Currently, banks in Singapore are subject to various restrictions on undertaking or investing in non-financial businesses (the Anti-Commingling Framework). The Anti-Commingling Framework was introduced by the Monetary Authority of Singapore (MAS) in 2001 to ensure banks stay focused on their core banking business and avoid potential contagion from the conduct of non-financial businesses.
With the advent of digital platforms, mobile apps and technology as a means of accessing and supporting financial services, financial and non-traditional financial businesses are converging and the banking landscape is evolving.
Recognising the trend, MAS announced in June 2017 that it will look to streamline the Anti-Commingling Framework to allow banks to broaden and better integrate their range of services.
On 29 September 2017, the MAS issued a consultation paper1, setting out the proposals on how it intends to refine the Anti-Commingling Framework.
What are the restrictions under the current Anti-Commingling Framework?
Currently, banks are subject to, among others, the following restrictions:
1. Conduct of non-banking / financial businesses. As a general rule, banks are required to confine their business to banking and financial businesses (Section 30 of the Banking Act). Any banks which wish to undertake non-banking or financial business may do so only if:
a. the business is not a prohibited non-financial business prescribed under regulation 23G(e) of the Banking Regulations (Blacklist). The Blacklist includes: (i) property development; (ii) manufacturing or sale of consumer goods; and (iii) management of properties not held by the bank or any of its major stake entities; and
b. the business qualifies as a permissible non-financial business prescribed under any of regulations 21 to 23G of the Banking Regulations (Whitelist). The Whitelist includes: (i) any businesses that are related or complementary to the bank's core financial business which fulfills the conditions in regulation 23G; (ii) property management for properties held by the bank or its major stake entities (regulation 21); (iii) Islamic financing business (regulations 22 to 23E); and (iv) private equity/venture capital (PE/VC) business (regulation 23F).
2. Approval for major stake acquisition. Banks which seek to acquire a major stake in any company will require prior approval from the MAS. Ordinarily, approvals will only be considered if the target undertakes a banking or financial business, or a Whitelist business (Section 32 of the Banking Act).
3. Single equity investment limit. Banks are prohibited from acquiring or holding equity investment in a single company the value of which exceeds in the aggregate 2% of the capital funds of the bank, unless such interest is acquired by way of security or other interest in the ordinary course of the bank's lending business, or it is an approved major stake acquisition (Section 31 of the Banking Act).
4. Co-branding. MAS' prior approval is required for any third party to use the name, logo or trade mark of any Singapore incorporated bank in the course of the third party's business, and/or in a manner that suggest that the third party or his business is related to or associated with the bank or its subsidiaries (Section 5A of the Banking Act).
How will the above rules change?
Going forward, banks will continue to be required to ensure that any non-banking or financial business they wish to undertake do not fall within the Blacklist and qualifies under the Whitelist. However, MAS proposes to refine the scope of the Blacklist and the Whitelist under regulation 23G as follows:
1. Refinements to the Blacklist. Banks will no longer be prohibited from undertaking business in sale of consumer goods (manufacturing of consumer goods will continue to be blacklisted). Banks will be allowed to engage in property management of properties held by the bank or its group entities. Unlike the current prohibition, banks will not be allowed to manage properties held by a major stake entity unless the major stake entity is a group entity.
2. Simplifying the 23G Whitelist. MAS will simplify and clarify the conditions in regulation 23G to make it easier for banks to conduct or invest in non-financial businesses that are related or complementary to their core financial business (Complementary Non-Financial Businesses).
Currently, MAS does not specify the types of businesses that will be regarded as Complementary Non-Financial Businesses. Under the consultation paper, MAS proposes to introduce a list of businesses that may qualify under the 23G Whitelist. This list includes:
a. operation of online location or electronic platform that matches buyers and sellers of consumer goods and services;
b. sale of consumer goods or services via online location or electronic platforms;
c. sale of software / systems originally developed or commissioned by the bank for its core financial business (e.g. accounting or risk analytics software);
d. sale, purchase and trading of commodities;
e. tie ups / referral arrangements with third parties for the sale of the third parties' products/services;
f. provision of Islamic financing (other than those prescribed in regulations 22 to 23E);
g. sale, marketing and administrative services on behalf of any related corporation of the bank which is a regulated financial institution;
h. provision of advice to customers on social and environmental impact of the customer's actual or planned investments or activities; and
i. any business which is incidental to the above.
Conditions under regulation 23G
The proposed list reflects the types of businesses currently undertaken/ invested by banks in the market in reliance of regulation 23G, and the convergence of financial services, non-financial services and technology that we see in the market today.
While MAS has proposed a list of businesses, based on the draft regulations, it appears that ultimately, banks will still need to demonstrate that the business (even if falling within the list above) needs to be related or complementary to any of the core financial business undertaken by the bank. Additionally, banks will need to satisfy the following conditions in order to undertake a Complementary Non-Financial Business in reliance of regulation 23G:
a. implement appropriate risk management and governance arrangements commensurate with the risks posed by the business. Such arrangements must be approved by the board of directors;
b. ensure that the aggregate size of all Non-=Financial Complementary Businesses carried on under regulation 23G does not exceed 10% (solo and group level). Currently, the cap is 15%;
c. provide MAS with 14-days prior notice before undertaking such Complementary Non-Financial Business, and for any subsequent change in scope, shareholding, ownership, investment or capital in the business;
d. obtain MAS' prior approval for the issuance of any guarantee, indemnity, letter of comfort or the like in respect of the Complementary Non-Financial Business;
e. ensure that the bank's name, logo or trademark is not used in the Non-Financial Complementary Business in situations where the business is carried on by a third party that the bank has partnered with; and
f. such other conditions imposed by MAS.
MAS proposes to remove the requirement for banks to seek prior parent supervisory approval.
The current 20% aggregate cap on PE/VC businesses under regulation 23F and Complementary Non-Financial Business under regulation 23G will also be removed.
MAS also proposes to simplify the measurement of aggregate size such that it will be based on the higher of the total balance sheet asset value or total exposure, and to clarify the parameters for calculating total exposure.
3. Exemptions from single equity investment limit and major stake acquisition. The single equity investment limit and the requirement to obtain approval for major stake acquisition as described above will not apply if the entity to be acquired carries on a Complementary Non-Financial Business and the bank complies with the conditions in regulation 23G (as mentioned above).
4. Other Whitelist. The remaining Whitelist under regulations 21 to 23F will continue to apply.
5. Other non-banking or financial business. Where a bank seeks to undertake or invest in any non-banking or financial business that does not fall within the specified list of Complementary Non-Financial Business under the revised regulation 23G, or any of the remaining Whitelist, the bank will require MAS' prior approval under Section 30(1)(e) of the Banking Act. Banks are still not permitted to engage in the sale of goods or non-financial services as a business in its own right.
6. Sharing of name, logo or trade mark. MAS proposes to allow Singapore incorporated banks to place their names, logos and/or trademarks on any events that are sponsored by the banks, subject to deliberation and approval by the banks' boards of directors.
MAS is seeking public feedback on the proposals. The consultation period will end on 15 November 2017.
If you have any questions, please do not hesitate to contact us. We would also be pleased to assist you in any feedback to the Consultation Paper which you may wish to submit to the MAS.