MAS clarifies regulatory expectations on IAC Guidelines

In our previous bulletin, we analysed the implications of Monetary Authority of Singapore’s (MAS) proposal to expand the scope of the Guidelines on Individual Accountability and Conduct (Guidelines) (CP2). In this sequel bulletin, we recapitulate some of the key points from MAS’ feedback to the first consultation issued recently on 06 June 2019, and chart the timeline and course ahead.

1. Overview of the IAC Guidelines

The IAC Guidelines were first introduced on 28 April 2018 in MAS’ consultation paper (CP1), amidst a slew of similar regulatory changes implemented in UK, Hong Kong, and Australia.

In developing the IAC Guidelines, MAS has noted that bright line rules and regulations are often insufficient to influence behaviours, and FIs need to promulgate standards of proper conduct, so as to influence both the day-to-day operations of the FIs as well as its strategic decisions. In this regard, MAS has emphasized that FIs should not take a mechanistic or check-list approach towards implementing the IAC Guidelines.

Culture guides how FIs interact with other stakeholders in the financial system, and also how those stakeholders respond to other FIs. As such, MAS has identified three prongs of approach:

  • promoting and cultivating a culture of trust and ethics in the financial industry through regular engagement, active collaboration and promulgation of good practices to promote sound industry norms
  • monitoring and assessing culture and conduct, focusing on both “hardware” and “software” elements, and
  • enforcing and deterring lapses in risk management, misconduct, regulatory breaches, or offences through supervisory or enforcement actions.

The IAC Guidelines are outcome-based, which will provide FIs with more flexibility in taking the approaches most suitable to their unique business operations and organisational structures.

In a similar vein, MAS’ own approach to the FIs will be guided by a principle of proportionality, considering the nature, size, and complexity of the FI’s operations. MAS also stated their view that even where FIs only serve non-retail customers or exclusively conduct wholesale market activities, the expectations on fair dealing as well as proper conduct remains relevant.

2. Scope of IAC Guidelines

The proposed expanded scope of the IAC Guidelines was covered in our previous article. In summary, MAS proposed to expand the scope of the IAC Guidelines to cover all the FIs that are currently regulated by MAS, with certain exemptions of entities that have a limited scope of activities in Singapore. MAS has also proposed that the IAC Guidelines should not apply to firms with a headcount of less than 20.

For locally-incorporated banks and insurers, MAS clarified that the IAC Guidelines would apply at the entity level to their downstream entities operating in Singapore:

  • the specification of senior managers’ (SMs) responsibilities should include both the operations of the parent entity, and where relevant, the operations of the group, and
  • significant downstream entities should be identified, and would be considered a “material business function”. The head of the “material business function” should be identified as a SM.

MAS stated that as the IAC Guidelines apply specifically to an FI’s operations in Singapore, FIs who follow the UK and Australia regimes are not exempted or deemed compliant, but may still apply and adapt other group policies to Singapore operations for the purpose of complying with the IAC Guidelines in Singapore.

3. Key outcomes

The Key outcomes apply at various levels:

  • Board
  • Senior Management
  • Material Risk Personnel (MRP), and
  • all other employees

We set out a summary of MAS’ key observations to the 5 outcomes which you can download here.

4. Notification of Material Adverse Developments

The Board and senior management are expected to notify MAS of material adverse developments, which include but are not limited to:

  • material impact on the FI’s viability, solvency, liquidity, funding, capital, earnings, risk profile, and/or reputation
  • material impact on, or compromise of the interests of, the FI’s customers or groups of customers, or
  • material impact on the FI’s counterparties or the fair, orderly and transparent operations of markets.

5. Enforcement of IAC Guidelines

MAS stated that it may pursue the following measures to ensure that the IAC Guidelines are properly implemented:

  • MAS may require the FI to put into place additional measures to address any deficiencies
  • MAS may take breaches of IAC Guidelines into account in its assessment of the FI and the effectiveness of Board and senior management oversight
  • if FIs and their board and senior management demonstrate an inability or unwillingness to take remedial actions, MAS will take appropriate supervisory actions depending on the severity and potential impact of the weaknesses uncovered, and
  • MAS may communicate with the home or host regulators of the FI on the issues of concern.

6. Next steps

FIs with global group policies and procedures should take steps to review their arrangements and risk management practices to ensure that they are in line with the IAC Guidelines.

In terms of the preparations, MAS has noted that FIs should avoid arrangements that undermine the accountability of SMs, such as insurance or other agreements that have the effect of indemnifying SMs or other employees against financial penalties for misconduct or other offences.

MAS has stated that it will announce the effective date of the IAC Guidelines after the conclusion of CP2, and there will be a transitional period of one year after the IAC Guidelines are published. MAS will also adopt a consultative approach to assessing FIs’ compliance.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.