24 March, 2016
Significant amendments to the Banking Act (“the Act”) were passed by Parliament on 29 February 2016. The last major review of the Banking Act was in 2007.
Following extensive public consultations conducted by the Monetary Authority of Singapore (“MAS”) since 2013, a number of amendments were made to the Act by the Banking (Amendment) Bill (“the Bill”).
At the Second Reading of the Bill on 29 February 2016, three broad areas of amendments (“Amendments”) in the Bill were highlighted: enhancing prudential safeguards, strengthening corporate governance and ensuring adequate risk management controls.
This article provides a brief overview of the rationale and scope of the Amendments, which are intended to improve the robustness of Singapore’s financial institutions and to align MAS’ regulatory and supervisory framework with international best practice.
A. Enhancing Prudential Safeguards
Two key measures were introduced in the Act to strengthen prudential safeguards and enhanced depositor protection:
1.Requirement for local incorporation of banking business
A new Section 55BA will empower MAS to require a foreign bank branch to locally incorporate all or part of its banking business, if MAS is of the opinion that:
(a) it is necessary or expedient in the public interest;
(b) it is in the interest of the depositors of the bank; or
(c) it is in the interest of the financial system in Singapore.
The requirement for local incorporation forms part of a suite of supervisory measures for domestic systemically important banks (“D-SIBs”) that MAS announced on 30 April 2015 and is in line with MAS’ policy intent to impose this requirement on banks that have a significant retail presence1 in Singapore so as to strengthen the resilience of D-SIBs and enhance systemic stability.
In MAS’ Response dated 25 January 2016 (“MAS’ Response”) to feedback received on the consultation on proposed amendments to the Banking Act, MAS stated that it will give the affected banks adequate time to complete their local incorporation process, as it recognized that different banks would require different timeframes to complete the process.
2. Prudential requirements
The Amendments will also empower MAS to set prudential requirements which cap banks’ leverage (leverage ratio requirement) under the new Section 10A and ensure that banks maintain sufficient liquidity (liquidity coverage ratio requirement) by an amendment to Section 38, that are in line with international standards.
B. Strengthening Corporate Governance
A second objective of the Amendments is to strengthen the corporate governance of banks.
1. Credit facilities and exposures to related persons Section 27(3) will be amended to empower MAS to prohibit, restrict or direct a bank to terminate any transaction that the bank enters into with its related parties if it is deemed to be detrimental to depositors’ interests.
The MAS’ Response noted that such power will be exercised judiciously and flexibility will be afforded to banks to unwind transactions, where appropriate. Banks will also not be required to include clauses in their contracts that provide for a possible termination at MAS’ direction.
Bank directors will no longer be liable for their banks’ losses arising from the granting of unsecured credit or exposures to the banks’ director groups.
Section 29(4) and (5) will be repealed as these provisions, which made bank directors jointly and severally liable for any bank losses arising from credit facilities or exposures to the directors and their related parties, discouraged candidates from taking up bank directorships and did not provide effective oversight over banks’ related party transactions (“RPTs”).
At the Second Reading, it was noted that MAS will also “require a bank to conduct all its RPTs on an arm’s length basis, and to obtain board approval before entering into RPTs that pose material risks to the bank”, so as to address potential conflicts of interest arising from these transactions.
Appointment and removal of key appointment holders
The new Section 53A will empower MAS to approve the appointment of key appointment holders of local banks, including the Chief Executive Officer (“CEO”) and Deputy CEO, as well as to remove them if they are found to be not fit and proper. In the latter case, both local and foreign banks must immediately inform MAS after they become aware that a key appointment holder is, in accordance with the Guidelines on Fit and Proper Criteria, no longer a fit and proper person to hold the office or appointment.
Extension of scope of safe harbour provision for auditors; approval and removal of auditors
The Amendments will reinforce the complementary role of external auditors in assessing a bank’s risks and internal controls.
A safe harbour provision has been added via Section 58(10), which will provide immunity to banks’ external auditors who disclose, in good faith, information to MAS in the course of their duties that is required under Section 58.
Section 58(6A) will also be added to empower MAS to direct banks to: (a) remove their external auditors if they have not discharged their statutory duties satisfactorily; and (b) appoint another auditor approved by MAS as soon as practicable after the removal. The MAS’ Response noted that MAS will exercise such removal powers judiciously, after carefully considering all relevant circumstances.
C. Ensuring Adequate Risk Management Controls
1. Implementation of risk management systems and controls
Section 78 will be amended to enable regulations to be made with respect to the risk management of banks. This is in line with
formalising MAS’ expectation for banks to institute risk management systems and controls that are commensurate with their business profiles and operations. Penalties may be imposed by MAS on banks if they fail to do so.
2. Places of business
Section 12 will be re-enacted to introduce a requirement for banks to obtain MAS’ approval to establish new places of business where non-banking activities which are still regulated by MAS (such as money-changing and remittance) are conducted. This will allow MAS to exercise better oversight of banks’ activities, such as by ensuring that the bank institutes adequate measures to prevent money laundering and terrorism financing before commencing business at new locations.
MAS’ Response noted that it will consult on the prescribed activities, as well as the entities, to which the requirement will apply.
D Other Amendments
1.Notification of material adverse developments
The new Section 48AA will formalise MAS’ expectation for banks to inform MAS, as soon as possible, all developments which they have reasonable grounds to believe have materially affected them adversely, or are likely to materially affect them
adversely.
For locally incorporated banks, the notification requirement will extend to any developments which they have reasonable grounds to believe have materially affected adversely, or are likely to materially affect adversely, their related entities.
Such developments would include developments that affect the financial soundness or reputation of the bank, or the ability of the bank to conduct any business referred to in Section 30(1) of the Act.
The notification requirements will allow MAS to take timely and necessary supervisory action.
MAS’ Response noted that all banks are expected to put in place a framework for identifying and assessing events to determine if they constitute an adverse development that has or is likely to have a material impact on the relevant entity.
Banks are also expected to take into account their circumstances and business operations and to exercise sound judgment in identifying and evaluating such adverse developments.
2. Inspection of subsidiaries
To facilitate the consolidated supervision of internationally active banks and merchant banks, the new Sections 46A and 46B will be introduced to respectively:
(a) allow the parent supervisory authority of a foreign bank or merchant bank to inspect all financial activities of the bank or merchant bank in Singapore, upon MAS’ approval; and
(b) empower MAS to inspect overseas subsidiaries of locally-incorporated banks. MAS’ response noted that it will seek prior written approval from the foreign supervisory authority to conduct such inspections, where required under the laws of the foreign jurisdiction.
Section 43 of the Act, which empowers MAS to inspect local banks, will also be amended to include inspection of subsidiaries of local banks.
3. Technical amendments
MAS will be able to collect application fees for new bank licences and the registration of representative offices (addition of Section 7(9)); and The range of penalties in the Act will be aligned for consistency across the various requirements in the Act.
Conclusion
The Amendments reflect MAS’ policy intent to strengthen the resilience of Singapore banks and financial institutions, and at the same time, aim to align Singapore’s financial regulatory regime with international best practices.
1 According to MAS’ Framework for Impact and Risk Assessment of Financial Institutions, a significant retail presence is
defined as having more than 3% of resident non bank deposits, and more than 150,000 deposit accounts with balances below S$250,000: see http://www.mas.gov.sg/~/media/
MAS/About%20MAS/Monographs%20and%20information%20papers/
Apr%202015_%20MAS%
20Framework%20for%20Impact%20and%20Risk%
20Assessment%20of%20Financial%
20Institutions.pdf
