This article was first published by Thomson Reuters Regulatory Intelligence
May 21 2018
The Monetary Authority of Singapore’s (MAS) recent proposals to strengthen individual accountability of senior managers and raise standards of conduct in financial institutions were inevitable following similar moves in the UK, Hong Kong and Australia.
The consultation paper, launched on April 26, set out MAS’ expectations on boards and senior managers with respect to individual conduct and behaviour. The proposed guidelines apply to all financial institutions including banks, asset managers, securities firms and financial advisers.
MAS said the proposed guidelines are not intended to be prescriptive and it is the responsibility of financial institutions to hold their senior managers accountable for their actions and ensure proper conduct among their employees.
“Clear accountability and proper conduct are important elements of good governance and sound business practice. Persistent misconduct and a lack of individual accountability by persons in charge will erode public confidence in our [financial institutions]. We expect the boards and senior management of [financial institutions] to instil a strong culture of responsibility and ethical conduct,” said Ong Chong Tee, MAS’ deputy managing director (financial supervision).
MAS took Wait-and-See Approach
Following Hong Kong’s implementation of the Manager-in-Charge regime last year, there was speculation about whether Singapore would follow suit. MAS had been taking a wait-and-see approach to see how similar regimes in other jurisdictions would work out, including what problems would arise and how those regimes were implemented, said Joanna Pearson, partner at Simmons & Simmons JWS in Singapore.
“Singapore operates as a key financial centre and many financial institutions based here would have already been subject to similar regimes in other jurisdictions. Many of them would have given thought to the Manager-in-Charge regime in Hong Kong and the Senior Managers and Certification Regime [SMR] in the UK. They will have gone through the identification of senior managers’ responsibilities in other jurisdictions,” she said.
Formalised Responsibility Mapping
Breaches and misconduct had arisen in the past whereby senior managers at financial institutions were not entirely clear who should be responsible for those problems and who should be taking action. MAS’ guidelines seek to require financial institutions to go through the process of identifying responsible persons in a systematic way, Pearson said.
She pointed out that the word “individual’ is of great significance since it requires one person to be responsible for an area within financial institutions.
“Effectively it is about identifying individuals who are responsible and identifying any gaps. One of the objectives of the guidelines is to ensure that a thorough process is undertaken and documented, that the individuals know that they have that responsibility and understand what that means in practice and what is expected of them,” she said.
Some financial institutions have, on a more informal basis, carried out responsibility mapping.
“This [set of] guidelines is to formalise that. What it does not require is notification of the identified persons. Instead, compliance will be assessed via the MAS’s ongoing supervisory process. MAS has not included a requirement to report who each of the key responsible persons are, which is very different to the UK regime which requires financial institutions to prepare a very detailed responsibilities map. There is greater notification under the UK regime,” Pearson said.
MAS’ Guidelines more Flexible
While MAS’ proposed guidelines have largely followed UK’s SMR and Hong Kong’s Manager-in-Charge regime, its proposals are less prescriptive, Pearson said.
“I haven’t yet done a line-by-line comparison, but broadly it is fair to say MAS’ guidelines are a little more flexible. They set out a set of desired outcomes and guidelines but they do offer financial institutions some flexibility [in] how they are implemented. The regimes elsewhere are more prescriptive,” she said.
One of the challenges presented by the individual accountability regime is the complication that financial institutions are likely to face when they have to identify responsible individuals for branches and locally-incorporated entities, Pearson said.
“Having a prescriptive regime may not work well,” she said.
Objectives and Five Outcomes
MAS’ proposed guidelines seek to reinforce financial institutions’ responsibilities in three main areas: by increasing the individual accountability of senior managers; by strengthening the oversight of employees in material risk functions, and by reinforcing standards of proper conduct among all employees. To achieve these objectives, MAS has set out five accountability and conduct outcomes which financial institutions are expected to work toward.
In outcome 1, senior managers who have responsibility for the management and conduct of functions that are core to the financial institutions’ operations are clearly identified.
In outcome 2, senior managers are fit and proper for their roles, and are held responsible for the actions of their staff and the conduct of the business under their purview.
In outcome 3, financial institutions’ governance framework is supportive of, and conducive to, senior managers’ performance of their roles and responsibilities. Financial institutions’ overall management structure and reporting relationships are clear and transparent.
In outcome 4, employees in material risk functions are fit and proper for their roles, and subject to effective risk governance as well as the appropriate standards of conduct and incentive structure.
Finally, in outcome 5, financial institutions have a framework that promotes and sustains the desired conduct among all employees.
Conduct and Culture
Nizam Ismail, Head of Financial Services at RHTLaw Taylor Wessing in Singapore, said the consultation paper clearly articulated that MAS is focusing on not just the hardware in financial institutions such as systems and compliance process, but also the software aspects such as culture and management oversight.
“It is not enough just having a set of compliance processes; you need to have a robust culture, and management has to set the tone at the top. It puts a lot of scrutiny on financial institutions to demonstrate that they have processes in place to measure culture and conduct of good behaviour,” he said.
MAS’ approach to conduct and culture, summarised in three aspects — namely, promote and cultivate, monitor and assess, enforce and deter — is also striking, Nizam said. “Promote and cultivate” is about promoting a culture of trust and ethics at financial institutions through engagement with the industry. “Monitor and assess” is about monitoring the culture and conduct at financial institutions, and “enforce and deter” talks about MAS’ approach to breaches and misconduct which will involve enforcement, investigation and prosecution.
“It is MAS’ nuanced approach that says, ‘We will work with you to ensure everything is ok, but if you misbehave, we will go after you'”, he said.
Nizam pointed to the first outcome in the guidelines which, he said, was significant. Senior managers at financial institutions are subject to MAS rules as long as they have oversight responsibility or decision-making authority, even if they are outside of Singapore.
“I see this as creating incentives for financial institutions to ensure most of critical decision-making functions reside in Singapore,” he said.
Outcome two, which requires senior managers to have responsibility for staff and for the conduct of the business under their purview, has raised the question of whether the senior manager should be held responsible if a member of staff misbehaves.
“That will be quite an interesting area. It goes into whether the staff [member]’s misconduct is something which could have been prevented by the manager or whether it is because of compliance framework that is not sufficiently robust,” Nizam said.
Financial institutions are also required to have in place a governance framework that is supportive of senior managers’ roles and responsibilities, and to ensure that the overall reporting structure is clear and transparent, as set out in the third outcome, Nizam said.
In the fourth outcome, employees in material risk functions are required to be fit and proper in their roles because such roles have an impact on the financial institutions’ risk profile, according to Nizam.
“There are a couple of expectations. Board and senior management should identify … these persons who are in material risk functions and make sure they are fit and proper on an ongoing basis. This includes matters like setting decision-making authority, risk limits, and supervisory oversight,” he said.
People in material risk functions are also subject to a few requirements including continuous training and an appropriate incentive structure that is aligned with their role and the risk they take.
“Financial institutions have to look at the risk outcome before they decide how much they want to pay the person for performing the function. The intention is to make sure the manager who performs the function is suitable for the role. They are expected to perform,” Nizam said.
The fifth outcome, which requires financial institutions to implement a framework that promotes and sustains the desired conduct of all employees, is a formalised whistle-blowing channel, according to Nizam.
“MAS expects a whistle-blowing function, a framework that escalates misbehaviour. More broadly, the new framework does create an expectation for financial institutions to think of setting up systems to measure good compliance culture and conduct,” he said.
· Patricia Lee is chief correspondent, banking and securities regulation, Asia