Chapter 3 Capital Markets Services License and Capital Markets Services PDF

CHAPTER THREE Capital Markets Services License & Capital Markets Services Representative's License (CMSRL)  DISCLAIMER □ Brunei Darussalam Central Bank (BDCB) is not responsible for the results of any action taken on the basis of information in this licen...

CHAPTER THREE Capital Markets Services License & Capital Markets Services Representative's License (CMSRL)  DISCLAIMER □ Brunei Darussalam Central Bank (BDCB) is not responsible for the results of any action taken on the basis of information in this licensing examination study manual or any errors or omission; □ BDCB expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted by a person in reliance, whether whole or partial, upon the whole or any part of the contents of this licensing examination study manual; and □ BDCB do not purport to provide legal or other expert advice in this licensing examination study manual and if any legal or other expert advice is required, the services of a competent professional person should be sought.  ABBREVIATIONS AMBD Autoriti Monetari Brunei Darussalam AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions BDCB Brunei Darussalam Central Bank BDCBO Brunei Darussalam Central Bank Order, 2010 BOD Board of Directors CMSL Capital Markets Services Licence CMSRL Capital Markets Services Representative’s Licence CIS Collective Investment Scheme CFD Contracts for Differences CSD Central Securities Depository ECF Equity Based Crowdfunding FCA Financial Conduct Authority FIMM Federation of Investment Managers Malaysia FinTech Financial Technology IOSCO International Organization of Securities Commissions IFRS International Financial Reporting Standards IMF International Monetary Fund ISAF Internal Syariah Audit Framework ICM Islamic Capital Market MMOU Multilateral Memorandum of Understanding OTC Over the Counter P2P Peer-to-Peer SMO, 2013 Securities Markets Order, 2013 SMR, 2015 Securities Markets Regulations, 2015 SFSB Syariah Financial Supervisory Board SFSBO Syariah Financial Supervisory Board Order, 2006 SRO Self-Regulating Organisation SAB Syariah Advisory Body SGF Syariah Governance Framework SPV Special Purpose Vehicle Contents CHAPTER 3 – CAPITAL MARKETS SERVICES LICENCE AND CAPITAL MARKETS SERVICES REPRESENTATIVE’S LICENCE................................................................................. 2 Learning Goals.............................................................................................................................. 2 3.1 Regulated Activities................................................................................................................ 2 3.2 Capital Markets Services Licence and Capital Markets Services Representative’s Licence....... 4 3.3 Different categories of regulatory regime................................................................................. 5 3.3.1 Licensed................................................................................................................. 6 3.3.2 Exempted................................................................................................................ 6 3.4 Licensing requirements for CMSL and CMSRL....................................................................... 7 3.4.1 Background............................................................................................................. 7 3.4.2 Market Conduct....................................................................................................... 9 3.4.3 Fit and proper........................................................................................................ 10 3.4.4 Granting or renewal............................................................................................... 14 3.4.5 Revocation............................................................................................................ 14 3.4.6 Revocation or suspension without representation opportunity...................................... 15 3.4.7 Complaints arrangements........................................................................................ 16 3.4.8 Notification of change............................................................................................ 17 3.4.9 Variation of licence................................................................................................ 17 3.5 Specific requirements for CMSRL......................................................................................... 17 3.5.1 The need for a CMSRL........................................................................................... 17 3.5.2 Additional specific requirements for CMSRL............................................................ 18 3.5.3 Exemptions from examination requirements.............................................................. 18 3.6 Continuous obligations.......................................................................................................... 19 3.6.1 Books................................................................................................................... 19 3.6.2 Clients and Securities............................................................................................. 19 3.7 The Compliance, Risk Management and Internal Audit functions.......................................... 22 3.8 Financial Technology Development....................................................................................... 25 3.8.1 Equity based crowdfunding (ECF) platform operators................................................ 25 3.8.2 Peer-to-peer financing (P2P) platform operators........................................................ 28 Summary..................................................................................................................................... 28 Looking ahead............................................................................................................................. 29 Questions.................................................................................................................................... 29 Additional recommended reading................................................................................................ 30 1 CHAPTER 3 – CAPITAL MARKETS SERVICES LICENCE AND CAPITAL MARKETS SERVICES REPRESENTATIVE’S LICENCE Learning Goals LG1. To describe the various regulated activities that can be undertaken by the Capital Markets Services Licence (CMSL) and the Capital Markets Services Representative’s Licence (CMSRL) holders. LG2. To describe the key licensing requirements of CMSL and CMSRL under the SMO and SMR. LG3. To discuss the continuous obligation expected of CMSL and CMSRL holders. LG4. To explain the importance of compliance. LG5. To describe the process of revocation, cessation, and variation of licence. LG6. To describe the exemption criteria. 