INTRODUCTION

The Monetary Authority of Singapore (“MAS”) has published a consultation paper proposing several changes to the Banking Act (Cap. 19) of Singapore ("BA"). MAS has indicated that the proposed changes are aimed at strengthening its supervisory oversight over banks as well as codifying its expectations as to banks’ risk management practices. This consult closes on 15 January 2014.

THE PROPOSED CHANGES

Duty to inform MAS of material developments

Banks and their related entities

MAS has proposed that banks be required to notify MAS as soon as they are aware of any material developments affecting the bank or any entity (whether located in Singapore or elsewhere) in the group. It is proposed that material adverse developments include breaches or possible breaches of any laws, regulations, business rules or codes of conduct at the minimum.

MAS also elaborated that with regard to the bank itself, this means that MAS should be notified as soon as there are reasonable grounds to suspect that a breach has occurred. For example, the bank should notify MAS in the event of the commencement of any investigations for any offence against the bank, even if the bank has not yet been convicted.

For other entities in the group, MAS has indicated that the bank would only be required to notify MAS upon becoming aware of any material adverse development. A bank would therefore not be in breach of this proposed requirement if it fails to inform MAS of a material adverse development affecting another entity in the group if it is unaware of such development.

Key appointment holders

Under the current regulatory regime, local banks have to seek MAS approval prior to the appointment of directors, chief executive officers, deputy chief executive officers, chief financial officers and chief risk officers, whilst foreign banks have to seek MAS approval for the appointment of chief executive officers and deputy chief executive officers. In deciding whether to grant its approval, MAS considers whether the proposed appointment holder is “fit and proper” taking into account the criteria set out in the MAS Guidelines on Fit and Proper Criteria (FSG-G01). In assessing whether a person is "fit and proper", MAS will take into account the (i)i honesty, integrity and reputation, (ii) competence and capability, and (iii) financial soundness of such person.

MAS has indicated that it expects that such appointment holders are to be “fit and proper” at the point of and throughout the tenure of their appointment. As such, MAS has proposed that banks are to notify it as soon as they are aware of any material information negatively affecting the fitness and propriety of such appointment holders whose appointments were approved by MAS. MAS has indicated that such notification would allow it to assess the appointment holders’ continued suitability and whether supervisory action may be required.

Substantial shareholders and controllers

At present, sections 15A and 15B of the BA stipulate that the Minister’s prior approval is to be obtained for persons who seek to become a substantial shareholder (not less than 5% of the total votes attached to all voting shares), a 12% controller, a 20% controller or an indirect controller of a bank incorporated in Singapore (collectively, “Controllers”). Currently, the onus is on such persons to obtain such approval from the Minister, and the bank is not required to inform MAS upon becoming aware of a person who has become a substantial shareholder or Controller without obtaining such approval.

As banks have access to information of their substantial shareholders and Controllers, MAS has proposed that banks incorporated in Singapore be required to notify MAS as soon as they are aware of persons who have become substantial shareholders or Controllers without first obtaining the Minister’s approval. MAS has indicated that this is to provide a safeguard in the event that the prior approval of the Minister is not obtained.

MAS has further proposed that locally incorporated banks be required to notify MAS as soon as they are aware of any material information that may adversely affect the suitability of substantial shareholders and Controllers.

MAS control over key officers and auditors

Directors and executive officers

Under the current regime, section 54(2) of the BA gives MAS the power to direct the removal of a director of a locally incorporated bank or an executive officer of any bank in Singapore based on grounds which include: wilfully contravening or causing the bank to contravene any provision of the BA, failing (without reasonable excuse) to secure the bank’s compliance with the BA, the MAS Act or written laws set out in the Schedule to the MAS Act or failing to discharge any duties of office. MAS may exercise such power if, in MAS' opinion, such removal is necessary in the public interest or for the protection of the depositors of the bank.

MAS has proposed replacing the currents grounds for removal with a single criterion of the director or executive officer (as applicable) ceasing to be “fit and proper”. MAS’ rationale for this proposed change is to align the grounds for removal with the criteria for appointment (which is that the appointee is to be “fit and proper”). In MAS’ view, the criterion of “fit and proper” would incorporate the existing three grounds for removal whilst more accurately reflecting the circumstances under which MAS would direct the removal of a bank director or executive officer.

It is further proposed that in the event of a director or executive officer (as applicable) ceasing to be fit and proper, MAS may exercise the power to remove such director or executive officer (as applicable) if, in MAS' opinion, such removal is necessary in the public interest, for the protection of the depositors of the bank, or in the interest of the Singapore financial system. The addition of third premise for removal, "interest of the Singapore financial system", is intended to allow MAS to take into account the reputation of and stakeholder confidence in the financial system in deciding whether to exercise its power of removal.

MAS has also noted that there will be no change from the current regime under section 54(4) of the BA where MAS will give prior notice of its intention to remove a director/executive officer. This allows banks, directors or executive officers to show cause against an intended removal. Under the current regime, any bank or director or executive officer aggrieved by a direction for removal, may within 30 days after receiving such direction, appeal in writing to the Minister.

Auditors

Under the current regime, bank auditors are approved by MAS and are to discharge statutory duties as prescribed by section 58 of the BA. Section 58(8) of the BA further requires the auditor to report the following matters to MAS:

  1. a serious breach or non-observance of the provisions of the BA or that a criminal offence involving fraud or dishonesty has been committed;
  2. losses have been incurred which reduce the capital funds of the bank by 50%;
  3. serious irregularities have occurred, including irregularities that jeopardise the security of the creditors; and
  4. the auditor is unable to confirm that the claims of creditors are still covered by the assets.

MAS has proposed introducing a safe harbour provision into the BA to protect auditors who in good faith disclose information to MAS. This would prevent auditors from being held liable for a breach of their duties of confidentiality or defamation.

MAS has also proposed that the failure of an auditor to discharge its statutory duties be prescribed as an offence, and further, that MAS be empowered to direct the removal of an auditor who does not satisfactorily discharge its statutory functions.

Duty to implement adequate risk management systems and controls

MAS has proposed amending the BA to codify its expectation that all banks are to institute and maintain adequate risk systems and controls. Specifically, banks will be required to establish comprehensive risk management systems and controls commensurate with their risk appetite, scale and complexity of operations.

MAS has indicated that it will take reference from its “Guidelines on Risk Management Practices” in determining the adequacy of a bank’s risk management systems and controls. These guidelines cover, inter alia, credit risk, market risk, liquidity risk, technology risk, internal controls, and the role of the bank's Board of Directors and senior management.

REFERENCES

Please click on the links below to refer to the relevant documents.

  1. Consultation Paper on Review of the Banking Act

  2. MAS Guidelines on Fit and Proper Criteria (FSG-G01)

  3. MAS Guidelines on Risk Management Practices