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Singapore – Consultation Paper On Proposed Amendments To The Banking Act.

6 March, 2015

 

 

On 15 January 2015, the Monetary Authority of Singapore (“MAS”) issued a consultation paper seeking feedback on a draft Banking (Amendment) Bill (“draft Amendment Bill”). The draft reflects policy changes consulted on by the MAS over various consultation papers, including the Consultation Paper on the Review of the Banking Act issued on 28 November 2013 (“Consultation Paper”). It also includes new changes not previously raised in earlier consultation papers. These changes and the response (“Response”) of the MAS to feedback received on the Consultation Paper are discussed below.


Formalising Notification Requirements


The Consultation Paper proposed formalising banks’ duties to inform the MAS of material adverse developments and information in relation to the bank, its shareholders and controllers, and key appointment holders. The MAS will be proceeding with these proposals which are now contained in the draft Amendment Bill.


In its Response, the MAS has clarified how it will be enforcing the requirements as to notification:

 

  • A bank will be imputed to have known the particular information once the directors and senior management have been made aware of it. In determining whether the bank is said to have knowledge of the particular information, the threshold will be limited to that of actual knowledge if reasonable steps have been taken to ensure compliance with all applicable requirements; i.e., the directors and senior management involved would need to have actual knowledge of that piece of information.

 

  • The MAS will take into account any confidentiality restrictions to which the bank may be subject to under the relevant laws, in assessing if a bank has breached the notification requirements under the Banking Act (“BA”). However, banks should ensure that any confidentiality agreements or undertakings that they enter into with other parties are subject to such disclosures as may be required by law, including the BA. The bank, and any individuals acting on the bank’s behalf, should ensure that they are contractually protected from any liability that may arise from the disclosure of the relevant information to the MAS as required under the BA.

 

  • The bank is expected to inform the MAS only when it has reasonable grounds to believe the accuracy of the information. In this regard, banks should take reasonable steps to ascertain the accuracy of any information it becomes aware of, regardless of the source of the information. This may, in certain situations, include the analysis of hearsay information which the bank has been made aware of, and which may trigger the notification requirements.
 

The notification requirements set out in the draft Amendment Bill include the following:

 

  • Banks will be required to immediately notify the MAS as soon as they become aware of any material information that may negatively affect the fitness and propriety of any officer whose appointment was previously approved by the MAS.

 

  • Singapore-incorporated banks must immediately notify the MAS as soon as they become aware of persons who have become substantial shareholders and controllers without seeking the prior approval of the Minister-in-charge of the MAS. They must also notify the MAS as soon as they become aware of any information that negatively affects the suitability of these persons to be their substantial shareholders and controllers.

 

  • Banks must immediately notify the MAS of any material adverse developments that the bank has reasonable grounds to believe is likely to materially and adversely affect the bank in Singapore. A bank incorporated outside Singapore will only be required to make such a report if it has reasonable grounds to believe that the adverse development is likely to materially and adversely affect the branch in Singapore; a Singapore incorporated bank will be required to make such a report if it has reasonable grounds to believe that the adverse development is likely to materially and adversely affect the bank or any entity or trust (including associates) in its bank group or designated financial holding company (“FHC”) group.
 

What constitutes material adverse developments will be set out in regulations to be issued by the MAS. However, some indication of what these will involve has been provided in the Response:

 

  • Banks should notify the MAS as soon as they become aware of, or have information which reasonably suggests that a breach of any laws or regulations administered by the MAS, or any requirements imposed by the MAS has occurred, may have occurred, or is likely to occur in the foreseeable future.

 

  • For breaches and potential breaches of other laws or regulations, business rules, codes of conduct, or industry guidelines, including those of other jurisdictions, banks would only have to notify the MAS if the breach or potential breach is believed to result in a material adverse impact on the bank in Singapore or, in the case of a Singapore-incorporated bank, any entity or trust in the bank group or designated FHC group.

 

  • In addition, banks should notify the MAS when the bank becomes aware that any of the following has occurred, or is likely to occur in the foreseeable future:
    • any development which the bank has reasonable grounds to believe may have a material adverse impact on the relevant entity’s financial soundness or reputation; or
    • any development which the bank has reasonable grounds to believe may have a material adverse impact on the relevant entity’s ability to serve its customers on a business-as-usual basis.

 

  • In determining whether the MAS should be notified of a development that may occur in the foreseeable future, banks should consider both the probability of it happening and the severity of the outcome, should it happen.

 

  • A bank is not expected to notify the MAS of non-regulatory operational breaches of their own internal policies or guidelines, unless they lead to adverse developments which materially affect the bank.
 

Requirement To Implement Risk Management Controls


The Consultation Paper also proposed formalising the expectation for banks to implement adequate risk management systems and controls. The detailed risk management requirements will be set out in regulations and the draft Amendment Bill empowers the MAS to issue such regulations. In response to concerns expressed by various respondents, the MAS has explained that it will continue to take the principle of proportionality into account, taking reference from the existing Guidelines on Risk Management Practices. An assessment of whether risk management systems and controls are considered adequate will therefore continue to take into account factors such as a bank’s business model, nature, and scale of operations. The MAS has also stated in its Response that banks may rely on their groups’ global risk management frameworks if the application of such frameworks is appropriate to the business in Singapore. It will consult on the draft regulations later in the year.


