Key takeaways
With the implementation of the Guidelines[1], the MAS has continued its focus on enhancing the robustness of the "Monitor and Assess" second prong of its three-pronged approach to regulation and supervision. The Guidelines supplement rather than replace existing regulatory obligations and will give the MAS a similar platform to those already in place in markets like the United Kingdom, Hong Kong and Australia against which to assess the conduct of key FI staff and commence disciplinary or enforcement actions.[2]
In preparing for the commencement of the Guidelines, FIs subject to the Guidelines should do the following:
- Understand where and how the Guidelines may intersect with other existing laws and regulations and the full extent and scope of any increased obligations.
- Identify any gaps in processes and procedures and supplement where necessary to fully implement the Guidelines by the implementation deadline.
Depending on existing processes and procedures, steps that FIs have to take may include the following:
- Ensure all senior managers are clearly identified.
- Clearly articulate the senior manager’s roles and responsibilities.
- Define material risk functions ("MRFs") and identify material risk personnel ("MRPs").
- Implement a clear reporting, monitoring and escalation framework to ensure senior managers stay accountable and MRPs are subject to adequate oversight and control.
- Reconsider incentive and remuneration structures to promote senior manager accountability and appropriate standards of conducts among MRPs.
- Implement or refine the institutional code of ethics and standards of conduct.
- Define appropriate succession plan(s).
- Conduct training to ensure senior managers and MRPs understand their roles and responsibilities, are aware of the new procedures and processes implemented by the FI[s, and fully appreciate the ultimate objectives of the Guidelines.
Appropriate implementation of the Guidelines will potentially take FIs a substantial amount of time as they require application to front, middle and back-office teams. The proposed implementation timetable of 12 months will pass very quickly and it will be important to commence preparation as soon as possible.
Background
The Guidelines, their supporting FAQs[3] and Information Paper[4] were released by the MAS on 10 September 2020. They were originally proposed by the MAS as part of a consultation paper issued in April 2018[5] and we discussed them in more detail in an earlier client alert.[6] Simultaneously with the release of the original consultation conclusions in June 2019[7] the MAS released a further consultation ("Second Consultation"), seeking further feedback on the proposed expanded scope of FIs to which the Guidelines would apply.[8]
The five accountability and conduct Outcomes
The Guidelines represent the latest step by the MAS in its ongoing long-term focus on culture and conduct in FIs, as it seeks the achievement of the following core goals:
- Ethical business practices that safeguard customers’ interests and ensure fair treatment.
- Prudent risk-taking behaviour and robust risk management that support FIs’ safety and soundness.
The Guidelines establish the five accountability and conduct Outcomes that FIs need to achieve.
Outcome 1: Senior managers responsible for managing and conducting the FIs core functions are clearly identified.
Who is a senior manager?
While seniority within an organisation is one factor to be taken into account in identifying senior managers, the MAS requires that the designation should also reflect the following:
- Responsibility for functions that are core to the management of an FIs affairs, including but not limited to the CMFs
- Actual oversight responsibilities and decision-making authority, regardless of physical location
What is a CMF?
The Guidelines contain a non-exhaustive list of CMFs, which provide a benchmark against which to analyse specific functions to determine comparative internal alignment based on an FIs operations. Deviation from the list is possible as some roles may not be applicable and alternative or additional functions may be designated.
The CMF roles include the following: (a) chief executive officer; (b) chief financial officer/head of finance; (c) chief risk officer/head of risk; (d) chief operating officer/head of operations; (e) chief information officer/chief technology officer/head of information technology; (f) chief information security officer/head of information security; (g) chief data officer; (h) chief regulatory officer; (i) head of business functions; (j) head of actuarial/ appointed actuary/certifying actuary; (k) head of human resources; (l) head of compliance; (m) head of financial crime prevention; and (n) head of internal audit.
Outcome 2: Senior managers are fit and proper for their roles, and held responsible for the actions of their employees and the conduct of the business under their purview.
Outcome 3: The FIs governance framework supports senior manager's performance of their roles and responsibilities, with a clear and transparent management structure and reporting relationships.
Outcomes 2 and 3 are closely linked as regards their intended results. An FI must perform due diligence prior to appointing a senior manager and accomplish the following:
- Establish appropriate governance policies and processes to promote accountability and facilitate senior managers' performance of their roles in an effective manner.
- Clearly articulate the roles and responsibilities of senior managers and their overall management structure.
