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What are the principal governmental and regulatory policies that govern the banking sector?
In Singapore, banks are licensed under the Banking Act (Chapter 19 of Singapore). There are different licences granted by the Monetary Authority of Singapore (MAS).
Full banks may provide the whole range of banking activities permitted by the Banking Act. There are currently four local full banks and 29 foreign full banks with qualifying full bank privileges.
Wholesale banks do not carry out Singapore dollar retail banking activities, otherwise they may engage in the same range of business activities as full banks.
Offshore banks do not operate savings accounts or accept fixed deposits denominated in Singapore dollars in respect of residents of Singapore. With regard to non-residents, fixed deposits may be accepted in the denomination of Singapore dollars with a minimum deposit of S$250,000.
Merchant banks can only accept deposits or borrow from banks, finance companies, shareholders and companies controlled by shareholders. Their typical activities include corporate finance, underwriting of share and bond issues, mergers and acquisitions, portfolio investment management, management consultancy and other fee-based activities.
Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
The main legislation in Singapore governing banks is the Banking Act. There are various subsidiary legislations relating to the Banking Act such as the Banking Regulations, Banking (Corporate Governance) Regulations and more. In addition, banks also need to comply the Financial Advisers Act (Chapter 110 of Singapore), Insurance Act (Chapter 142), the Securities and Futures Act (Chapter 289 of Singapore) and the relevant subsidiary legislation promulgated under these Acts in relation to activities which fall within the Acts.
Further, banks in Singapore must also comply with the relevant directives, notices, practice notes, codes and circulars issued by the MAS.
Which regulatory authorities are primarily responsible for overseeing banks?
In Singapore, the MAS is the primary regulator responsible for overseeing banks.
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.
In Singapore, deposits made by non-bank depositors (including sole proprietorships, partnerships and companies) are insured by the Singapore Deposit Insurance Corporation Limited under the deposit insurance scheme for up to S$50,000 per depositor, per bank. All full banks are members of the deposit insurance scheme. The Singapore Deposit Insurance Corporation is a company limited by guarantee under the Companies Act (Chapter 50 of Singapore) and its board of directors is accountable to the Minister in charge of the MAS.
The Singapore government’s ownership interest in the banking sector is mainly through indirect holdings through a private investment company, Temasek Holdings (Private) Limited and its sovereign wealth fund, GIC Private Limited. For example, Temasek Holdings holds shares in, among others, the Bank of China Limited, China Construction Bank Corporation, DBS Group Holdings Ltd and Standard Chartered PLC.
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 following limitations apply under MAS Notice 639:
Banks must ensure that the aggregate of its exposures to their directors, shareholders holding at least 5% voting rights in the bank, and entities in which the bank owns more than 10% of the total issued shares or controls more than 10% of the voting rights do not exceed 25%.
Banks are not allowed to:
- grant unsecured credit facilities exceeding S$5,000 to a director of the bank or any firm, partnership or company that the director has an interest in; or
- grant to any of its officers (other than directors) or employees of the bank any unsecured credit facility that in the aggregate, and outstanding at any one time, exceeds one year’s emoluments of that person.
Under MAS Notice 643, banks must set out materiality thresholds for transactions where exposure arises for any related party of the bank. Where a new exposure to any related party would cause the materiality threshold to be exceeded, the transaction shall be subject to the approval of a special majority of three-quarters of its board.
Bank activities prohibited or regulated in Singapore are as follows:
- banks are prohibited from carrying out any non-financial business;
- banks cannot hold or acquire any equity investments in a single company with a value exceeding 2 per cent of the capital funds of the bank without prior approval by the MAS;
- banks must obtain the prior approval by the MAS before it holds or acquires, directly or indirectly, a major stake in any company. The MAS does not ordinarily grant its approval if the company carries on non-financial business;
- banks cannot hold or acquire interests in, or rights over, immovable property with a value exceeding 20 per cent of the bank’s capital funds; and
- banks are required to limit their property sector exposure to 35 per cent or less under the Banking Regulations.
