Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

Strong local banks will continue to remain at the core of the Singapore banking sector, and the government’s policy of maintaining the local banks’ market share at no less than 50 per cent of the total resident deposits remains unchanged. Local banks will also continue to be subject to more stringent capital adequacy requirements than those required under Basel III to reflect their systemic importance to the Singapore economy and financial system.

However, the Singapore government has also progressively liber­alised the sector to allow greater competition from foreign banks in wholesale banking and retail banking in order to spur dynamism and innovation. The progressive liberalisation of the banking sector has led to the grant of qualifying full bank (QFB) licences to 10 foreign banks, which allow them to engage in retail banking. Existing QFBs, which are important to the local market, are also required to incorporate their retail operations.

Further, as part of the move towards banking liberalisation, in particular the delivery of financial services to underserved segments, the Monetary Authority of Singapore (MAS) awarded two digital full banking licences and two digital wholesale banking licences in December 2020. These new digital banks are expected to commence operations from early 2022. MAS also kept open the possibility of granting additional digital banking licences in the future.

Regulated institutions

What are the defining characteristics of a bank to be caught by the banking laws and regulations? Is non-bank fintech regulated differently?

The defining characteristic of a bank is that it is a company that carries on 'banking business' in Singapore. In this regard, 'banking business' refers to the conduct of all of the following activities: the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers and making advances to customers. Another defining characteristic of a bank is that it is one of a few types of financial institutions that are permitted to accept deposits from the public.

Whether non-bank fintech companies are regulated as banks would depend on whether they carry on banking business in Singapore – and if so, they would be regulated in the same way as other traditional banks. For example, while MAS recently handed out two digital full banking licences to applicants that were from non-bank corporate groups, these applicants will still be subject to largely the same regulatory requirements as existing full banks.

Do the rules vary depending on the size or complexity of the banking institution?

If a bank that is licensed in Singapore is designated by MAS to be a domestic systemically important bank (D-SIB), they will be subject to additional supervisory measures, such as higher capital requirements, recovery and resolution planning requirements, liquidity coverage ratio requirements, and enhanced disclosures. These would depend on the bank's operating model and structure, as well as the type of D-SIB the bank is (for example, a locally incorporated bank, a foreign bank branch in Singapore or a foreign bank group comprising a locally incorporated bank).

MAS looks at four main indicators to assess a bank’s systemic importance – size, interconnectedness, substitutability and complexity. Broadly speaking, size refers to the bank’s share of domestic activity, interconnectedness refers to the bank's linkages and contagion potential with other financial institutions, substitutability refers to potential for widespread disruption if the bank's services were to be interrupted, and complexity refers to the bank’s business, structural and operational complexity.

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

Banks in Singapore are primarily governed by the Banking Act (BA) (Chapter 19 of Singapore) and various pieces of subsidiary legislation promulgated under the BA. Banks that provide capital markets and financial advisory services will also be governed under the Securities and Futures Act (Chapter 289 of Singapore), the Financial Advisers Act (Chapter 110 of Singapore), and subsidiary legislation promul­gated under these Acts. The resolution regime that banks in Singapore are subject to is set out in the BA as well as the Monetary Authority of Singapore Act (the MAS Act) (Chapter 186 of Singapore). Aside from the above, banks in Singapore are also subject to other applicable regula­tory instruments issued by MAS including directives, notices, guidelines, codes, practice notes and circulars.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

MAS is the primary regulator having oversight of banks in Singapore.

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

Deposits made by non-bank depositors are insured under the deposit insurance scheme (DI Scheme) up to an aggregate of S$75,000 per depositor per bank in the event a full bank or finance company fails. All licensed full banks and finance companies are required to be scheme members, unless otherwise exempted. The DI Scheme is administered by the Singapore Deposit Insurance Corporation Limited in accordance with the Deposit Insurance and Policy Owners’ Protection Schemes Act (Chapter 77B of Singapore).

The Singapore government’s ownership interests in the banking sector are largely held through its sovereign wealth fund (GIC Private Limited) and private investment company (Temasek Holdings (Private) Limited).

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

The key limitations that apply to transactions between banks and their related parties or affiliates are:

  • banks incorporated in Singapore must ensure that their aggregate exposure to their direc­tors, shareholders with at least 5 per cent voting rights in the bank (substantial shareholders) and entities in which the bank owns or controls more than 10 per cent of shares or voting rights respec­tively (major stake companies), do not exceed 25 per cent of its total eligible capital;
  • banks are not allowed to grant unsecured credit facilities to:
    • their directors (other than an executive director) and, among others, entities controlled or managed by such directors, which exceed S$5,000; and
    • their officers (other than directors) or employees that in aggregate and outstanding at any one time exceed one year’s emoluments of that officer or employee;
  • banks must establish separate materiality thresholds on an aggre­gate basis for each type of transaction with related parties (eg, mortgages, unsecured lending and trade finance facilities) and processes for independent approval or review are required for any transaction that exceeds such thresholds. The related parties generally include, among others, the bank’s directors, key credit approvers, senior management and their family members and entities that are owned or controlled by them, related corporations, substantial shareholders and major stake companies; and
  • affiliated entities of Singapore-incorporated banks (its subsidiaries, companies in which the bank holds more than 20 per cent interest and companies under the control of the bank) are not permitted to hold in aggregate more than 2 per cent voting power over the bank.