3.1 Regulated Activities An entity wishing to conduct a regulated activity in Brunei Darussalam needs to apply for a licence to be a capital markets services provider. The regulated activities, i.e. any activities which constitute investment business as stated in Part II of the Schedule of the SMO are as follows: (1) Dealing in investments This includes buying, selling, subscribing for or underwriting investments (or offering or agreeing to do so). An entity that conducts these activities, be it as a principal or as an agent, is deemed to run a regulated activity. (2) Arranging deals in investments This covers the making, or offering or agreeing to make arrangements where the arrangements were made, either: (a) With a view to another person buying, selling, subscribing for, or underwriting an investment, or (b) With a view to a person who takes part in the above processes (i.e. buying, selling, subscribing for or underwriting investments. 2 Item (a) applies only where the arrangement brings about or would bring about the particular transaction in question. As an illustration, we look at the UK’s Financial Conduct Authority’s (FCA) guidelines. The UK’s FCA says that a person “brings about a transaction only if his involvement...is... [sufficiently important]”1. This means that if he is not involved, that transaction would not have happened. (3) Safekeeping and administration of assets This means safeguarding and administering someone else’s assets or offering or agreeing to do so. It also includes the arrangement of said safeguarding and administration. (4) Managing securities This entails managing (or offering or agreeing to manage) someone else’s assets where the assets include any types of investments. Likewise, if you arrange for a client’s assets to be managed and these assets include investments at your discretion, then this arrangement is also deemed to be “managing securities”. (5) Investment advice This entails recommending other people to buy, sell, subscribe for or underwrite an investment. It also includes exercising a right given by an investment to buy, sell, underwrite or convert an investment. The Guideline on Conducting the Regulated Activity Of Giving Or Offering Investment Advice (CMU/G-6/2019/1) states that investment advice should have three main features: (a) relate to a specific security; (b) be given to an investor or potential investor (or agent thereof); and (c) relate to the merits of the investor or potential investor buying, selling, subscribing for or underwriting the security. Under the guideline, it further clarifies that financial planning activity is also within the regulated activity of investment advice. As a licensed investment adviser, a person may offer investment advice to both sophisticated and retail investors whereas a financial planner may offer investment advice to retail investors only. (6) Establishing a Collective Investment Scheme (CIS) 1 Financial Conduct Authority Handbook, retrieved from https://www.handbook.fca.org.uk/handbook/PERG/8/32.html 3 This means to set up, run or wind up a CIS, including acting as a unit trust scheme’s trustee, an investment company’s operator or other arrangement. In essence, a CIS is an investment arrangement that allows several investors to collectively participate in a scheme to share profits out of the investment. The profits or income that the participants receive arise from the CIS’s assets or property. (7) Using computer-based systems for giving investment instructions. This includes sending on behalf of another firm some investment-related instructions through a computer-based system that enables investments to be transferred without a written instrument. Most communication between the broker and the investor is through verbal and written communication. As technology advances, more communication is done through computer-based systems. It also includes actions made on another person’s behalf pertaining to investment- related instructions sent through a computer-based system, i.e. (a) To offer or agree to send such instructions; (b) Cause such instructions to be sent; and (c) Offer or agree to cause such instructions. 3.2 Capital Markets Services Licence and Capital Markets Services Representative’s License As mentioned in Chapter 1 (Section 1.2), a company wishing to undertake any of the regulated activities in Section 3.1 needs to apply for only one licence known as the Capital Markets Services Licence (CMSL). There are two (2) tiers of licences for a capital markets services provider: (1) Capital markets services licence (CMSL): entitles a company to carry on a business in one or more regulated activities; and (2) Capital markets services representative’s licence (CMSRL): entitles an individual who is employed by or acting for a CMSL holder company to conduct regulated activities for which the CMSL holder company is licensed to conduct. Each licence, be it a CMSL or a CMSRL, is generally valid until 31 December during the year of its approval. However, the Authority may extend the licence tenure to thirty-six 4 (36) months and twenty-four (24) months for qualified CMSL and CMSRL holders respectively. The combination of regulated activities which a CMSRL holder may conduct depends on: (1) The nature of the regulated activities, and (2) Whether there are conflicts arising from running the regulated activities simultaneously. The overall licensing process for CMSL and CMSRL is shown in Figure 12. This is the current process; however, the process may be updated from time to time. Please check the BDCB’s website for the prevailing process. Figure 1. Licensing process 3.3 Different categories of regulatory regime The SMO states that if you wish to carry out a regulated activity, you must belong to one of these four categories of regulatory regimes, i.e. licensed, recognised, designated or exempted. In the context of the CMSL and CMSRL requirements, only the licensing and 2 The recognition application here applies only to the Collective Investment Scheme (CIS). 5 exemption regimes apply. Discussions on the other two regimes, namely recognised and designated, will be done in Chapter Five (5) which deals with market operators. 3.3.1 Licensed The CMSL and CMSRL licensing requirements are covered specifically in Part VII of the SMO. An applicant who is granted a CMSL or CMSRL licence is under the Authority’s continuous supervision. The applicant must comply with the requirements not only for the initial licensing (including capital requirements) but also all other continuing obligations specified by the SMO. The Authority will grant a licence only if it is satisfied that the applicant is fit and proper and complies with the requirements of the SMO and its regulations and where it is in the interest of the country. 3.3.2 Exempted The Authority may exempt a person from holding a CMSL or CMSRL. These exemptions are stated in Section 159 of the SMO as being persons who conduct regulated activity(ies): (1) Solely for its Group-related companies’ undertakings, that is: a. Their parent or parent’s subsidiaries; and b. Their subsidiaries (2) Solely for its staff participation schemes; (3) Solely for its staff participation schemes and its Group-related companies’ undertakings; (4) Where that activity is done in the course of a professional activity that is regulated or governed by legal or regulatory provisions or the profession’s code of ethics; (5) Solely for own account dealing provided they are neither market makers nor dealing outside a regulated market; note that the SMO defines a market maker as one who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling securities against his proprietary capital at prices defined by him; and (6) Such other person or class of persons in respect of any regulated activity as may be exempted by the Authority. For example, the Authority has exercised this power to give specific exemption to people providing investment advice upon request. For further details, please see Brunei Darussalam Central Bank (2017), Guideline to 6  Persons seeking for exemption under Sections 158(2) and 159(1)(f), Securities Markets Order, 2013 from holding a Capital Markets Services Licence and Capital Markets Services Representative’s Licence respectively to provide investment advice upon client’s request, Guideline No. CMU/G-3/2017/3. 