Jurisdiction - Singapore
Reports and Analysis
Singapore – Regulatory Supervision of Banks and Insurance Companies.

28 February, 2012

 

 

INTRODUCTION
 
The Monetary Authority of Singapore (“MAS”) recently announced plans to develop a regulatory framework for financial groups. In Singapore, such financial groups are typically headed by a financial institution such as a bank or an insurance company, or by a non-operational holding company commonly referred to as a financial holding company (“FHC”).
 
Two consultation papers were published by MAS. The first, titled “Regulatory Framework for Financial Holding Companies” (“FHC Consultation”), discusses a new regime for FHCs which have at least one Singapore-incorporated bank or insurance company within the group. The second, titled “Insurance Group-wide Supervision (“Insurance Consultation”), relates to group-wide supervision of insurance operations. The closing date for feedback for both consultation papers is 19 March 2012.
 
SCOPE OF APPLICATION FHC
 
Consultation
 
The purpose of the new FHC regulatory regime is to strengthen the prudential oversight of financial groups in Singapore. In this regard, MAS has noted that in respect of an international group, group-wide prudential supervision could already be put into place by the home regulator of the group. Nevertheless, MAS is of the view that it may nonetheless be necessary to supervise from Singapore part of such an international group (as might be the case if there is an intermediate FHC in Singapore). Accordingly, it has proposed that the scope of regulation for the new FHC regime will be determined on a designation basis, ie. MAS will decide and designate which FHCs will come under its supervision.
 
In terms of how MAS will exercise its powers of designation, it is proposed that:
 
(a) In the case of a Singapore-based financial group, MAS would, from the Singapore bank or insurance company, look through the intermediate levels of ownership to the parent FHC. The parent FHC will be designated so that the parent FHC, all intermediate FHCs and downstream subsidiaries in Singapore or overseas will come under the FHC regulation regime.
 
(b) Where a Singapore-based financial group is large, and an intermediate FHC within the group is itself at the head of a sub-group whose members are significant to the Singapore financial sector, then MAS may further designate the intermediate FHC so that the sub-group itself comes under the FHC regulation regime.
 
(c) In the case of a foreign FHC group, MAS would, from the Singapore bank or insurance company, look through to the controlling intermediate FHC that is in Singapore and designate this entity, so that it, together with its downstream subsidiaries in Singapore or overseas, come under the FHC regulation regime.
 
Insurance Consultation
 
In a similar vein, MAS intends to carry out group-wide supervision for Singapore insurance groups and selected insurance groups whose ultimate parent entity is incorporated outside Singapore.
 
(a) In the case of a Singapore insurance group, MAS would, from the Singapore insurance company look through the intermediate levels of ownership to identify the parent company. The parent company may be an FHC or an insurance company. If it is an FHC, the FHC regulatory regime will apply to the group comprising the parent FHC, all intermediate FHCs and downstream subsidiaries. If the parent company is itself an insurance company, the existing supervisory provisions under the Insurance Act, together with relevant amendments to include rules on group-wide supervision, will apply to the group.
 
Apart from the identified parent company and its group, MAS may also include within its supervision other entities within the group structure which it assesses to pose contagion risk to the group.
 
(b) For insurance groups whose ultimate parent entity is outside Singapore, MAS will consider whether to carry out group-wide supervision based on intermediate insurance groups. Looking through from the entity carrying out insurance business in Singapore up to the parent controlling entity in Singapore, the parent entity and its downstream group members form an intermediate insurance group.
 
If the intermediate insurance group is not subject to group-wide supervision by the home supervisor in the country where its ultimate parent is located; and the operations of such intermediate insurance group in Singapore is significant to the Singapore financial sector, MAS will consider carrying out group-wide supervision on that intermediate insurance group.
 
CONTENT OF REGULATION
 
Prior approval of shareholding and major stake acquisition
 
Currently, the Banking Act (“BA”) and the Insurance Act (“IA”) stipulate shareholding and control thresholds for Singapore-incorporated banks and insurance companies. Regulatory approval must be sought when the threshold is exceeded. For banks, the relevant thresholds are 5%, 12% and 20%. For insurance companies, the thresholds are 5% and 20%.
 
It is proposed that FHCs shall be subject to these shareholding and control thresholds, in addition to the individual banks or insurance companies. When an FHC increases its shareholding in the relevant bank or insurance company beyond the relevant threshold, it will have to seek regulatory approval from either the Minister in charge of MAS (for banks) or from MAS (for insurance).
 
