Tighter fintech watch likely after Chocolate Finance fallout

The central bank might impose reserve requirements to meet withdrawal demands.

The Monetary Authority of Singapore (MAS) might have to impose stricter liquidity requirements on fintech firms after Chocolate Finance faced financial distress due to a surge in withdrawals, analysts said.

“While current regulations are strong, authorities may refine guidelines around minimum liquidity requirements to ensure fintech firms hold sufficient reserves to meet withdrawal demands," Li Yang, a senior lecturer at the School of Business of Singapore University of Social Sciences, told Singapore Business Review.

Regulators might mandate fintech companies to hold a portion of their assets in highly liquid forms, such as cash or equivalents with short maturities, he said, citing the European Banking Authority's (EBA) draft regulatory technical standards as a model.

“The EBA has proposed that a certain percentage of the reserve assets should have maturities no longer than between one to five working days to ensure adequate liquidity,” he said in an emailed reply to questions.

Unlike traditional banks, fintechs are not subject to strict rules, including reserve requirements that force them to keep a certain amount of cash. Deposits with fintechs such as Chocolate Finance are also not insured by the Singapore Deposit Insurance Corp. because it is not a bank.

Li said regulators could require fintechs to put at least 20% their assets in investments maturing in five business days to enhance liquidity. The threshold is “illustrative” and would need to be tailored to the risk profile of a specific firm.

Henry Tan, group CEO and chief innovation officer at accounting firm CLA Global TS Holdings Pte. Ltd., said tighter liquidity requirements would likely be imposed on fund management companies that sell complex or high-reward products.

In March, fund management company Chocolate Finance suspended its instant withdrawal function, citing unusually high demand, and announced that withdrawals would now take three to 10 working days to process.

READ MORE: Chocolate Finance completes March redemptions processing

The move came after influencers and financial bloggers flagged concerns over the company's decision to stop supporting AXS bill payments amid a surge in rewards-driven use that made it unsustainable.

Tan described the Chocolate Finance incident as a consequence of insufficient scrutiny and oversight of “financial influencers.”

“While it is licensed by the MAS as a fund management company, it is not a bank and therefore not subject to the same capital adequacy and depositor protection requirements,” he said in an emailed response.

“The general public may not fully understand these distinctions, especially when investment products are promoted by financial influencers without adequate financial expertise,” he added.

Tan advised fintech firms to prevent miscommunication by working with trusted voices or educating users directly, whilst Li cited the need for clear communication during crises, including having a crisis plan, dedicated support, and timely user updates.

“The Chocolate Finance incident serves as a reminder of the importance of liquidity and operational preparedness,” Li said. He added that regulators would likely refine transparency rules, including on cash availability.

Tan expects clearer guidance on the types of products licensed fund managers can offer and  how they structure reward systems.