3.4 Licensing requirements for CMSL and CMSRL 3.4.1 Background The general requirements for a CMSL holder include the following three (3) items: (1) Sufficiently good repute and sufficiently experienced to ensure sound and prudent management and operation; (2) The CMSL holder must inform the Authority of proposed changes of the persons who effectively direct the business and operations. The Authority shall reject the proposed changes if it believes that this person or these persons may threaten the sound and prudent management and operation of the CMSL holder; and (3) The following organisational arrangements: a. Identify and manage potential adverse effects of conflict of interest. b. Manage risk exposures, implement arrangements and systems to identify key risks, and mitigation measures. c. Any outsourcing of key functions must not significantly worsen the firm’s internal control and the Authority’s ability to monitor compliance. d. Sufficient financial resources to facilitate its orderly functioning. In terms of outsourcing, Table 1 shows the important operational functions which CMSL holders can outsource and to whom: Table 1. Functions which may be outsourced MAY BE OUTSOURCED TO: FUNCTIONS Internal parties External parties 7  Back office Service provider (including subsequent service provider to whom the initial provider further contracts, i.e sub- contractor Internal audit Group External auditor who is not the current auditor Risk management Group Not applicable Compliance For more information, see Brunei Darussalam Central Bank (2020), Notice on Outsourcing for Capital Markets Services Licence Holders, Notice No. CMA/N-1/2020/15. Next, an individual cannot act as a CMSL holder’s representative for any regulated activity(ies) unless he holds a CMSRL for that activity(ies). This requirement, however, does not apply under two (2) circumstances stated below: (1) The type and scope of the regulated activity run by the representative are within the type and scope of, or similar to, those run by the CMSL holder; or the way the representative runs the regulated activity is the same as how the CMSL holder runs it. For example, Company A is licensed to undertake investment advice as an investment adviser and financial planner. Ahmad, as a licensed representative of Company A, is only permitted to undertake the same regulated activity i.e. giving investment advice as an investment adviser or financial planner. He shall not be undertaking the regulated activity of dealing in securities. (2) The Authority exempts a person from needing to hold a CMSRL. 8 3.4.2 Market Conduct BDCB’s Notice on Market Conduct requires all financial institutions (including CMSL holders) to provide greater disclosure and transparency of their product and service offerings, treat consumers fairly, and act appropriately to address deficiencies in controls or provision of products. This Notice covers four (4) key aspects: (1) Disclosure and transparency CMSL holders must: a. Ensure that their customers understand their products and services well; b. Provide customers information on terms and conditions, fees and charges, information availability, and accurate and non-misleading advertisements; and c. Train their staff or representatives to disclose information in a transparent manner. (2) Fair treatment to financial consumers CMSL holders must: a. Treat consumers fairly, honestly and professionally; and b. Only sell products/services which their customers can afford and are suitable for them. Towards this end, CMSL holders need to ensure that they have the resources and procedures to protect the customers’ interests. This includes general rules to cover ethical staff behaviour and acceptable selling practices. The CMSL holders should also obtain sufficient information from the customers so as to better assess their needs/risk profile. Staff who interact with the customers should be properly and sufficiently trained, and also meet the fit and proper requirement. 9 (3) Protection of Customer Data and Information The CMSL holders must ensure that they have a written privacy policy and controls in place to protect customers’ personal data and information and customers have to be informed of the policy including the data to be stored and any changes to the policy. 3.4.3 Fit and proper The term ‘fit and proper’ refers to the following criteria: (1) Honesty, integrity and reputation; (2) Competence and capability; and (3) Financial soundness. Illustration: Suppose Simpur Capital Sdn Bhd applies for a CMSL. We discuss in the following paragraphs the four (4) ‘fit and proper’ criteria which the Authority may consider before granting the licence. (1) Honesty, integrity and reputation First, in terms of ‘honesty, integrity and reputation’, the consideration made by the Authority is not limited to matters in Brunei Darussalam but also abroad. This applies to both the company and individuals representing the company. For instance, a conviction for a criminal offence may not by itself lead to immediate rejection of a licence application. Suppose Ali, a director of Simpur Capital Sdn Bhd, had been convicted of a criminal breach of trust in the past. This does not by itself mean that Simpur Capital Sdn Bhd’s CMSL application will be automatically rejected. Instead, the Authority may consider the application on a case-by-case basis, while considering the following: a. Seriousness of the offence; b. Circumstances surrounding the offence; c. The convicted person’s explanation (in this case, Ali’s explanation); d. The relevance of the offence to the proposed rule; e. The passage of time since commitment of the offence; f. Evidence of Ali’s rehabilitation; 10 g. The impact of Ali’s reputation on his responsibilities and his client; h. Whether Ali has been truthful in his past dealings with regulatory bodies; and i. Whether Ali shows readiness and willingness to comply with the requirements of the regulatory system, legal and professional. (2) Competence and capability In terms of ‘competence and capability’, the Authority considers the following for an individual: a. Whether the person fulfils the relevant training and competence requirements of the Authority; and b. Whether the person has shown by experience and training that he is suitable to perform the function. At the company level, the Authority would also consider that the company has put in place proper organisational arrangements as follows: (1) An organisational structure with clear lines of responsibility and authority; (2) Information technology systems and infrastructure; (3) Internal control