 

The range of activities that banks are generally prohibited or restricted from conducting are:

  • non-financial business (ie, business not regulated or authorised by MAS). There are, however, certain prescribed exemptions to this prohibition or restriction – for instance, banks may engage in certain non-financial businesses related or complementary to their core financial businesses. MAS has, however, announced that it will relax certain aspects of the anti-commingling framework for banks – eg, allowing banks to engage in operation of digital online e-commerce platforms;
  • banks must obtain MAS’ approval before acquiring or holding a major stake in any entity. Such approval is generally not granted if the entity carries on non-financial business unless MAS is satisfied that there are clear synergies with the bank’s financial business;
  • banks are, however, allowed to purchase non-controlling stakes (generally 10 per cent or less) in the share capital of any company. However, to limit concentration risks, equity investments in any single company are limited to 2 per cent of the bank’s capital funds;
  • banks can invest in immovable properties, as long as such invest­ments do not, in aggregate, exceed 20 per cent of their capital funds (as defined in the BA), but they are not allowed to engage in prop­erty development or management. However, banks are permitted to manage investment properties that are owned by their banking groups; properties that have been foreclosed by their banking groups in satisfaction of debts owed to them; and properties used in the business of their banking groups; and
  • to minimise the vulnerability of the banking sector in a property market downturn, all banks are required to limit their property exposure to 35 per cent of their eligible assets (as defined in the Banking Regulations).
Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

Shadow banking

The growth of shadow banks continues to be a prominent regulatory challenge facing the banking industry. The increased capital and liquidity requirements under Basel III coupled with technological innovations may drive the conduct of shadow banking by non-financial players that provide services that mirror tradi­tional banking services provided by banks (eg, payment systems and peer-to-peer lending systems). This will increase the competition for clients between banks and such non-financial players and heighten the risks associated with consumer protection in relation to the provision of innovative products and services. In line with these concerns, efforts have been made by MAS to enhance the competitiveness of the banking industry. For example, MAS recently awarded four digital banking licences in December 2020. These new digital banks bring with them unique value propositions, such as the innovative use of technology to serve customer needs, and access underserved segments of the financial industry.

 

Cybersecurity

As more financial services are delivered over the internet, the frequency, scale and complexity of cyberattacks on financial institutions (FIs) have also increased. Cybersecurity is a very real and ongoing regulatory challenge, especially in light of the regulatory obligations to protect the privacy of customers’ information and personal data. In light of this, in January 2021, MAS issued a revised set of Technology Management Guidelines to keep pace with emerging technologies and shifts in the cyber threat landscape. The revised Guidelines focuses on the technology and cyber risks arising from the growing use of cloud technologies, application programming interfaces, and rapid software development by financial institutions in general.

 

Anti-money laundering (AML) and countering the financing of terrorism (CFT)

In the course of serving customers, financial institutions have the responsibility to ensure that they do not inadvertently help to disguise or legitimise ill-gotten gains, particularly where technological advances offer more effective, efficient and inclusive financial services, but also more challenging and complex financial crime risks. In building its AML/CFT programmes, MAS encourages financial institutions to empha­sise AML/CFT as an organisational priority, with implementing proper oversight from board and senior management, strong risk awareness measures and proper AML/CFT controls. In the 2020 Terrorism Financing National Risk Assessment Report, MAS once again highlighted the need for banks to remain vigilant to the risk of Singapore's banking system being used as a conduit by terrorists and their financiers, given Singapore’s position as an international financial centre, which exposes it to large international money flows, and the difficulty in detecting terrorism financing activities among small transactions. On the regulator’s front, MAS has also been proactively engaging banks on their AML/CFT control measures, through ongoing dialogue and thematic inspections conducted on banks in Singapore.

Consumer protection

Are banks subject to consumer protection rules?

Banks providing common financial products and services such as bank deposits, loans, unit trusts and securities must ensure that their sales practices do not breach the provisions for fair trading under the Consumer Protection (Fair Trading) Act (CPFTA) (Chapter 52A of Singapore). A breach will give consumers a right under the CPFTA to take civil action against a supplier of such products and services.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

MAS’ policies on financial sector supervision are unlikely to change fundamentally and will remain focused on pre-empting systemic risks to the financial system, promoting the safety and soundness of Singapore FIs, and ensuring resilient and well-functioning financial markets. That said, the following are some ways in which legal and regulatory policy will or is likely to change in the future.

 

Environmental risk management

Recognising that environmental risks are key global risks, MAS intends to issue a set of guidelines to enhance the environmental risk management practices of the various types of financial institutions, so as to build resilience against the impact of environmental risks. Under these guidelines, banks will be required to integrate environmental risk considerations into their financing and investment decisions, and promote new opportunities for green financing. MAS also expects the bank's board and senior management to oversee the bank’s environmental risk management and to implement robust policies and processes to identify, assess, mitigate and monitor material environmental risk at both a customer and portfolio level.

 

Management of outsourced relevant services by banks and merchant banks

MAS has proposed to issue notices containing requirements on (1) ongoing outsourced relevant services of banks and merchant banks in Singapore, with a focus on services that are material; and (2) outsourced relevant services that involve the disclosure of customer information to service providers. In this regard, MAS has further listed out a subset of requirements that banks and merchant banks have to comply with, in order to protect customer information. This new notice is intended to replace the existing Guidelines on Outsourcing.

 

Simplifying the anti-commingling framework

MAS has also announced that it will be relaxing certain aspects of the anti-commingling policy framework for banks (ie, the policy of separating financial and non­financial businesses of banks in Singapore), as part of the next round of amendments to the Banking Regulations expected in 2021. The revised anti-commingling policy measures would allow banks to more easily conduct or invest in permissible non-financial businesses related or complementary to their core financial businesses and engage in the operation of e-commerce platforms focusing on the trade of consumer goods or services (subject to prescribed restrictions and risk manage­ment related requirements). This would allow banks to broaden and better integrate their range of services and compete effectively against non-financial players delivering financial services.

Law stated date

Correct on

Give the date on which the information above is accurate.

5 February 2021.