What are the principal regulatory challenges facing the banking industry?
Some of the key regulatory challenges facing the banking industry relate to the prevention of money laundering and information technology.
In 2016, pursuant to investigations relating to the 1Malaysia Development Berhad fund, the MAS ordered the closure of BSI Bank Limited and Falcon Private Bank Limited for serious failures in anti-money laundering controls and improper conduct by some of the bank’s staff. In addition, the MAS also imposed financial penalties on the Development Bank of Singapore Limited and UBS for breaches of anti-money laundering requirements and control lapses. This highlights the challenges faced by the MAS in relation to anti-money laundering. Ravi Menon, managing director of the MAS, stated that the investigations’ recent findings have ‘made a dent’ in Singapore’s reputation as a clean and trusted financial centre. In particular, apart from a sound regulatory framework, a strong enforcement capability is necessary. The MAS has recognised this and, in November 2016, announced its intention to form a dedicated anti-money laundering department together with a new enforcement department.
In addition to the above censures, various individuals have also been issued with prohibition orders. For example, a former representative of Maybank Kim Eng Securities Pte Ltd, was convicted of an offence under the Prevention of Corruption Act (Chapter 241 of Singapore) for bribing another individual with S$3,000 to expedite the preparation of a valuation report on PetroSaudi Oil Services Limited. The prohibition order, effective from 30 October 2017, will prevent the individual for a period of six years, from:
- providing any capital market and financial advisory services; and
- taking part in the management of, acting as a director of, or becoming a substantial shareholder of any capital market and financial advisory services firm in Singapore.
Information technology risks
In recent years, technological innovations have resulted in new areas such as mobile banking and internet banking. Information technology outsourcing is also becoming increasingly attractive. Cybersecurity is therefore a real regulatory challenge since there is now an increased risk of cyberattacks and system disruptions. For instance, it was reported that, between October and December 2015, about 50 mobile banking customers were targeted by malware. The malware attackers subsequently made various purchases, ranging from airline tickets to electronic devices. Some customers lost thousands of dollars as a result of such an attack. The Director of the Association of Banks of Singapore reported an increasing trend of unauthorised transactions using smartphones involving malware infections. The situation is exacerbated by the commoditised proliferation of malware on the internet. Malware can be readily obtained from the dark web, an encrypted network that is commonly used to sell illegal material.
Are banks subject to consumer protection rules?
In Singapore, the Consumer Protection (Fair Trading) Act (Chapter 52A of Singapore) (CPFTA) also extends to all banking activities under the Banking Act including deposits, mortgages, letters of credits, bank guarantees and more. Parties cannot contract out of the CPFTA. The CPFTA protects consumers against ‘unfair practices’ by the banks. ‘Unfair practices’ include misrepresentations, making false claims and taking advantage of consumers. A breach of the CPFTA gives the consumer a right to commence a civil action against the bank under the CPFTA if the claim does not exceed S$30,000. Commencing an action under the CPFTA confers several benefits for the consumers such as benefits relating to burdens of proof and interpretation of documents.
Further, the MAS also published the ‘Guidelines on Fair Dealing’ under the Financial Advisers Act in 2009. The Guidelines envisage five fair dealing outcomes:
- customers have confidence that they deal with financial institutions where fair dealing is central to the corporate culture;
- financial institutions offer products and services that are suitable for their target customer segments;
- financial institutions have competent representatives who provide customers with quality advice and appropriate recommendations;
- customers receive clear, relevant and timely information to make informed financial decisions; and
- financial institutions handle customer complaints in an independent, effective and prompt manner.