systems; (4) Risk management policies and processes; (5) Policies and processes on conflict management and the monitoring of unethical conduct and market abuse; and (6) Policies and procedures to ensure compliance with any written laws and regulations. If Simpur Capital Sdn Bhd intends to engage in more than one activity, it must have: (1) Systems and procedures to monitor all relevant activities; and (2) Control procedures to monitor conflict of interest, unethical conduct and market abuse. (3) Financial soundness Third, in terms of ‘financial soundness’, the Authority would evaluate Simpur Capital Sdn Bhd’s ability to pay its debts. Among the factors considered are whether Simpur Capital Sdn Bhd has outstanding or judgement debts which remain outstanding or 11 unsatisfactory within a reasonable period. If the answer is yes, Simpur Capital Sdn Bhd is not financially sound in which case, the Authority would deem Simpur Capital Sdn Bhd not to be fit and proper. The Authority may accordingly reject the Company’s application. Financial soundness may be seen from two aspects, namely the ability to meet the minimum financial requirements and the sufficiency of its working capital. The minimum financial requirements for a CMSL holder are mentioned in regulations 33(1) and (2), as shown in Table 2. Table 2. Minimum financial requirements for a CMSL holder. Minimum financial requirements in terms of base capital or net The activity for which the head office funds holder is licensed to run (Base capital for a corporation incorporated in Brunei Darussalam / net head office funds for a corporation which is a foreign branch) Dealing and arranging $2 million deals in investments $300,000 or 10% of aggregate margins required, whichever is the Managing investments higher Giving or offering Investment adviser: $250,000 investment advice Financial planner: $100,000 Using computer-based systems for giving Determined by the Authority investment instructions Safekeeping and Determined by the Authority administration of assets In determining whether the applicant is facing financial distress, the Authority may also check whether the applicant has: a. Been subject of any judgement debt or award; b. Made any arrangements with his creditors; and c. Been involved in or in proceedings relating to the following: (i) Filed for bankruptcy; (ii) Had a bankruptcy petition served on him; 12  (iii) Been adjudged bankrupt; (iv) Been subject of a bankruptcy restrictions order; (v) Offered a bankruptcy restriction undertaking; (vi) Had assets sequestrated; and (vii) Involved in proceedings. These financial distress considerations may be illustrated as follows. One of the indicators assessed to gauge Simpur Capital Sdn Bhd’d financial soundness would be whether the court is considering instructing the company to repay his debt (judgement debt). If the court instructs Simpur Capital Sdn Bhd to repay his debt, then that is a debt reward. Likewise, the Authority may consider whether Simpur Capital Sdn Bhd has made arrangements with his creditors. This arrangement may involve settlement of Simpur Capital Sdn Bhd’s debt or even seeking to give Simpur Capital Sdn Bhd more time to pay its debts. Finally, the Authority may check whether the company is unable to pay his debts and has voluntarily applied to declare that it is bankrupt or whether its lenders have filed a court document which seeks to initiate a bankruptcy petition against Simpur Capital Sdn Bhd. To compare, the Monetary Authority of Singapore3 considers, among other factors, the licence applicant’s ability to fulfil its or his financial obligations globally, both in the past and present. The CMSL and CMSRL licensing requirements also apply to Islamic investment businesses. Chapter Six (6) will discuss matters pertaining to Islamic investment businesses in greater detail. There are also Guidelines on the assessment of the minimum ‘fit and proper’ criteria for the appointment of all frontline staff of financial institutions including CMSL holders. The frontline staff must carry out his/her duties efficiently, honestly, fairly and act in the customers’ best interests. The CMSL holders have the discretion to determine how they should implement the Guidelines whose criteria include but are not limited to the first three criteria applicable to the CMSL, namely: (1) Competence and capability; 3 Monetary Authority of Singapore (2018), Guidelines on Fit and Proper Criteria, 8 October 2018, available at https://www.mas.gov.sg/-/media/MAS/resource/legislation_guidelines/insurance/guidelines/Guidelines-on-Fit- and-Proper-Criteria-October-2018-Guideline-No-FSGG01.pdf 13 (2) Honesty, integrity, fairness and ethical behaviour; and (3) Financial soundness. If the frontline staff does not meet these criteria, the CMSL holder may provide in-house capacity building, re-assign the staff to a more suitable role, issue a warning letter, suspend or otherwise, and take any other appropriate action. More details can be found in Brunei Darussalam Central Bank (2017), Guideline on Application for Capital Markets Services Licence and Capital Markets Services Representative’s Licence, Guideline No. CMU/G-1/2017/1. 3.4.4 Granting or renewal Section 160 of the SMO deals with the granting or renewal of the CMSL/CMSRL. The licence is valid until 31st December of the year it was granted and is renewable annually. In granting or renewing a licence, the Authority may: (1) State the regulated activity to which the licence relates; (2) Impose conditions or restrictions, or (3) Relate the licence of a representative (individual e.g. Ali) to the CMSL holder (the company e.g. Simpur Capital Sdn Bhd) which supported the representative’s application. More details can be found in Autoriti Monetari Brunei Darussalam (2017), Guideline on Application for Capital Markets Services Licence and Capital Markets Services Representative’s Licence, Guideline No. CMU/G-1/2017/1. 3.4.5 Revocation The SMO deals with the revocation or cancellation of a CMSL or CMSRL as follows. Under Section 165(1), the licence (CMSL or CMSRL) may be revoked by the Authority’s order. The revocation may also be made on the CMSL holder’s request or with the CMSL holder’s consent. The Authority may, under Section 165(2), order the licence revocation if it sees that the CMSL holder, among others: (1) Does not engage in the approved regulated activity(ies) within twelve (12) months, renounces the licence or has not provided the services for the last six (6) months; 14 (2) Is failing or has failed to satisfy the licence requirements and comply with other obligations imposed under this Order; (3) Obtained the licence by making false statements; and (4) Is assessed to be not fit and proper to be licensed. Nonetheless, the SMO requires the Authority to perform the following before revoking the licence: (1) Give written notice to the CMSL/CMSRL holder: a. Of the Authority’s intention to order the licence to be revoked; b. Reason(s) for the revocation order; and c. Draw attention to the licence holder’s right to make representations. (2) Notify other persons who are likely to be affected Upon deciding to revoke a CMSL/CMSRL, the Authority must notify: (1) The CMSL/CMSRL holder of its decision; and (2) Other persons who are likely to be affected by its decision. Finally, if the Authority refuses to grant or renew or vary a licence or if it revokes or suspends a licence, the aggrieved party may appeal to the Financial Markets Services Panel. We will further discuss the Panel matters in Chapter eight (8). 