For both FHCs and insurance groups, new acquisitions present a prudential risk and may affect the financial soundness of the group. MAS therefore proposes that the acquisition by the FHC or the insurance group of a major stake in any company shall require MAS approval. In the case of divestments or disposals, MAS should also be notified.
 
Ban on cyclical shareholdings
 
In relation to both FHCs and insurance groups, MAS proposes that cyclical shareholdings (arrangements where an entity holds share in a downstream entity which in turn holds share in the parent) be prohibited.
 
Excluded from the cyclical shareholding prohibition are investments held under insurance funds (as opposed to equity or shareholders’ funds) where the rights conferred are held for the primary benefit of policyholders. This is provided that the insurance company in question has in place a clear investment policy and voting policy to ensure that the rights of the policyholders are not compromised. MAS will issue guidelines on the relevant investment policies and voting policies in due course.
 
Corporate governance
 
Corporate governance (“CG”) requirements for banks and insurers are currently set out in the Banking (Corporate Governance) Regulations 2005, the Insurance (Corporate Governance) Regulations 2005 and the MAS Guidelines on Corporate Governance for Banks, Financial Holding Companies and Direct Insurers. MAS is of the view that CG regulations should apply to both FHCs with bank subsidiaries as well as FHCs with insurance company subsidiaries.
 
For FHCs with bank subsidiaries, the existing banking CG regulations will apply.
 
For insurance groups, MAS proposes that the parent board of directors of significant insurance groups should be subject to more stringent CG requirements. “Significant insurance groups” refers to an insurance group which:
 
(a) conducts life and composite business, and which has insurance assets equal to or greater than S$20 billion;
 
(b) conducts non-life business, and which has total gross premiums equal to or greater than S$2 billion; or
 
(c) comprises a “Tier 1” insurer.
 
Incidentally, MAS is concurrently holding another consultation on the CG requirements to apply to insurance companies at the solo entity level. In the MAS Consultation Paper on Corporate Governance for Insurers (“Insurance CG Consultation”), it is proposed that locally-incorporated insurers be categorised into two tiers.
 
A “Tier 1” insurer is defined in the Insurance CG Consultation as:
 
(a) a direct life or composite insurer whose total assets are at least $5 billion; or
 
(b) a direct general insurer or reinsurer whose annual gross premiums are at least $500 million.
 
A “Tier 2” insurer is defined in the Insurance CG Consultation as:
 
(a) a direct life or composite insurer whose total assets are less than $5 billion; or
 
(b) a direct general insurer or reinsurer whose annual gross premiums are less than $500 million.
 
MAS proposes that the CG regulations applicable to “Tier 1” insurers will be more stringent than those for “Tier 2” insurers. “Tier 1” insurers will be subject to the existing CG regulations applicable to significant insurers, whereas “Tier 2” insurers will have their CG regulations calibrated to their smaller scale of operations.
 
Accordingly, it is proposed that the parent board of a significant insurance group should comply with the same requirements as that of the “Tier 1” insurers, whereas the parent board of a non-significant insurance group should comply with the “Tier 2” CG requirements.
 
Fit and proper criteria
 
The MAS requirements relating to fit and proper criteria will extend to FHCs. Thus, directors, executive officers and employees who are not fit and proper would also be disqualified from holding positions in parent entities of insurance groups or in FHCs.
 
Permitted activities
 
The following activities have been proposed to be regulated at FHC level:
 
Name Sharing: The BA and IA currently restrict the use of the words “bank” and “insurance”. Only companies engaged in banking and insurance business are allowed to use names which contain “bank” or “insurance” or their derivatives.
 
MAS proposes to extend similar restrictions to FHCs. The FHC may share the same name and logo as the regulated bank or insurance company. If it includes the word “bank” or “insurance” in its name, it must indicate that it is a holding company. Related corporations of the FHCs may also share name and other representations which indicate an association with the FHC.
 
Anti-commingling: Currently, banks in Singapore are subject to a requirement that they do not commingle their financial and non-financial businesses.
 
MAS proposes that the anti-commingling policy will also apply to FHCs, which should not undertake any non-financial or commercial business. However, MAS does recognise that there would be efficiency gains and benefits if the FHC carried out certain ancillary support services such as fund raising, central liquidity management, group accounting and IT services and will allow these.
 