Further, customers are indirectly protected by the MAS in its supervisory actions. For example, the MAS took supervisory actions against the DBS Bank Ltd for the service outage of its online and branch banking systems on 5 July 2010, which caused significant inconvenience to its customers. The MAS required the DBS Bank to set aside an additional amount of S$230 million in regulatory capital. Such regulatory actions serve as a deterrence to banks, therefore indirectly protecting consumers.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
Currently, fintech is becoming more prevalent, resulting in the emergence of financial products or services utilising it. There may be uncertainty over whether the innovation meets regulatory requirements. In such circumstances, some financial institutions or companies may decide to adopt a cautious approach and choose not to implement such new financial products or services utilising fintech. The MAS has recently issued a statement that this outcome is undesirable as ‘promising innovations may be stifled and this may result in missed opportunities’. The MAS is encouraging more fintech experimentation ‘so that promising innovations can be tested in the market and have a chance for wider adoption, in Singapore and abroad’. In this regard, the MAS issued regulatory sandbox guidelines in November 2016. As new financial products or services that utilise fintech mature and gain wider adoption rates, it is anticipated that the MAS will alter the regulatory guidelines and tailor it to the circumstances. Therefore, regulations relating to such financial services or products utilising fintech are expected to undergo changes in the future.
In addition, cryptocurrencies and initial coin offerings present a unique problem to the MAS. Cryptocurrencies and initial coin offerings are becoming increasingly popular globally, especially in Asia. Mr Tharman Shanmugaratnam, Singapore’s Deputy Prime Minister, Coordinating Minister for Economic and Social Policies, and Chairman of the MAS had stated that the cryptocurrencies and initial coin offerings fall outside of the MAS’ current financial legislation. In addition, he stated that MAS does not recognise bitcoin as legal tender and that, instead of regulating bitcoin itself, the MAS will seek to regulate companies providing bitcoin payment services. The MAS had also previously issued a guide to digital coin offerings on 14 November 2017. In that guide, the MAS had cautioned that offers or issues of digital tokens may be regulated by the MAS if the digital tokens are capital markets products under the Securities and Futures Act. Capital markets products include any securities, futures contracts and contracts or arrangements for purposes of leveraged foreign exchange trading. Usage of cryptocurrencies and initial coin offerings are progressing at an alarming rate and it will be interesting to see how or if the MAS chooses to regulate this sector further.
Extent of oversight
How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?
Under the Banking Act, every bank is required to furnish the MAS with information. Such information includes a bank’s latest audited financial statements, reports from the banks’ auditors, reports from the banks’ directors, interim profit and loss statements and more.
The MAS also has the power to occasionally inspect the books of each bank in Singapore and of any branch, agency or office outside Singapore opened by a bank incorporated in Singapore. The MAS adopts risk-focused supervision. The frequency or extent of the investigation depends on the MAS’ evaluation of the risk profile of the bank, taking into account the quality of the institution’s internal risk management systems and processes. In relation to a bank incorporated outside Singapore or a foreign-owned bank incorporated in Singapore, a parent supervisory authority may, with the prior written approval of the MAS, conduct an inspection in Singapore of the books of any branch or office of that bank within the country if conditions listed in the Banking Act are satisfied.
Further, under the Banking (Amendment) Bill proposed in January 2016, when a bank becomes aware of any development likely to have a material adverse effect on the financial soundness or reputation of the bank, the bank must immediately inform the MAS of such a development. This amendment will come into force on a date appointed by the Minister.
How do the regulatory authorities enforce banking laws and regulations?
The MAS has a range of enforcement tools at its disposal. This includes reprimands, warnings, fines, suspensions and revocations of licences, compositions, prohibitions orders, civil penalty actions and criminal penalty actions. The type of sanction depends on the nature and severity of the breach concerned.
What are the most common enforcement issues and how have they been addressed by the regulators and the banks?
As stated, one of the most common enforcement issues faced by the MAS relates to anti-money laundering. In May 2016, the MAS ordered the closure of BSI Bank Limited for serious breaches of anti-money laundering requirements, poor management oversight of the bank’s operations and gross misconduct by some of the bank’s staff. The MAS also referred six members of BSI Bank Limited’s senior management and staff to the Public Prosecutor for criminal investigations. In October 2016, the MAS also ordered the closure of Falcon Private Bank Ltd for breaching anti-money laundering requirements. Financial penalties amounting to S$1 million and S$1.3 million were also imposed on the Development Bank of Singapore Limited and UBS respectively for their breaches of anti-money laundering requirements.