3.4.6 Revocation or suspension without representation opportunity As mentioned in Section 3.4.4, prior to revocation, the licence holder is given the opportunity to make representations. However, in situations involving winding up, property placed under receivership, bankruptcy and conviction of an offence, the Authority can revoke or suspend a CMSL without giving the licence holder an opportunity to make representations. This applies in the following situations: (1) The licence holder is in the process of being wound up or dissolved be it in Brunei Darussalam or overseas; (2) A receiverand manager or equivalent has been appointed in relation to the licence holder’s property. This may happen when the licence holder is in financial difficulty. 15  The licence holder’s secured lenders may seek a court order to appoint independent parties called receivers and managers to manage the licence holder’s property on matters such as the physical management of the property, the rent or other revenue receipts and expenses, so as to protect the secured lenders’ interests; and (3) The licence holder or any of his directors, chief executive, senior managers or controller has been convicted of any offence involving dishonesty or moral turpitude. Likewise, the SMO empowers the Authority to do so for a CMSRL if the licence holder: (1) Is an undischarged bankrupt; or (2) Has been convicted of any offence involving dishonesty or moral turpitude. 3.4.7 Complaints arrangements The SMO covers complaints made to the Authority that question whether the CMSL/CMSRL holders should remain licensed. For such complaints, the Authority must arrange to investigate accordingly. In order to enhance consumer protection, all financial institutions including CMSL holders must establish a complaint handling function. CMSL holders should provide simple and transparent information regarding its complaint handling function, including illustrating how a customer can lodge a complaint and how the complaint is being handled. Customers may lodge complaints to this function which should have written complaints handling procedures in place. Such procedures should include among others the following: (1) Processes to assess the eligibility, validity, merits, and severity level of all complaints; (2) Processes and organisational structures to handle and investigate complaints; (3) Complaints handling and a list of the types of remedies available to resolve common complaints; and (4) Processes to monitor, track and manage the status of complaints resolution. CMSL holders must: 16 (1) Keep information of every complaint received and retain the documentation for a period of not less than seven (7) years; (2) Report to BDCB on the complaints received on a half-yearly basis; and (3) Provide the complainants with a final response within thirty (30) business days of receiving the complaint or, if there is delay after thirty (30) business days, the CMSL holders must write to the complainant to inform the progress of the complaint. Complainants may escalate their complaints to BDCB if the CMSL holders do not satisfactorily resolve their complaints within Ninety (90) business days of first receiving the complaint. 3.4.8 Notification of change The CMSL/CMSRL holder needs to notify the Authority of any changes relating to the following events within fourteen (14) days after the occurrence of the event: (1) A CMSL holder ceases to conduct business in any of the regulated activities; (2) A CMSRL holder ceases to represent his principal; and (3) Change in any matters relating to the CMSL/CMSRL holder that the Authority is required to maintain in its public register of holders of CMSL. 3.4.9 Variation of licence The licence holder may apply, with supporting documents, to vary his licence for reasons such as: (1) Adding or removing a regulated activity from those listed in the licence; and (2) Varying the name of the licence holder’s principal. In response, the Authority may approve the application and specify conditions or restrictions with the approval. Alternatively, the Authority may refuse the application on the grounds specified in Section 165(2), as discussed in Section 3.4.4 of this Study Manual. 3.5 Specific requirements for CMSRL 3.5.1 The need for a CMSRL No person can represent a CMSL holder to carry out any regulated activity(ies) unless he holds a CMSRL for that activity(ies). 17 3.5.2 Additional specific requirements for CMSRL Besides the above and the general ‘fit and proper’ requirements mentioned in Section 3.4, the SMR specifies the requirements for a CMSRL applicant as follows: (1) He must be at least twenty-one (21) years old; (2) He must provide all relevant information to his principal (a CMSL holder) to facilitate the necessary due diligence; and (3) He must be competent. Moreover, the Notice on Licensing Examination requires the CMSRL applicant to pass the relevant licensing examinations. The relevant licensing examinations recognised by the Authority are from the following four (4) bodies: (1) Brunei Institute of Leadership & Islamic Finance (BILIF); (2) The Securities Industry Development Corporation, Malaysia; (3) The Institute of Banking and Finance, Singapore; and (4) The Singapore College of Insurance, Singapore. The above examination requirements do not apply to the regulated activity of assets safekeeping and administration. The Notice on Licensing Examination also states that an applicant needs to pass the relevant examination once. If, however, an applicant passes the examination but does not conduct the pertinent regulated activity within three years, he would need to retake the examination. 3.5.3 Exemptions from examination requirements The CMSRL applicant may apply for an exemption from the above examination requirements if he has: (1) A distinguished service which includes: a. Twenty (20) years working experience; and 18  b. At least ten (10) years in the capital markets or financial services industry or in a regulatory body that regulates these industries, or (2) Holds a senior management position during his time in the capital markets or financial services or the regulatory body. 3.6 Continuous obligations 3.6.1 Books The CMSL holders need to keep proper auditable books, accounting records and data to facilitate the preparation of true and fair financial statements. These records should be maintained for a period not less than seven (7) years. In order to have true and fair financial statements, a CMSL holder should take reasonable measures to prevent the falsification of, and detect attempts to, falsify the books, accounting records and data. The CMSL holders must also appoint an independent auditor and submit an audited report within three (3) months from the financial year-end. However, the Authority is empowered to appoint a different independent auditor to audit the CMSL holder in the event that: (1) The CMSL holder is unable to submit the audited report on time (where there is no special reason for the failure); (2) The auditor that was previously appointed by the CMSRL holder, during its audit, reports to the Authority that the CMSL/CMSRL holder has contravened the SMO, committed fraud or dishonesty, cannot meet the minimum financial requirements; (3) The auditor found an irregularity that may risk the client’s asset or money; or (4) The auditor is unable to confirm that the claims of the clients and the creditors of the CMSL holder are covered by assets of the CMSL holder. 