The Board or Head Office of the FI (as applicable) should implement practices resulting in: (a) robust standards and processes to assess fitness and propriety of senior managers; (b) clear specifications of each senior manager's role and responsibilities in management committees; (c) appropriate delineation of the FIs overall management structure; (d) appropriate incentive, escalation and consequence management frameworks holding senior managers accountable for their roles; and (e) regularly reviewed and updated succession plans.
The FI may determine the frequency with which reviews of fitness and propriety occur, though at a minimum, they should occur annually or more often if circumstances arise which call a senior manager's status into question.[9] Self-declarations may be used as an aid, though these should not be the sole source of determination.[10] Reporting lines should be clear where matrix reporting applies to more than one person.[11] Incentive structures are encouraged to be implemented by reference to the MAS' previously published Information Paper on Incentive Structures in the Banking Industry.[12]
Outcome 4: Material risk personnel (MRPs) are fit and proper for their roles, and subject to effective risk governance, and appropriate incentive structures and standards of conduct.
Who is an MRP?
MRPs are employees with authority to make decisions or conduct activities that can significantly impact the FIs safety and soundness, or cause harm to a significant segment of the FIs customers or other stakeholders. They include employees in front, middle, and back-office functions, as well as those with supervisory capacity over such functions who are not senior managers. FIs should consider both qualitative and quantitative indicators in determining employees falling within this category.
What steps are required?
The Board and senior management are required to implement appropriate standards and processes to: (a) identify employees in material risk functions; (b) assess their fitness and propriety; (c) facilitate effective risk governance (e.g., by imposing appropriate mandates, decision-making authority, risk limits and supervisory oversight); and (d) subject such employees to standards of proper conduct, training and appropriate incentive structures.
It is expected that the compensation system applicable to MRPs will allow for adjustments based on factors, including risks taken or materialized, profit and loss over time and potential improper conduct.[13] An employee may be designated an MRP regardless of their location, meaning that offshore employees can be captured.[14]
Outcome 5: The FI has a framework that promotes and sustains among all employees the desired conduct.[15]
As part of its Review of Private Banking Sales and Advisory Practices, the MAS considered tone-from-the top as a means by which organisational values and desired employee behaviour were demonstrated.[16] The MAS has continued this approach in the Guidelines, noting that it has a significant impact on the manner in which desired conduct standards are cascaded down and embedded within the organisation.
Pursuant to the Guidelines, the Board and senior management should ensure a framework is in place to address: (a) standards of conduct for all employees; (b) consistent and effective communication of the expected standards of conduct; (c) appropriate policies, systems and processes to enforce the expected standards of conduct (including regular monitoring, reporting and escalation to the Board and senior management, appropriate incentive structures, consequence management systems and a formalised whistleblowing channel); and (d) engagement strategies with key stakeholders (including depositors, policyholders, investors, corporate and institutional clients and counterparties, shareholders and regulators).
The Guidelines incorporate a positive obligation on the part of the Board and senior management to notify MAS as soon as they become aware of any material adverse development. This includes misconduct, lapses in risk management and controls or breaches in legal or regulatory requirements that have the potential to cause widespread disruption to the FIs operations or business, and/or significantly impact the FIs customers, safety and soundness.
Application - entity level
In releasing the final form of the Guidelines, MAS has confirmed that, unless otherwise falling within an exception, they will apply to all FIs regulated by the MAS that have greater than 50 employees (rather than the 20 proposed in the Second Consultation). The following are the currently applicable exceptions:
- an exempt financial adviser[17]
- an exempt corporate finance adviser[18]
- an exempt trust business[19]
- an exempt over-the-counter derivatives broker[20]
- an exempt futures broker[21]
- an exempt payment services provider[22]
- a Recognised Market Operator incorporated outside Singapore
- a Recognised Clearing House incorporated outside Singapore
- a Licensed Foreign Trade Repository
- the Continuous Linked Settlement Bank
Importantly, the MAS has noted that if an entity has a headcount lower than the threshold, they should still achieve the Outcomes but are not expected to adopt all of the specific guidance contained in the Guidelines.[23] This means that in reality, the Guidelines will apply to all FIs regardless of the number of employees. The MAS may however still require full compliance in circumstances including where there are potential gaps in accountability and oversight, or when necessary, due to the nature and complexity of the FIs operations.[24] Where an FIs headcount subsequently exceeds the minimum of 50, a 12-month transition period will apply to comply.[25]
Application - group basis
The Guidelines will apply on a group basis to: (i) locally-incorporated banks and insurers[26]; and (ii) approved exchanges and approved clearing houses that are operated as a single group.[27] The MAS expects that the responsibilities of senior managers within a parent entity and at a group level will both be specified.[28] Significant downstream subsidiaries and entities within Singapore and overseas (the criteria for determination of which is determined by the parent bank or insurer) should also be identified as a "material business function" and senior managers designated for each reflecting the "Head of Business Function" definition within the Guidelines. The individual downstream subsidiaries and entities within Singapore will also be subject to the Guidelines in their own capacity, while those overseas will only require identification of the "Head of Business Function."