In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?
The MAS may assume control of, and manage the business of, a Singapore-incorporated bank or the part of the business of a foreign-incorporated bank in the following circumstances:
- a bank informs the MAS that it is, or is likely to become, insolvent or that it is, or is likely to be, unable to meet its obligations;
- a bank becomes insolvent or is unable to meet its obligations;
- if the MAS is of the opinion that the bank:
- is carrying on business in a manner likely to be detrimental to the interests of its depositors or its creditors;
- is, or is likely, to become insolvent, or is or is likely to be, unable to meet its obligations;
- has contravened any of the provisions of the Banking Act; or
- has failed to comply with any conditions attached to its licence; or
- the MAS considers it in the public interest to do so.
Directors and executive officers of banks are expected to be responsible for a bank’s compliance with provisions of the Banking Act and other written laws. Under the Banking Act, any director or executive officer of a bank who fails to take all reasonable steps to secure compliance by the bank with any provision of the Banking Act, or any other written law applicable to banks in Singapore, are guilty of an offence and are liable, on conviction, to a fine or a term of imprisonment or both.
There is some measure of protection afforded to depositors and creditors. The MAS has the authority to conduct investigations into the books of any bank in Singapore if it has reason to believe that the bank is carrying on its business in a manner likely to be detrimental to the interests of the depositors or creditors. Further, as stated above, the MAS may assume control of and manage the business of a bank in such a situation as well. Also, banks are required to prepare and submit quarterly statements to the MAS showing all credit facilities and exposures of the bank to any related person. If the MAS is of the opinion that any credit facility or exposure of the bank to any person is to the detriment of the interests of depositors of the bank, it may direct the bank to secure repayment of the credit facility and prohibit the bank from granting any further credit facilities.
What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?
Any bank that is, or is likely to become, insolvent, or is, or is likely to be, unable to meet its obligations, is required to inform the MAS immediately of that fact. Therefore, it follows that responsibility rests with a bank’s management and directors to ensure that this is undertaken.
Further, when a bank is likely to become insolvent, its directors have a duty to take into account the interests of the creditors, such as minimising losses, when making decisions for the company.
See question 15 as to resolution plans.
Are managers or directors personally liable in the case of a bank failure?
Directors or managers of the bank may be made personally liable in certain situations:
- if it appears that the business of the bank had been carried out with the intent to defraud creditors or for any fraudulent purposes; or
- if a director or officer of the company was knowingly a party to the contracting of a debt when, at the time the debt was contracted, there was no reasonable or probable ground of expectation of the bank being able to repay that debt.
Also, where any company’s officer has misapplied or retained or become liable or accountable for any money or property of the company or been guilty of any misfeasance or breach of duty in relation to the company, he or she may be compelled to repay or restore such property or be made to contribute the sum to the company’s assets by way of compensation.
Describe any resolution planning or similar exercises that banks are required to conduct.
The Monetary Authority of Singapore Act was amended in July 2017 to provide the MAS with the power to require a bank notified by it to propose, maintain and submit Recovery and Resolution Plans (RRP), which set out the procedures and establish the systems necessary to restore the financial strength and viability of the bank. The MAS expects banks to appoint an executive officer as the accountable person responsible for leading and overseeing the recovery planning process, as well as for maintaining and submitting the required information to the MAS to facilitate the resolution planning process. Upon reviewing the submitted RRP, the MAS may require the bank to make specific changes to address any material deficiencies in it or any impediments to its implementation. The MAS will also be empowered to require these banks to implement recovery measures where necessary.
Although the Monetary Authority of Singapore Act was amended in July 2017, the new provisions relating to the recovery and resolution planning have not yet come into force. Despite this, the MAS has issued a monograph titled ‘MAS’ Approach to Resolution of Financial Institutions in Singapore’, that sets out, in brief, what its approach to recovery and resolution planning is as well as the requirements of the RRPs that are to be submitted to the MAS upon notification.
Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?