3.6.2 Clients and Securities A CMSL holder should recommend (with a reasonable basis) the investment transactions or strategies which are suitable for a given client. These are based on the CMSL holder’s due diligence conducted during opening and maintaining the client’s accounts as well as what the client discloses. For instance, Company D conducted an investment risk profile 19 to a new customer, Haziq, a forty (40) year old civil servant which produces that he is a conservative investor. Thus, Company D should not recommend to Haziq a high-risk investment portfolio beyond his risk profile. In the case of an institutional investor (Section 20, SMO), a CMSL holder fulfils the client- specific suitability requirement if: (1) The institutional investor affirms it is willing to forego the protection of the client- specific suitability rule; and (2) The CMSL holder can reasonably believe that the institutional investor can evaluate investment risks and evaluate the CMSL holder’s recommendations independently. A CMSL/CMSRL holder shall not state or imply that the Authority has approved its abilities or qualifications. Besides, the CMSL/CMSRL holder should not make a recommendation of any securities to its clients, who may reasonably be expected to rely on the recommendation, without having a reasonable basis for making the recommendation to the client. A CMSL/CMSRL holder must always act in the best interests of its clients. When receiving a client’s order, a CMSL/CMSRL holder should prioritise the client’s order even if the CMSL/CMSRL holder is selling or buying the same securities. The CMSL/CMSRL holder should not take advantage of this information for its own interests ahead of its client’s. Illustration: Consider, for instance, the following example, as illustrated in Figure 2. 20  Order to buy stock of Kaya Company Awang Malar Untung (Client) (Dealer) Figure 2. Illustration of Client's instruction order to Dealer Malar Untung, an investment dealer, receives an order from Awang, a client, to conduct a huge purchase of Kaya Company’s stocks. Malar Untung expects Kaya’s stock price to increase. Malar Untung then buys Kaya’s stocks for itself before doing so for the client, Awang. In this case, Malar Untung is putting its interests ahead of its customer, Awang, by profiting ahead of Awang. It is unethical and hence, this requirement is imposed to prevent such incidents from happening. Next, a CMSL/CMSRL holder and his staff cannot, as principal, jointly buy or subscribe for any securities. Likewise, he cannot lend monies to his staff (or people associated with the staff) to facilitate the buying or subscription of those securities. This is to avoid potential conflicts of interest in a principal-agent relationship with clients. Typically, the client is the principal and the licence holder (e.g. a stockbroking firm) is the agent. The client engages the licence holder to buy or subscribe for securities (e.g. shares) on the client’s behalf. The client would expect the licence holder to act with proper skill and care in the interest of the client. So, if the licence holder were to buy the shares in its capacity as a principal rather than an agent, the licence holder may have its own interests to consider instead of focusing entirely on the client’s interests. A CMSL holder must disclose his interests in underwriting agreements. Suppose a security is offered for subscription or purchase. Suppose also that a CMSL holder subscribes to buy these unsubscribed/unbought securities in an underwriting agreement. In such a situation, the CMSL holder cannot, within a ninety (90) day period, offer to sell or make recommendations on these securities. The only exceptions are: (1) If the offer to sell these securities are part of the normal trading on a securities exchange or other market operators; and 21 (2) The CMSL holder discloses in the offer or recommendation that he holds or may or may be required to hold these shares. The CMSL/CMSRL holder must clearly segregate his funds from those of the client’s moneys. Suppose a CMSL/CMSRL holder receives money or other assets from or for a client and these items are not meant for the payment of the client’s outstanding contracts with the CMSL/CMSRL holder. In this situation, the CMSL/CMSRL holder must deposit the money in a trust account and the assets should be put in a custody account. Both account types must be maintained separately from the CMSL/CMSRL holder’s accounts. The CMSL/CMSRL holder must also record these items separately (for each client) and use them solely for the client’s agreed purpose. Likewise, a CMSL/CMSRL holder cannot withdraw any moneys from a trust account unless it is used to pay to the person entitled to the moneys or to defray brokerage and other proper charges of the same client. 3.7 The Compliance, Risk Management and Internal Audit functions The CMSL holder must establish suitable operational policies, procedures and measures to detect risk and subsequent risk of non-compliance. It must also take appropriate measures to manage those risks. In this regard, the CMSL holder must establish the functions of compliance, risk management and internal audit. All three functions must operate separately and independently from other functions and activities of the CMSL holder. Of these three functions, the SMR mandates only the appointment of a compliance officer. The compliance officer is subject to assessment and must be authorised by the Authority. 22 Figure 3 Three Lines of Defence The respective roles of these three functions are as follows. First, the compliance function’s responsibilities are: (1) To monitor and regularly assess the adequacy and effectiveness of policies, procedures and measures implemented and actions taken to remedy any deficiency to ensure that the CMSL holder and relevant persons comply with their obligations; and (2) To advise and help the relevant persons responsible for the regulated activities so that they comply with the CMSL holder’s obligations “relevant persons” refer to, in essence, all who work for the firm; this includes those who are seconded to and placed under the CMSL holder’s authority and those who provide services to the CMSL holder under an outsourcing agreement. The SMR further strengthens the requirements of the compliance function so as to carry out its responsibilities effectively: (1) The compliance function must have the appropriate authority, resources, expertise and access to all relevant information; 23 (2) Appoint a compliance officer who is responsible for the compliance function and for reporting as to compliance, including preparation and filing of report to the management regarding compliance, risk control and steps taken if there are weaknesses; this must be done at least annually; (3) The relevant persons involved in the compliance function are not involved