MAS proposes increased scope for Individual Accountability and Conduct Guidelines

On 06 June 2019, the Monetary Authority of Singapore released a consultation paper expanding the scope of the Guidelines on Individual Accountability and Conduct for Financial Institutions. This article recapitulates the key outcomes set out in the IAC Guidelines, and summarises how the proposed extension of the IAC Guidelines’ scope will affect the newly-included entities, such as fund management companies, trustees and payment services licensees.

1. Overview

On 06 June 2019, Monetary Authority of Singapore (MAS) issued a consultation paper (CP2) on the Proposed Scope of Application of the Guidelines on Individual Accountability and Conduct Act (IAC Guidelines).

CP2 sets out how the scope of the IAC Guidelines will be expanded to include all the financial institutions (FIs) it currently regulates, except for certain key exempted FIs. This extends the IAC Guidelines’ scope from the previous eleven categories of FIs initially set out in the first consultation paper issued by the MAS on 26 April 2018 (CP1), demonstrating the MAS’ clear priority to clarify its expectations of the conduct of the entities it regulates.

This article recapitulates the key outcomes set out in the IAC Guidelines, and summarises how the proposed extension of the IAC Guidelines’ scope will affect the newly-included entities, such as fund management companies, trustees, and payment services licensees.

2. Purpose of the IAC Guidelines

The IAC Guidelines aim to: (i) promote the individual accountability of senior managers; (ii) strengthen oversight of Material Risk Personnel1; and (iii) reinforce standards of proper conduct among all employees.

The IAC Guidelines set out five Outcomes and specific guidance underpinning each Outcome that FIs should work towards:

  1. Outcome 1: Senior managers2 who have responsibility for the management and conduct of functions that are core to the FI’s operations are clearly identified.

  2. Outcome 2: Senior managers are fit and proper for their roles, and held responsible for the actions of their staff and the conduct of the business under their purview.

  3. Outcome 3: The FI’s governance framework is supportive of and conducive to senior managers’ performance of their roles and responsibilities. The FI’s overall management structure and reporting relationships are clear and transparent.

  4. Outcome 4: Material Risk Personnel are fit and proper for their roles, and subject to effective risk governance as well as the appropriate standards of conduct and incentive structure.

  5. Outcome 5: The FI has a framework that promotes and sustains the desired conduct among all employees.

Although MAS has not requested for submissions on how the roles and responsibilities of senior managers should be regulated, FIs will still be required to perform a responsibility mapping exercise and maintain adequate records in order to demonstrate compliance with the IAC Guidelines.

MAS should be notified as soon as the board or senior management become aware of any material adverse developments. As for information that may have a material negative impact on the fitness and propriety of senior managers or employees in material risk functions, MAS should be notified of it in a timely manner. In order to achieve this, FIs will have to ensure that their frameworks contain the necessary steps for timely regulatory reporting, and that any material issues are flagged to management at an early stage.

3. Extended scope of the IAC Guidelines

Initially, MAS proposed to apply the IAC Guidelines to a limited scope of eleven types of FIs, which included banks, finance companies, local and foreign insurers, approved exchanges and clearing houses, approved holding companies, capital markets intermediaries, financial advisers and trust companies. For locally-incorporated banks and insurers, the IAC Guidelines apply on a group basis.

In CP2, MAS proposed that the IAC Guidelines cover all the FIs that are currently regulated by MAS, with certain exemptions. This follows from MAS’ view that the underlying principles of clarity in individual responsibilities and standards for proper conduct should apply to FIs across the financial sector in general.

The newly-included entities are as follows (among others):

  1. credit card and charge card issuers
  2. registered fund management companies
  3. approved trustees of unit trusts
  4. recognised market operators and clearing houses
  5. authorised or designated benchmark submitters
  6. payment services licenses (including approved stored value facilities), and
  7. money-changers and remittance companies.

Conversely, certain entities are exempted from the IAC Guidelines because of they: (i) have a limited scope of activities; (ii) have a minimal presence in Singapore; or (iii) are primarily regulated by a foreign regulator. These entities are:

  1. an exempt financial adviser
  2. an exempt corporate financial adviser
  3. an exempt over-the-counter derivatives broker
  4. an exempt futures broker
  5. a Recognised Market Operator or Recognised Clearing House incorporated outside Singapore
  6. a Licensed Foreign Trade Repository, and
  7. the Continuous Linked Settlement Bank.

In addition, MAS has proposed that the IAC Guidelines should not apply to firms with a headcount of less than 20. MAS’ rationale is that in such firms, management oversight and control is more concentrated in the directors and the chief executive. These individuals usually oversee the FI’s functions, leading to simpler decision-making structures, making accountability clearer.