The MAS has also explained that, as the requirement to implement adequate risk management controls will be imposed on the bank in Singapore, the responsibility for ensuring compliance with it will lie with the directors of the Singapore-incorporated bank. However, the MAS will assess the adequacy of a bank’s Head Office support and oversight in deciding on the supervisory engagement to be undertaken, where appropriate.

 

Strengthening The Control Of The MAS Over Key Appointment Holders


The Consultation Paper discussed strengthening the control of the MAS over the key appointment holders of banks. Under the current BA, the MAS may direct a Singapore-incorporated bank to remove a director or executive officer under three specific circumstances if it believes that this is necessary in the public interest or for the protection of the depositors of the bank. Under the draft Amendment Bill, the MAS may direct a Singapore-incorporated bank to do so if it is satisfied that the director or executive officer is not a fit and proper person to act as such. In determining fitness and propriety, the MAS may have regard to the circumstances currently specified in the BA, as well as any other matter that it considers relevant. The effect of the amendment is therefore to expand the bases on which the MAS may direct a bank to remove a director or executive officer.


Strengthening The Control Of The MAS Over Banks’ Auditors


To implement its proposal in the Consultation Paper to strength its control over the auditors of banks, the draft Amendment Bill provides that the MAS will be able to penalise auditors for their failure to discharge their statutory duties as set out in the BA. Any such failure will be a criminal offence rendering the auditor liable to a fine not exceeding SGD 100k. If the offence is a continuing one, the auditor will also be liable to a further fine not exceeding SGD 10k for every day that the offence continues after conviction.


The MAS has stated in its Response that in determining whether to impose a penalty for an auditor’s failure to report a matter that it was aware of, it will consider whether the auditor’s failure was wilful, reckless, or careless. It has also clarified that the duties imposed on bank auditors are imposed on the audit firm as an entity, rather than the specific audit partners and employees involved in the audit. Therefore, any failure to discharge the auditors’ statutory duties under the BA would constitute an offence by the audit firm, rather than the specific audit partners or employees involved in the audit.


Under the Amendment Bill, the MAS will also be able to direct a bank to remove external auditors who have not satisfactorily performed their statutory duties. This provision expressly provides that it has effect notwithstanding the provisions of the Companies Act which mandate that auditors are to be removed only by shareholders’ resolution at a general meeting. In response to concerns expressed as to potential operational challenges and disruptions that could arise from the removal of an auditor, the MAS has given the assurance in its Response that it will exercise its powers judiciously, after careful consideration of all relevant circumstances. It has also clarified in its Response that the removal of an auditor for a bank in Singapore would be specific to the firm’s duties in respect of a particular bank.


Finally, the draft Amendment Bill introduces a safe harbour provision protecting external auditors from liability arising from disclosure, in good faith, of confidential information provided to the MAS. In its Response, the MAS has clarified that the safe harbour provision will extend to both the audit firm and its employees.


Other Changes to the Banking Act


Some of the other changes to the BA set out into the draft Amendment Bill include the following:

 

  • The MAS may require any bank that is incorporated outside Singapore which meets certain specified criteria, to be incorporated in Singapore, for the purpose of enhancing depositor protection.

 

  • The MAS will have the power to require banks to obtain approval to open a place of business to conduct money-changing and remittance activities, as well as other financial or related activities.

 

  • The MAS will be empowered to declare any day or part thereof to be a bank holiday or holidays and to prescribe either a positive or negative list of activities that banks may or may not conduct during the bank holiday. The bank holiday provision for merchant banks will be similarly amended.

 

  • The MAS will be able to terminate, prohibit, or impose restrictions on transactions with related persons that are detrimental to depositors’ interests.

 

  • The MAS will implement a registration regime for representative offices. It will be able to impose fees for new applications for the registration of representative offices.

 

  • The MAS will clarify that the requirement for banks to seek approval for their major stakes includes holdings in non-companies such as Singapore partnerships, co-operative societies, and trusts. References to major stakes in companies in Parts VII and VIII of the Banking Regulations will correspondingly be amended and consulted on in due course.

 

  • The MAS will clarify that it may require banks to disclose information relating to the operations or activities of, or standards to be maintained by banks, for the purpose of enhancing market discipline.

 

  • The MAS will repeal the provision that makes bank directors jointly and severally liable for their banks’ losses arising from unsecured credit facilities granted or exposures to specified persons in the director groups of the bank.

 

  • The MAS will be able to penalise banks which fail to take reasonable care to ensure that the submission of information required by it is accurate, even if the information is not material. The MAS will be able to disclose any information received from a bank if such disclosure is required under any written law or an order of a Singapore court.

 

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For further information, please contact:

 

Elaine Chan, Partner, WongPartnership 

elaine.chan@wongpartnership.com

 

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