Enforcement
Reflecting the "Enforce and Deter" third prong in its three-pronged approach, MAS has stated that where misconduct, regulatory breaches or offences have occurred, it will take necessary enforcement action against the FI and/or the relevant director, senior manager or employee.
Conclusion
If you have any questions on any of the above matters, please do not hesitate to liaise with your usual contact at Baker McKenzie or the lawyers listed in this Alert.
BM Wong & Leow is a member firm of Baker & McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner or equivalent in such a law firm. Similarly, reference to an "office", means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
[1] https://www.mas.gov.sg/regulation/guidelines/guidelines-on-individual-accountability-and-conduct
[2] Please refer to our Bite-size Briefing for a discussion on the regimes in these markets available at the following link: https://www.bakermckenzie.com/en/insight/publications/2019/07/bitesize-briefings
[3] https://www.mas.gov.sg/-/media/MAS/MPI/Guidelines/FAQs-on-Guidelines-on-Individual-Accountability-and-Conduct.pdf
[4] https://www.mas.gov.sg/-/media/MAS/MPI/Guidelines/Information-Paper-on-Culture-and-Conduct-Practices-of-Financial-Institutions.pdf
[5]https://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/2018%20Apr%2026%20Consultation%20on%20Guidelines%20for%20Individual%20Accountability/Consultation%20Paper%20on%20Proposed%20Guidelines%20on%20Individual%20Accountability%20and%20Conduct.pdf
[6] https://www.bakermckenzie.com/-/media/files/insight/publications/2018/05/al_monetaryauthorityofsingapore_may18.pdf?la=en
[7] https://www.mas.gov.sg/-/media/Response-to-Feedback-Received_Proposed-Guidelines-on-Individual-Accountability-and-Conduct.pdf
[8] https://www.mas.gov.sg/-/media/Response-to-Feedback-Received_Proposed-Guidelines-on-Individual-Accountability-and-Conduct.pdf
[9] See the response to Q1 to section (II) of the FAQs.
[10] See the response to Q2 to section (II) of the FAQs.
[11] See the response to Q3 to section (II) of the FAQs.
[12] https://www.mas.gov.sg/-/media/MAS/Publications/Monograph-or-Information-Paper/2019/Information-paper--Incentive-Structures-in-the-Banking-Industry.pdf
[13] See the response to Q2 to Section (IV) of the FAQs.
[14] See the response to Q4 to Section (IV) of the FAQs.
[15] https://www.bakermckenzie.com/en/insight/publications/2020/03/mas-private-banking-practices
[16] Please refer to our separate client alert available at: https://www.bakermckenzie.com/en/insight/publications/2020/03/mas-private-banking-practices
[17] Persons providing financial advisory services for up to 30 Accredited Investors (AIs) under Regulation 27(1)(d) of the Financial Advisers Regulations.
[18] Persons giving advice on corporate finance to only AIs, Expert Investors (EIs) or Institutional Investors (IIs) under Paragraph 7(1)(b) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations (SFR).
[20] Corporations carrying on business in dealing in capital markets products that are over-the-counter derivatives contracts with only AIs, EIs or IIs under Paragraph 3A(1)(d) of the Second Schedule to the SFR.
[21] Corporations carrying on business in dealing in capital markets products that are block futures contract with only AIs, EIs, or IIs under Paragraph 3(1)(d) of the Second Schedule to the SFR.
[22] Persons exempted from the requirement to have a license to carry on a business of providing any payment service under Section 13 of the Payment Services Act 2019.
[23] Paragraph 4 of the Guidelines.
[24] Paragraph 5 of the Guidelines.
[25] See the response to Q2 to section (I) of the FAQs.
[26] For locally incorporated banks and insurers that are headquartered in Singapore, this refers to the group including the holding company in Singapore, as well as local and overseas subsidiaries and branches, where applicable. For locally incorporated subsidiaries of foreign banks and insurers, this refers to the local operations in Singapore and its downstream subsidiaries and branches in Singapore and overseas, where applicable.
[27] For approved exchanges and approved clearing houses that are run as separate entities, the Guidelines apply separately to the disparate entities in the group.
[28] See paragraph 1 of Annex A.
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