In Singapore, capital requirements of banks differ depending on whether the bank is incorporated in Singapore or outside.
Bank incorporated in Singapore
Singapore-incorporated banks are required by the Banking Act to have a minimum paid-up capital of S$1,500 million. Subsidiaries of a Singapore-incorporated bank or wholesale banks incorporated in Singapore are required to have a minimum paid-up capital of S$100 million.
Singapore-incorporated banks must also have a capital adequacy ratio of at least 12 per cent as required by the Banking Act.
Further, MAS Notice 637 on Risk Based Capital Adequacy Requirements for Banks Incorporated in Singapore was amended to implement revisions to the Basel III capital framework. Where a Singapore-incorporated bank is designated by the MAS as a domestic, systemically important bank, it must maintain the minimum ratios as follows:
- minimum common equity Tier 1 capital adequacy ratio (CAR) of 6.5 per cent;
- minimum Tier 1 CAR of 8 per cent;
- minimum total CAR of 10 per cent; and
- minimum capital conservation buffer of at least 1.875 per cent in 2018 and 2.5 per cent in 2019.
In addition, Singapore-incorporated banks must maintain, pursuant to MAS Notice 649, a Singapore dollar liquidity coverage ratio of at least 100 per cent and an all currency liquidity coverage ratio of at least 90 per cent in 2018 and 100 per cent in 2019.
Banks incorporated outside Singapore
Foreign-incorporated banks are required by the Banking Act to have a minimum paid-up capital of S$200 million.
How are the capital adequacy guidelines enforced?
Under the Banking Act, the MAS has the authority to investigate the books of any bank in Singapore if it has reason to believe that it is contravening the provisions of the Act. Further, banks that fail to comply with the capital requirements are required to notify the MAS immediately.
What happens in the event that a bank becomes undercapitalised?
Where a bank fails to comply with the capital requirements, the MAS may restrict or suspend the operations of the bank or give such directions as appropriate.
Moreover, where the MAS is satisfied that the bank’s director has wilfully caused the bank to contravene any provisions of the Banking Act or has, without reasonable excuse, failed to secure the compliance of the bank with the Act, the MAS may direct the bank to remove the directors.
What are the legal and regulatory processes in the event that a bank becomes insolvent?
Under the Banking Act, any bank that is, or is likely to be, insolvent is required to immediately inform the MAS. Any bank that fails to do so is guilty of an offence.
Under the Monetary Authority of Singapore Act, the MAS may exercise any of the following powers where a bank is insolvent or is likely to be insolvent:
- acquire the relevant bank to immediately take any action as the Authority may consider necessary;
- appoint one or more persons as statutory adviser to advise the bank on the proper management of that part of the business as the MAS may determine; or
- assume control of and manage that part of the business of the bank as the MAS may determine.
Singapore-incorporated banks may be wound up under the Companies Act if it is insolvent. A company may be wound up under a court order on the application of the bank itself, any creditor, any contributory, or of the MAS. In addition, the Banking Act prescribes that certain bank liabilities shall have priority over all of the bank’s unsecured liabilities, other than preferential debts, as specified in the Companies Act.
Foreign-incorporated banks registered under the Companies Act can also be wound up under the Companies Act. However, under the Companies Act, a liquidator of a foreign company being wound up in its home jurisdiction is required to realise or recover assets of the foreign company in Singapore and to pay any debts or liabilities incurred in Singapore before paying any remainder to the liquidator of that foreign company of the place where it was formed or incorporated.
Recent and future changes
Have capital adequacy guidelines changed, or are they expected to change in the near future?
Capital adequacy requirements have been strengthened in Singapore. For instance, the requirement for Singapore-incorporated banks to meet a minimum common equity Tier 1 CAR of 6.5 per cent, Tier 1 CAR of 8 per cent and Total CAR of 10 per cent are higher than the Basel III minimum requirements of 4.5 per cent, 6 per cent and 8 per cent respectively.
As stated, the requirements are expected to be further strengthened, which is deemed by the requirements for Singapore-incorporated banks to maintain an all currency liquidity coverage ratio of at least 80 per cent in 2017, 90 per cent in 2018 and 100 per cent in 2019.
