The Banking (Amendment) Bill 2019 ("Amendment Bill") was passed by Parliament on 6 January 2020. The Bill seeks to make several significant changes to the current regulatory framework under which the banking industry is regulated by the Monetary Authority of Singapore ("MAS"). Amongst other things, the current divide between a bank's Domestic Banking Unit and Asian Currency Unit will be abolished, and merchant banks will be licensed and regulated by MAS as a separate licensing class under the Banking Act. This update will discuss one feature of the Amendment Bill that has largely been overlooked by mainstream media, but which may yet turn out to be of equal if not greater significance to existing players in the banking market, namely the introduction of a new section 47A in the Banking Act, that will establish a more formalistic regime under which MAS will oversee outsourcing arrangements that banks enter into.
Currently, the outsourcing arrangements of banks are governed by a set of "Guidelines on Outsourcing" ("Guidelines"). The Guidelines were revised quite substantially in 2016 (following a consultation that was initiated in 2014), and are generally applicable to not only banks but also to other classes of regulated financial institutions such as insurance companies, capital market intermediaries and financial advisers. At the time the consultation in 2014 was initiated, MAS had also proposed to issue binding notices that would define a set of minimum standards for financial institutions. However, the notices were never proceeded with, and the 2014 consultation only resulted in the revised Guidelines that took effect in 2016.
While the Guidelines (as revised in 2016 and further refined in 2018) have generally worked well, it seems that MAS is now proposing to formalise its oversight powers even further, at least in relation to outsourcing arrangements that are entered into by banks and merchant banks which are licensed under the Banking Act.
Once introduced, the new section 47A of the Banking Act will oblige a bank in Singapore to comply with whatever requirements MAS sets out in a written notice, before the bank obtains or receives a relevant service.
The expression "relevant service" is defined in section 47A(12) of the Banking Act as any service obtained or received by the bank, other than a service that is provided in the course of employment by an employee or a service provided by a director or officer in the course of that director's or officer's appointment.
By contrast, the Guidelines apply only to an arrangement that is an outsourcing arrangement, this term being defined as an arrangement in which a service provider provides the institution with a service that may currently or potentially be performed by the institution itself and which includes the following characteristics:
(a) the institution is dependent on the service on an ongoing basis; and
(b) the service is integral to the provision of a financial service by the institution or the service is provided to the market by the service provider in the name of the institution.
Broken down into its component, in order for an arrangement to constitute an outsourcing arrangement to which the Guidelines would then apply, and assuming for present purposes that the financial institution is a bank, the arrangement must satisfy three elements:
Firstly, the service provided by the service provider to the bank must be one that may currently or potentially be performed by the bank. This element limits the application of the Guidelines only to those cases where the service being provided is one which the bank could choose to perform in-house itself.
Secondly, the bank must be dependent on the service on an ongoing basis. This element serves to rule out oneoff arrangements, such as commissioning a third party to conduct a study.
Thirdly, the service being provided must either be integral to the financial service offered by the bank or the service is provided to the market by the service provider in the name of the bank. This element will mean that the Guidelines will only apply to services which may be considered to be fundamental to the bank.
The result of such an approach is that a bank would need to observe the Guidelines only in relation to a relatively well-defined group of outsourcing arrangements. Coupled with the fact that the Guidelines do not contain hard legal requirements, the burden that is placed on banks overall, is not particularly onerous.
By contrast, section 47A of the Banking Act has a considerably wider scope of application. All sorts of services other than those which the bank obtains from its own employees and its own directors are potentially within its scope. This would include temporary, short-term or one-off service engagements, as well as services that have no direct or close correlation to banking operations and services.
Admittedly, the actual written notice that MAS will issue to a bank or to a class of banks may adopt a narrower scope of coverage.
Currently, the failure to comply with the Guidelines do not carry any immediate or direct financial consequences, although MAS will no doubt take this into account when supervising a bank generally and when assessing the quality of its internal compliance controls.
However, written notices issued by MAS pursuant to the new section 47A of the Banking Act will be legally binding. The failure to comply will expose a bank to formal sanctions under section 47A(11), which can extend to a fine not exceeding S$250,000, as well as a continuing penalty for each day that the contravention remains unremediated after conviction.
Procurement teams and compliance officers responsible for overseeing vendor procurement within banks may have a lot more to worry about, once section 47A of the Banking Act becomes law in Singapore.