The Monetary Authority of Singapore (MAS) has published a consultation paper seeking feedback on proposals to enhance investors’ ability to seek civil compensation for losses suffered from market misconduct.
This follows MAS’s three “focus areas” to strengthen investor protection, unveiled in July: allowing investors to “ride on” a court action or civil penalty to seek compensation, enabling not-for-profit representative actions on behalf of investors, and introducing a grant to defray the costs of legal cases involving market misconduct.
Released on Oct 24, the 12 questions in MAS’s consultation paper seek views on the finer details of three key proposals, such as the criteria that will be used to designate an independent representative who will bring legal action on behalf of investors. MAS also proposes to remove the statutory cap on compensation for all market misconduct offences.
To mitigate the high costs of bringing legal action, MAS proposes establishing a grant scheme to co-fund “meritorious” investor actions. MAS proposes to collect participation fees from each of the investors upon grant approval, and the consultation paper seeks views on whether a participation fee of $200 and $500 per investor for “piggyback” action and independent action respectively would be appropriate.
Piggybacking refers to investors who “ride on” a court action or civil penalty to seek compensation.
According to MAS, the participation fee will discourage “frivolous participation” in investor lawsuits. “However, MAS will be mindful to calibrate the fees at an amount that is affordable for retail investors who have already suffered financial losses. The amount of participation fees will reflect the complexity and amount of resources likely needed for different types of recourse.”
See also: Resource for recourse: How should MAS enhance avenues for investor recourse?
MAS adds: “For piggyback actions, the market misconduct would have been established via public enforcement actions, and therefore less investigative, analytical and legal work would be needed for the civil action.”
The consultation will close on Dec 31.
Three key proposals
See also: Investor recourse ideas from US, UK and Taiwan
In an Oct 24 statement, MAS says its three key proposals to strengthen the investor recourse regime are to facilitate self-organisation, provide access to funding and reduce legal barriers to civil action.
Firstly, while investors impacted by market misconduct can bring collective action to strengthen their case through pooled resources and shared evidence, they may face difficulties organising themselves and finding someone willing to lead the action, says MAS.
Under the law, a third party can assist claimants, but it cannot bring action on behalf of claimants. To address this challenge, MAS proposes introducing a mechanism that would allow an independent party to be appointed as a designated representative to coordinate and bring legal action on behalf of affected investors.
To prevent “potential profiteering behaviour and vexatious litigation”, the designated representative must satisfy specified criteria such as having no conflicts of interests and no direct financial interest in the outcome of the case, says MAS.
Secondly, MAS says one of the most significant hurdles for investors in taking legal action is the upfront costs involved. Market misconduct cases may be complex, requiring specialised legal expertise, expert witnesses and detailed financial analysis — all of which come at substantial expense.
Recognising this, MAS proposes establishing a grant scheme to co-fund “meritorious” investor actions. The grant scheme will also seek to defray the costs of the designated representative in organising and coordinating investors.
However, MAS says it is “cognisant” that providing funding without adequate controls risks encouraging “opportunistic litigation”, which would waste judicial resources and impose unnecessary costs on market participants. “Accordingly, MAS proposes appropriate grant parameters, co-payment features and a governance framework, to ensure that the scheme supports genuine claims while preventing abuse.”
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Thirdly, while there are existing legal provisions that facilitate investors’ pursuit of compensation claims, MAS proposes to refine these provisions.
This includes simplifying the procedural steps by which investors may bring a piggyback claim.
MAS also proposes to extend the scope of the piggyback claim to allow investors to bring compensation claims that reference not only a criminal conviction or civil penalty order, but also a default judgment or consent order against the wrongdoer, or a civil penalty settlement which the wrongdoer has entered into with MAS.
This will allow investors to use a wider range of resolved enforcement cases where there is admission of liability to commence piggyback claims, says MAS.
The financial regulator also proposes to ease investors’ proof of reliance in cases of misstatements or omissions in relation to the trading of capital markets products. “This recognises that reliance may be difficult to establish, for instance, if there are concurrent market rumours or business developments relating to the listed company.”
MAS also proposes to remove existing statutory caps that limit compensation amounts, so that the court may determine compensation amounts based on the particular circumstances of each case. This will be consistent with the court’s standard approach to assessing damages in civil claims, adds MAS.
“Over the course of the year, the equities market review group has announced measures to increase investor interest, improve our ecosystem’s attractiveness to quality listings and adopt a more pro-enterprise regulatory stance while strengthening investor confidence,” reads MAS’s announcement.
“An important plank of the review group measures is to strengthen investor protection through enhancing investor recourse avenues against market misconduct,” adds MAS. “An effective investor recourse regime gives investors greater confidence to participate in the securities market.”
The enhancement of investor recourse avenues is intended to complement public enforcement actions, says MAS. “MAS will continue to work with relevant authorities to pursue and take firm actions against wrongdoers.”
MAS invites views and suggestions from interested parties on the proposals set out in its consultation paper, available here.
Here is the list of 12 questions in full:
Question 1. MAS seeks views on its proposal to allow a designated representative to bring legal action on behalf of the investors for market misconduct cases.
Question 2. MAS seeks views on the three key criteria for the approval of a designated representative.
Question 3. MAS seeks views on providing funding support to retail investors seeking collective civil action for alleged market misconduct.
Question 4. MAS seeks views on the proposed grant parameters and any other grant parameter which will support the objectives of the grant scheme.
Question 5. MAS seeks views on whether a participation fee of $200 and $500 per investor for piggyback action and independent action respectively would be appropriate.
Question 6. MAS seeks views on whether the grant scheme should seek to recover the grant amount dispensed from the total compensation successfully awarded, before allowing the balance to be distributed to the participating investors.
Question 7. MAS seeks views on the proposed governance arrangements for the grant scheme.
Question 8. MAS seeks views on the proposal to expand the piggyback provision to allow investors to file compensation claims by riding on civil penalty settlements, default judgments and consent orders, which contain an admission or finding on the wrongdoer’s liability.
Question 9. MAS seeks views on the proposal to simplify the process for investors to use the piggyback provision.
Question 10. MAS seeks views on the proposal to facilitate proof of reliance by investors in cases of misstatements or omissions in relation to the trading of capital markets products.
Question 11. MAS seeks views on the proposed mechanics by which proof of reliance may be facilitated, such as by providing that proof of certain matters is sufficient to demonstrate the requisite reliance or ignorance.
Question 12. MAS seeks views on the proposal to remove the statutory cap on compensation for all market misconduct offences, and for the Court to determine compensation amounts on a case-by-case basis.
Read this week's The Edge Singapore cover story on investor recourse:
Resource for recourse: How should MAS enhance avenues for investor recourse?
