One of the primary concerns for investors when managing personal wealth is the safety of their assets—especially when those assets are held by a third party, such as a custodian. This concern gained particular attention in the wake of the relatively recent incident involving Chocolate Finance.
In Singapore, custodians play a critical role in safeguarding investors’ assets, ensuring operational efficiency, and upholding trust in the financial system. But how secure are these investments, especially in the unlikely event that a custodian closes down?
This article explores how custodians operate in Singapore, the safeguards mandated by the Monetary Authority of Singapore (MAS), and what happens to your investments if the custodian ceases operations. The goal is to provide clarity and assurance to investors seeking peace of mind.
What is a Custodian?
A custodian is a financial institution that holds customers’ securities—such as stocks, bonds, and other assets—for safekeeping. Beyond merely storing these assets, custodians often provide additional services like trade settlement, income collection (e.g. dividends or interest), and corporate action handling.
In Singapore, custodians are typically banks, trust companies, or brokerage firms that are licensed and regulated by the MAS. They may operate under specific licensing regimes such as Capital Markets Services (CMS) licences, or as banks regulated under the Banking Act.
Regulation and Licensing: The Role of MAS
The MAS, Singapore’s central bank and integrated financial regulator, sets strict standards for custodians. Any firm wishing to offer custodial services must be licensed under the Securities and Futures Act (SFA), unless exempted. These custodians are subject to comprehensive regulatory requirements, including capital adequacy, internal controls, anti-money laundering measures, and crucially, asset segregation obligations.
This regulatory oversight ensures that custodians adhere to high standards of governance and transparency, thereby reducing operational and counterparty risk for investors.
Asset Segregation: A Pillar of Investor Protection
A critical investor protection mechanism in Singapore’s regulatory framework is the requirement for asset segregation. Under MAS regulations, custodians must segregate clients’ assets from their own. This means that the investments held in custody are legally separate from the custodian’s proprietary assets.
These client assets are typically held under a trust structure, where the custodian holds the investments on trust for the investor. This legal separation ensures that the custodian cannot use client assets for its own operations, borrow against them, or commingle them with other funds.
What Happens if a Custodian Closes Down?
Despite the safeguards in place, investors may worry about a worst-case scenario—what happens if a custodian becomes insolvent or voluntarily winds up?
Here’s what typically happens:
1. Assets Remain Intact and Legally Yours
Thanks to the segregation rules, the custodian’s creditors have no legal claim to your assets. These investments are not part of the custodian’s balance sheet and are therefore not available to satisfy the custodian’s debts.
2. Transfer to Another Custodian
In the event of a closure, MAS or a court-appointed liquidator will facilitate the orderly transfer of client assets to another licensed custodian. This process ensures continuity and limits disruption to investors. While the process may take some time, your ownership remains intact throughout.
3. Client Notification and Communication
Investors will be informed of the situation and the steps being taken to protect and transfer their assets. During this period, you may have limited access to initiate transactions, but the security of your holdings is preserved.
4. Ongoing Oversight
MAS typically monitors such situations closely and may step in to ensure the smooth handling of clients’ assets, protecting the integrity of Singapore’s financial ecosystem.
Why Singapore Is a Safe Haven for Investors
Singapore’s financial system is widely regarded as one of the most stable and transparent globally. MAS has earned international recognition for its proactive and stringent regulatory approach, which fosters trust and confidence.
Some key advantages of investing through MAS-licensed custodians in Singapore include:
- Strong Legal Framework: Singapore has a robust legal system that supports property rights and enforces trust law effectively.
- Regulatory Discipline: Regular audits, compliance checks, and capital requirements help ensure custodians remain financially sound and operationally reliable.
These factors combine to make Singapore one of the most secure jurisdictions globally for custody services.
What Should We Consider?
At Providend, we work with several platforms to invest and custodise our clients’ investments. Here are some of the factors that we consider when deciding to work with them:
1. Use MAS-Licensed Custodians Only
Ensuring that platforms we work with are licensed by MAS.
2. Understanding the Terms
Reviewing the custody agreement to ensure that assets are always and clearly segregated from the platform’s balance sheet in accordance with MAS regulations and industry best practices, as well as the process in various scenarios.
3. Ongoing Assessment
Remaining active in our assessment of the custodian such as regular engagement with them and providing feedback on their service levels. Therefore, ensuring they provide our clients and us with impeccable and reliable services.
4. Stay Informed
Keeping abreast of market developments and regulatory updates.
Final Thoughts
Custodians play a vital role in the investment process, ensuring the safe keeping and proper management of your assets. In Singapore, the regulatory safeguards—especially the segregation of assets under trust—offer a high degree of protection, even in the event of a custodian’s closure.
By understanding how custody frameworks operate, investors can enjoy peace of mind knowing that their investments are not only professionally managed but also legally protected. In the complex world of finance, this assurance is not just comforting—it’s essential.
This is an original article written by Tan Chin Yu, Lead of Advisory Team at Providend, the first fee-only wealth advisory firm in Southeast Asia and a leading wealth advisory firm in Asia.
For more related resources, check out:
1. Fee-Only Wealth Advisory Practice
2. Discovering Your “Ikigai” with Providend’s Philosophy
3. Here’s Why We Charge a Higher Fee Than Robos
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