That said, MAS has stated that it may still specifically require such firms to comply with the IAC Guidelines, after taking into account factors such as the nature and complexity of the FI’s operations.

4. Core Management Functions under the IAC Guidelines

MAS has updated the list of Core Management Functions (ie the expected core functions relating to the management of an FI’s day-to-day affairs) in light of the nature of the newly-included FIs’ operations.

For the role of “head of business function” in particular, who is principally responsible for the management and conduct of a function which undertakes the business activities of the FI, MAS noted that:

  1. For registered fund management companies, the functions include the regulated activity of fund management, and any other material function.
    1. This would include the management of a portfolio of capital markets products or the entry into spot foreign exchange contracts for the purpose of managing the customer’s funds, but would not include real estate investment trust management, and
  2. For approved trustees, the functions involved acting as a trustee for unit trusts, and any other material functions.

For payments services licensees, extra care will have to be taken for selecting a candidate and reviewing the roles and responsibilities of the role of “head of financial crime prevention and/or compliance”. This is because this role would also involve discharging the proposed obligations relating to anti-money laundering and countering terrorism financing, as set out in the recent MAS consultation paper published on 06 June 2019 (AML Consultation).

The draft AML Notices introduced by the AML Consultation emphasize that the payments services licensee will have to: (i) develop and implement relevant policies, procedures and controls; (ii) monitor their implementation; (iii) perform enhanced measures for higher risks; and (iv) ensure that they manage and mitigate identified risks based on risk assessments issued by MAS or other relevant authorities in Singapore. The FI’s policies and procedures must also be developed to address any specific risks associated with non-face-to-face transactions undertaken without an account being opened for a customer.

As the “head of financial crime prevention and/or compliance” will have oversight over these critical responsibilities, payments services licensees should note the standards and expectations set out in the applicable AML notice(s) carefully. Any failures in compliance will have implications on their licensing status and operations in Singapore.

5. Implications and Next Steps

Singapore’s enforcement agenda is increasingly focused on the responsibility and accountability of the FIs’ senior management, as evinced by the recent enforcement actions in the 1MDB-related investigations. Accordingly, FIs will need to properly assess their existing governance frameworks to strengthen their risk management processes and future-proof their operations against future misconduct. For FIs in the newly-included categories such as registered fund management companies, trustees of unit trusts and payments services licensees, conducting this process may be relatively new and unfamiliar.

In preparation for compliance with the IAC Guidelines, the newly-included FIs will now need to take steps to assess their businesses to ensure the following:

  1. Senior managers who are responsible for core management functions, and employees in material risk functions are clearly identified and relevant responsibility maps and statements are updated.
  2. Organisational charts are updated to ensure that the FI’s management structure and reporting relationships are clear and transparent.
  3. An existing framework is put into place to ensure that employees are aware of the expected standards of conduct, which are effectively enforced, and that there are appropriate incentive systems and feedback channels in place.
  4. Senior management employment contracts are updated to reflect responsibilities and undertakings arising from the IAC Guidelines, and
  5. Appropriate training is provided to staff to ensure that they are aware of the firm’s code of conduct and standards they must adhere to. Management should set the tone from the top and endorse accountability and sound conduct.

From our experience in assisting FIs to implement senior management accountability regimes in other countries (such as the United Kingdom, Hong Kong and Australia), FIs would need to perform the identification process in a careful manner, due to the cross-border nature of some of their businesses. Doing so would ensure that the FIs meet the relevant criteria and can clearly articulate their employees’ roles and reporting relationships.

FIs will also need to clearly consider whether their revised responsibility maps and statements accurately reflect the actual position in practice, regardless of where the senior managers are located. This may present political and practical difficulties for some organisations, which may need to consider changes in resource structures, incentive systems and disciplinary procedures.

If FIs are concerned about any aspects of the IAC Guidelines or its impact on the FI’s business, FIs may wish to consider whether there is a need to make relevant submissions to MAS.

1 “Employees in material risk functions” are defined in the IAC Guidelines as employees whose decisions or activities could impact a financial institution’s risk profile. These include, but are not limited to, employees in executive, business, risk management, control, or support functions who, while not senior managers, have the authority to make decisions or conduct activities that can significantly impact the financial institution’s safety and soundness, or cause harm to a significant segment of the financial institution’s customers or other stakeholders.
2 “Senior managers” are defined in the IAC Guidelines as individuals employed in an executive capacity by, and who are principally responsible for the day-to-day management of, the financial institution. These include, but are not limited to, the senior managers performing core management functions, eg the chief executive officer, chief financial officer, chief risk officer, heads of business functions, head of human resources, head of compliance etc.

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.