Ownership restrictions and implications
Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?
Under the Banking Act, a person must first obtain the approval of the Minister before becoming a substantial shareholder in a Singapore-incorporated bank. A substantial shareholder is a person who has an interest in 5 per cent or more of the bank’s total votes.
Also, a person must first obtain the approval of the Minister before becoming:
- a 12 per cent controller;
- a 20 per cent controller; or
- an indirect controller.
A 12 per cent controller refers to a person who holds 12 per cent or more of the total issued shares or is in a position to control voting power of 12 per cent or more in the bank. A 20 per cent controller refers to a person who holds 20 per cent or more of the total issued shares or is in a position to control voting power of 20 per cent or more in the bank. An indirect controller refers to a person in accordance with whose directions, instructions or wishes the directors of the bank are accustomed or under an obligation to act, or a person who is in a position to determine the policy of the bank.
Are there any restrictions on foreign ownership of banks?
There are currently no restrictions on bank foreign ownership. However, as stated in question 21, any acquisition that results in a person becoming a substantial shareholder, a 12 per cent controller, a 20 per cent controller or an indirect controller of a Singapore-incorporated bank would require MAS prior approval.
Implications and responsibilities
What are the legal and regulatory implications for entities that control banks?
Under the Banking Act, the Minister may serve a written notice of objection on a substantial shareholder, a 12 per cent controller, 20 per cent controller or indirect controller of Singapore-incorporated banks, if he or she is satisfied that that person is not a fit and proper person, or if, having regard to the likely influence of the person, the bank is no longer likely to conduct its business prudently or comply with the provisions of the Banking Act. The Minister may also direct the transfer or disposal of all or any of the shares in the bank held by the person or any of his or her associates.
Further, the MAS may direct any Singapore-incorporated bank to obtain from its shareholders and to transmit to the MAS any information relating to its shareholders that the MAS may require for the purpose of ascertaining or investigating into the control of shareholding or voting power in the bank.
What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?
As stated in question 23, the Minister may serve a written notice of objection or direct the transfer or disposal of all or any of the shares in the bank held by the person or any of his or her associates where the Minister is satisfied that that person is not a fit and proper person or if, having regard to the likely influence of the person, the bank is no longer likely to conduct its business prudently or to comply with the provisions of the Banking Act. Therefore, there is an implicit duty on the entities or individuals that control banks to be a fit and proper person, and not to negatively influence the bank in such a way that it is no longer likely to conduct its business prudently or to comply with the provisions of the Banking Act.
What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?
In the event that a bank becomes insolvent, the MAS may assume control of, and manage that part of the bank’s business, as the Authority may determine. This may have implications for its shareholders.
Changes in control
Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?
See question 21.
Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?
As stated in question 22, there are currently no restrictions on bank foreign ownership. However, any acquisition that results in a person becoming a substantial shareholder, a 12 per cent controller, a 20 per cent controller or an indirect controller of a Singapore-incorporated bank requires MAS prior approval. One of the conditions listed in the Banking Act relating to such an approval is that the Minister must be satisfied that it is in the national interests to approve the acquisition. Therefore, this may have implications for foreign acquirers.
Factors considered by authorities
What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?
Under the Banking Act, in order for approvals to be granted to a person for control of Singapore-incorporated banks:
- the MAS must be satisfied that:
- the person is a fit and proper person; and
- having regard to the likely influence of the person, the designated financial institution will or will continue to conduct its business prudently and comply with the provisions of this Act; and
- the Minister must be satisfied that it is in the national interest to grant such an approval.
Describe the required filings for an acquisition of control of a bank.
As stated in question 29, a person must first obtain the approval of the Minister before becoming a substantial shareholder, a 12 per cent controller, a 20 per cent controller or an indirect controller in a Singapore-incorporated bank.
Timeframe for approval
What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?
The time required for regulatory approval depends on the facts of the circumstances, including the characteristics of the potential acquirer.