in running the services and activities that they monitor; and (4) The relevant persons’ remuneration must not compromise their objectivity. Second, in terms of risk management, the SMR provides that the CMSL holder must perform the following: (1) To establish and maintain effective risk management policies and procedures which identify risks and where appropriate set the risk tolerance levels; (2) To adopt effective arrangements, processes and mechanisms to manage risks pertaining to their activities, processes and systems, in light of its risk tolerance level; and (3) To monitor the adequacy and effectiveness of the policies and procedures, compliance level and measures taken to address weaknesses of those systems and procedures. Third, in terms of internal audit, the SMR stipulates this function’s responsibilities are as follows: (1) To establish and maintain an effective audit plan to examine and evaluate the adequacy and effectiveness of the management systems and internal controls; (2) To recommend ways to enhance the management systems and internal controls; (3) To verify compliance with the recommendations; and (4) To provide reports on internal audit issues to the board of directors and management. SMR stipulates a CMSL holder to: (1) Not engage in transactions which has or may have conflict of interest between the CMSL holder and the funds under its management; (2) Not trade, for its own account, from or to funds under its management; 24 (3) Obtain the Authority’s prior approval for investment in assets other than conventional and Syariah-compliant securities, futures contracts, money market instruments and deposits; and (4) Submit advertisement or promotional material to the Authority for post-vetting. 3.8 Financial Technology Development As technology advances, financial technology (FinTech) solutions have been developed to support or change the way financial institutions provide financial services or conduct regulated activities. Regulators around the world have developed regulatory frameworks to facilitate the governance of these FinTech developments. The following two (2) Sub- Sections discuss some of the regulatory frameworks developed in Brunei Darussalam. 3.8.1 Equity based crowdfunding (ECF) platform operators Crowd-funding, in general, is an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan, and other needs through an online web-based platform. Equity crowdfunding is the practice of raising capital through the issuance of shares to investors using an online platform. In this regard, BDCB had issued a Notice on ECF Platform Operators in August 2017. The Notice sets out the additional requirements for any person who wishes to operate an ECF platform in Brunei Darussalam. An entity which intends to operate an ECF platform must apply for a CMSL to carry out the regulated activities of dealing and arranging deals in investments and investment advice. BDCB, in considering whether to grant a CMSL to operate an ECF platform would consider, inter alia, the following criteria: (1) Clear and transparent rules relating to the ECF platform which cover satisfactory provisions for the protection of investors and public interest, on its proper functioning, promoting fairness and transparency, managing conflict of interest, proper regulation and supervision of any person using and accessing the platform and providing an avenue of appeal against the decision of the ECF platform operator; (2) Able to operate an orderly, fair and transparent market in relation to all transactions which are carried out by means of or through its ECF platform; 25 (3) Board of directors, chief executive and any person who is primarily responsible for the operations must be fit and proper; (4) Sufficient financial, human and other resources for its operation; and (5) Able to demonstrate an IT assurance regarding the system readiness. The Notice also sets out continuous obligations on the board of directors, chief executive or any person who is primarily responsible for the operations of the ECF platform such as: (1) To ensure compliance with all the requirements under the SMO, the Notice and any direction issued by BDCB; (2) To establish and maintain appropriate policies and procedures; (3) To immediately notify BDCB of any irregularities or breach of any provisions under the SMO, this Notice or any directions issued by BDCB; and (4) To immediately notify BDCB of any material changes in the information submitted to BDCB and any matters which adversely affects or is likely to adversely affect the ECF platform operator’s ability to meet its obligations or to carry out its functions under this Notice. An ECF platform operator is required to submit an annual compliance report and its latest audited financial statements to BDCB, within three months after the close of each financial year or such further period that BDCB may allow. Besides, various ongoing obligations are also imposed on an ECF platform operator. This includes: (1) To carry out a due diligence exercise on prospective issuers; (2) To carry out investor education programmes; (3) To ensure that the fundraising limits imposed on the issuer and the investment limits imposed on the investors are not breached; and (4) To have in place processes in monitoring and ensuring compliance to anti-money laundering requirements and others. With respect to minimum financial requirement, such requirement varies depending on the type of investors that an ECF platform operator intends to tap into. If an ECF platform operator deals in securities with sophisticated investors4 only, a minimum base capital of 4 Sophisticated investor refers to the group of investors as defined under Section 20 of the SMO. 26 $50,000 shall apply. Contrastingly, a minimum base capital of $300,000 shall be imposed on an ECF platform operator if it deals in securities with both retail and sophisticated investors. Other requirements relating to outsourcing arrangements, transfer of funds, managing conflicts of interest, advertising restrictions can also be found in the Notice. With regards to an issuer, not all types of entities can be hosted on an ECF platform. Paragraph thirteen (13) of the Notice states that the following entities are not allowed to raise funds through an ECF platform: (1) Commercially or financially complex structures; (2) Public companies and their subsidiaries; (3) Companies with no specific business plan or its business plan is to merge or acquire an unidentified entity; and (4) Any other type of entity that the Authority specifies. In addition, an issuer is required to comply with the requirements on private offering specified in Section 117 (b)(ii) of the SMO. An issuer shall not be allowed to be hosted concurrently on multiple ECF platforms. Common shares are the only securities that can be listed on an ECF platform and offered to investors. As for fundraising limits, an issuer can only raise up to $500,000 within a twelve (12) month period, irrespective of the number of projects an issuer may seek funding for during that twelve (12) month period and raise a maximum amount of $1 million, excluding the issuer’s own capital contribution. An issuer is also imposed certain disclosure requirements requiring him to submit relevant information to an ECF platform operator, among others, key information about the company, its business plan and financial statement and information that explains the purpose of the fund raising and the targeted offering amount. Such information must be true and accurate and shall not contain any information or statement which is false or misleading. In terms of investment limit, sophisticated investors are allowed to invest, without any restriction, in any issuer hosted on an ECF platform. In contrast, retail investors can only invest up to a maximum of $5,000 per issuer with a total amount of not more than $30,000 within a twelve (12) month period. This investment limit applies to both local and foreign investors. 