Investment in immovable property: The current limitations applicable to banks holding immovable property should be extended to all FHCs. FHCs should not acquire or hold immovable property except if it is used to conduct its financial group’s business.
 
Minimum paid-up capital and capital funds
 
Banks and insurance companies are subject to minimum paid-up capital and capital maintenance funds requirements which depend on the type of licence held.
 
MAS proposes that FHCs should generally have minimum paid-up capital and capital maintenance funds equivalent to that of the highest requirement amongst its subsidiaries regulated by MAS. MAS would also have the discretion to impose a higher paid-up capital and capital maintenance funds requirement on a FHC should it be of the view that that FHC group is subject to higher risk.
 
The predominance test
 
MAS recognises that there are sectoral differences between the regulations applicable to banks and those applicable to insurance companies. If a financial group is engaged only in banking or insurance business, it would be straightforward to determine the relevant sectoral rules to apply to the FHC level. If however, the financial group carries out a mixture of financial businesses, it is proposed that in order to determine what sort of sectoral rules to apply to the FHC group, a predominant sector representing the primary financial business of the group should first be identified.
 
The FHC Consultation suggests a proposed test for determining predominance. Such test would contain quantitative criteria such as relative balance sheet size, revenue and risk-weighted assets, as well as qualitative assessment such as group organisational hierarchy and extent of common directors between the FHC and its primary financial subsidiaries.
 
Group-wide concentration limits
 
MAS proposes to introduce group-wide concentration limits to mitigate group concentration risks which may not be adequately addressed when applied on the solo regulated entity. Group-wide concentration limits may also prevent regulatory arbitrage if a bank or insurer-held group carries out restructuring within an FHC group.
 
Currently, only banks have specified (or “hard”) concentration limits, such as the large exposure limit under Section 29 BA, the equity investment limit under Section 31 BA and the property investment limit in Section 33BA. For insurance companies, concentration risk charges apply and any exposures beyond certain specified thresholds will attract additional capital requirements.
 
Under the FHC Consultation, it is proposed that banking groups structured under an FHC should be subject to the concentration limits currently applicable to banks.
 
Under the Insurance Consultation, MAS is seeking feedback as to whether insurance companies should also be subject to “hard” concentration limits like those applicable to banks, and to whether any modifications are necessary.
 
Capital adequacy framework
 
Again, banks and insurance companies are subject to different capital adequacy regulations. For banks, risk-based capital adequacy regulation is currently provided for under MAS Notice 637 which follows the Basel capital framework. Insurance companies are also subject to a suite of regulations which address capital adequacy, such as the Insurance (Valuation and Capital) Regulations 2005.
 
MAS proposes that bank capital adequacy requirements will apply to predominantly banking FHC groups at group level, using a uniform approach on the consolidated accounts of the FHC group. For FHC groups where banking is not predominant, a modular approach to capital adequacy will be applied, details of which are set out in the FHC Consultation.
 
In relation to group capital adequacy assessments for insurance groups, MAS proposes to adopt a group level focus approach using a consolidation method. Details of this approach are set out in the Insurance Consultation.
 
With regard to the valuation bases and capital rules currently applicable to insurance companies in Singapore, it is proposed that these will apply with the necessary modifications to insurance groups.
 
Under the Insurance Consultation, MAS proposes that it will require insurance groups to maintain a prescribed minimum group solvency level based on the current risk-based capital framework for insurance companies. It will also be developing a group wide set of solvency control standards, known as “Prescribed Capital Requirement” and “Minimum Capital Requirement”, which comply with the standards set by the International Association of Insurance Supervisors.
 
Other prudential requirements for FHCs
 
MAS also proposes to require FHCs to develop and maintain capital management policies and plans which consider risk assessment on a group-wide basis, and to report their leverage ratios to MAS at both solo and group levels.
 
FUTURE IMPLEMENTATION
 
As to the implementation of the various proposals set out in the FHC Consultation and the Insurance Consultation, MAS has indicated that these consultations are but the first step in the formulation of the new group-wide regulatory framework. There will be a draft FHC Bill, a draft IA Amendment Bill and several related regulations, which will be made available for further public consultation at a later stage.
 
REFERENCES
 
Please click on the links below to access the relevant documents.
 
 
 
 

 

For further information, please contact:

 

Eric Chan, Director, Drew & Napier

[email protected]

 

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