified people from finance and compliance or rely on professional administrators for your funds.

Financial Checklist Before MAS Fund Management License Application

If you’re planning to get a fund management license in Singapore, make sure you understand the financial basics through this checklist:

• Be sure your company’s paid-up capital is equal to or greater than the minimum required.
• Make sure to include bank statements and shareholder resolutions among your capital documents.
• Make sure your budget covers about a year and a half of running costs.
• Set your capital higher than the minimum required by MAS.
• Get reliable accounting and reporting set up.
• Consider protected information when dealing with retail funds.
• Look over the templates and the rules for filing set by MAS.

Conclusion: Meeting Financial Requirements for Fund Management Company Licensing

Because Singapore has many strict regulations in the fund management industry, maintaining sufficient finances is important for operations and convinces investors about the integrity of the business.

Key takeaways:

• The capital needed for a minimum base starts at S$250,000 and goes up to S$1 million, depending how your license is issued.
• Of all the LFMCs, retail companies are held to the greatest individual financial scrutiny.
• Risk management always includes using Capital Adequacy Ratios and creating financial buffers.
• It is important to meet financial resource requirements all the time.

For those hoping to be granted a MAS fund management license, getting a clear view of these requirements is important for their future growth.