27 Where an ECF Platform operator intends to carry on an Islamic investment business, it must appoint a Syariah Advisory Body and obtain approval from Syariah Financial Supervisory Board. Once such approval has been obtained, the ECF platform operator must disclose the name of the members of the Syariah Advisory Body appointed and a declaration by the issuer that the business activities conducted are in accordance with Hukum Syara’. 3.8.2 Peer-to-peer financing (P2P) platform operators In general, peer-to-peer financing is another type of crowdfunding used to provide loans that are paid back with interest. Both P2P and ECF can be referred to collectively as “financial return crowdfunding” as they provide any financial return in the form of a yield or return on investment. ECF and P2P use online platform that matches investors/borrowers with issuers/debtors for capital raising. The only difference is that ECF deals with equity securities such as shares whereas P2P facilitates capital raising through unsecured loans or issuances of debt securities. On this point, BDCB had issued a Notice on P2P Platform Operators in April 2019. The Notice introduces additional requirements for any person who intends to operate a P2P platform in Brunei Darussalam. The main requirements set out in this Notice is almost similar to those specified in Notice on ECF Platform Operators except few notable differences. The differences are the requirement on risk scoring in the former Notice and the types of securities permitted for offering. The former requires the securities to be rated by the P2P platform operator and the final risk scoring must be made available to the investor at the time of offer. As for the latter, only debentures, rights and interests in investments that are in accordance with Hukum Syara’ are the types of securities that can be listed on a P2P platform and offered to investors. Summary This chapter described the various regulated activities in the capital market sector that can be undertaken by a CMSL/CMSRL holder. An entity or person wishing to carry out regulated activities would typically need to apply for the CMSL and/or CMSRL unless otherwise exempted. 28 We discussed the key licensing requirements for both the CMSL and CMSRL, in terms of the initial licensing application requirements and also continuous obligations so as to maintain the licence. We also discussed the importance of the compliance function whose role is to monitor and regularly assess the adequacy and effectiveness of policies, procedures and measures to ensure that the CMSL holder and relevant persons comply with their obligations. The compliance function also advises and helps the relevant persons so that they comply with the CMSL holder’s obligations. Next, we described the process of CMSL/CMSRL revocation, cessation and licence variation. Normally, prior to issuing a revocation order, the Authority needs to serve a written notice containing the reasons for the revocation. The licence holder is normally given the right to be heard. If there is a cessation in terms of the CMSL business or the CMSRL ceasing to be a representative or if there are material changes in the CMSL’s details, the licence holder needs to inform the Authority within fourteen (14) days. In order to vary the licence, the licence holder needs to apply to the Authority, together with the application fee. Looking ahead The next chapter discusses the running of a Collective Investment Scheme (CIS). Questions 1. What are the key regulated activities that can be undertaken under the CMSL and CMSRL? 2. What are the key differences between a CMSL and a CMSRL? 3. Describe the ‘fit and proper’ criteria for a CMSRL. 4. What are the relationship and liability linkages between a CMSL and CMSRL? 5. What are the requirements and roles of the compliance, risk management and internal audit functions in a CMSL? 6. What are the record-keeping requirements for CMSL holders? 7. What may cause the Authority to consider revocation of a CMSL or a CMSRL? 8. Under what circumstances would a CMSL be prohibited from buying or selling securities upon receipt of a client’s instruction? 29 9. Briefly describe what an equity-based crowdfunding platform is and how it is regulated. 10. Briefly describe what a peer-to-peer financing platform is and how it is regulated. Additional recommended reading 1. Brunei Darussalam Central Bank (2013), Securities Markets Order, 2013, available at https://www.bdcb.gov.bn/SiteAssets/regulatory/legislation-notices-and- regulations/Guideline-on-Handling-of-Conflict-of-Interest-upon-Promoting- Researh-Report.pdf 2. Brunei Darussalam Central Bank (2013b), Notice under the Securities Markets Order, 2013 Notice No. CMU/N-1/2017/6, Notice on equity based crowdfunding platform operators 3. Brunei Darussalam Central Bank (2015), Securities Markets Regulations, 2014, available at https://www.ambd.gov.bn/SiteAssets/Pages/Securities-Market-2015,- Compunding-Offenses-and- Fees/Securities%20Markets%20Regulations,%202014%20V2.pdf 4. Brunei Darussalam (2017), Guideline on application for Capital Markets Services Licence and Capital Markets Services Representative’s Licence, Guideline No. CMU/G- 1/2017/1 5. Brunei Darussalam Central Bank (2017a), Guideline to Persons seeking for exemption under Section 158(2) and 159(1)(f), Securities Markets Order, 2013 from holding a Capital Markets Services Licence and Capital Markets Services Representative’s Licence respectively to provide investment advice upon client’s request, Guideline No. CMU/G-3/2017/3 6. Brunei Darussalam Central Bank (2017), Equity Based Crowdfunding Platform Operators, Notice No, CMU/N-1-2017/6 7. Brunei Darussalam Central Bank (2018), Guidelines on Fit and Proper Criteria for Financial Institutions’ Frontline Staff, Guideline No. FCI/G1/2018/1 8. Brunei Darussalam Central Bank (2019), Notice under the Securities Markets Order, 2013 Notice No. CMA/N-1/2019/13, Notice on peer to peer financing platform operators 9. Brunei Darussalam Central Bank (2020), Notice on Outsourcing for Capital Markets Services Licence Holders, Notice No. CMA/N-1/2020/15 30 10. Brunei Darussalam Central Bank(2020a), Guideline on Handling of Conflict of Interest upon Promoting Research Report, Guideline No. CMU/G-2/2020/9 11. Brunei Darussalam Central Bank (2021), Notice for the Establishment of a Complaints Handling Function Within Financial Institutions, Notice No. FCI/N1/2021/1 12. Brunei Darussalam Central Bank (2021a), Notice on Market Conduct, Notice No. FCI/N1/2021/1 13. Financial Conduct Authority website: https://www.fca.org.uk/ 31