The Monetary Authority of Singapore ("MAS") has on 10 September 2020 published its guidelines on individual accountability and conduct (the "Guidelines"). The Guidelines seek to improve standards of conduct across the financial industry by promoting the individual accountability of senior managers, strengthening oversight of material risk personnel, and reinforcing standards of proper conduct among all employees. Specifically, the Guidelines spell out five accountability and conduct outcomes for Financial Institutions to achieve. This note sets out the key highlights.
Applicability of the Guidelines to Financial Institutions
The Guidelines apply to all Financial Institutions regulated by the MAS, except for exempt financial advisers1, exempt corporate finance advisers2, exempt trust businesses3, exempt over-the-counter (OTC) derivatives brokers4, exempt futures brokers5, exempt payment services providers6, foreign-incorporated recognised market operators, foreign-incorporated recognised clearing houses, licensed foreign trade repositories and the Continuous Linked Settlement (CLS) Bank.
In relation to parent entities, the Guidelines would apply on a group basis for locally-incorporated banks, locally-incorporated banks insurers, and approved exchanges and approved clearing houses that are operated as a single group.
MAS does not intend for the Guidelines to be prescriptive. Financial Institutions with a headcount of lesser than 50 would not ordinarily be expected to adopt the specific guidance described in the Guidelines. Financial Institutions with a headcount of 50 or more also have the flexibility not to adopt specific guidance, should they assess these measures to be irrelevant to their businesses. However, Financial Institutions that choose not to adopt the specific guidance should be prepared to justify their decision and demonstrate how they achieve the relevant account and conduct outcomes through other means.
The Guidelines do not prescribe how headcount should be defined. In the recent response to feedback on the consultation paper in relation to the Guidelines, MAS had clarified that Financial Institutions would have the flexibility to decide how the headcount should be tabulated. However, it should generally include all personnel that engage in or support the Financial Institution's core management functions, whether on a full or part time basis. It would not generally include non-executive directors, outsourced service providers or employees in foreign offices with the exception of overseas-based representatives.
Five accountability and conduct outcomes
I. Outcome 1: Senior managers responsible for managing and conducting the Financial Institution's core functions are clearly identified
MAS requires Financial Institutions to have clarity in individual responsibilities, and to be able to hold senior managers accountable for matters under their purview. In this regard, the Board of Financial Institutions should:
- clearly identify the senior managers who have responsibility for functions that are core to the management of the Financial Institution's affairs;
- accurately identify senior managers who exercise actual oversight responsibilities and have decision-making authority, regardless of their physical location; and
- exercise appropriate management oversight over all material aspects of the Financial Institution's affairs.
MAS has set out in Annex B of the Guidelines a list of roles that would typically be considered as core management functions. These core management functions should be taken charge of by designated senior managers, and these senior managers should ideally have direct reporting lines to the CEO.
II. Outcome 2: Senior managers are fit and proper for their roles, and held responsible for the actions of their employees and the conduct of the business under their purview
III. Outcome 3: The Financial Institution's governance framework supports senior managers' performance of their roles and responsibilities, with a clear and transparent management structure and reporting relationships
Outcomes 2 and 3 will be discussed together, as they have some common points and the specific guidance would apply to both of them.
To meet these two outcomes, the Board should ensure the following:
- processes are put in place to assess the fitness and propriety of each senior manager, prior to appointment and on an on-going basis thereafter;
- clear specification of each senior manager's individual area of responsibility and their respective roles in management committees;
- appropriate delineation of the Financial Institution's overall management structure, including reporting lines;
- acknowledgement by each senior manager of his specified roles, responsibilities and reporting lines;
- approval by the Board of each senior manager's specified roles and responsibilities;
- proper documentation of the Financial Institution's overall management structure, and each senior manager's specified roles and responsibilities;
- appropriate incentive and consequence management frameworks that hold senior managers accountable for their performance, including the actions of their employees and the conduct of the business under their purview; and
- a proper succession plan that is regularly reviewed and updated.
IV. Outcome 4: Banks Material risk personnel are fit and proper for their roles, and subject to effective risk governance, and appropriate incentive structures and standards of conduct
Material risk personnel ("MRPs") are individuals who 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. MRPs may include employees in front, middle or back office functions.
To meet this outcome, the Board and senior management should ensure that processes are put in place to:
- identify MRPs;
- assess the fitness and propriety of each MRP, prior to appointment and on an on-going basis thereafter;
- facilitate effective risk governance by subjecting MRPs to appropriate risk limits and supervisory oversight, and according them the necessary stature and authority where such employees perform risk management or control functions; and
- subject MRPs to standards of proper conduct and regular training, as well as an appropriate incentive structure that encourages behaviour which is consistent with the desired conduct outcome.
When identifying MRPs, Financial Institutions should keep in mind its financial and non-financial risk profile, and the materiality of the impact that an individual's decisions or activities could have on this risk profile. To evaluate the materiality of the impact, Financial Institutions may consider quantitative indicators (eg. approval limits for trades) and qualitative indicators (eg. authority to approve new technologies, authority to on-board high risk clients).
V. Outcome 5: The Financial Institution has a framework that promotes and sustains among all employees the desired conduct
MAS already has in place various legislations and regulatory instruments that set out the requirements and expectations on the conduct of Financial Institutions and their employees. The Guidelines seek to augment the existing regulatory regime by requiring the Board and senior management ensure that a framework is in place which addresses the following:
- the standard of conduct expected of all employees;
- consistent and effective communication of the expected standard of conduct;
- there are appropriate policies, systems and processes to enforce the expected standards of conduct (such as regular monitoring, incentive and consequence management system, whistleblowing program); and
- engagement strategies with key stakeholders (such as customers, shareholders and regulators) to ensure transparent and timely communication of relevant material information.
In addition, Financial Institutions should notify MAS as soon as they become aware of any material adverse developments. These developments would include misconduct, lapses in risk management and controls, or breaches in legal or regulatory requirements that have the potential to cause widespread disruption to the Financial Institution's day-to-day operations, services, or activities, and/or significantly impact its customers and other stakeholders, or the safety and soundness of the financial system in Singapore. This appears to go beyond the current responsibilities and reporting requirements of capital markets services licence holders and financial advisers for the misconduct of their representatives, as well as the current reporting requirements of insurance brokers for the misconduct of their broking staff.
The introduction of the Guidelines is another step by MAS in its continued efforts to improve the corporate governance of Financial Institutions. By focusing on the individual accountability of senior staff, MAS seeks to raise the standards of Financial Institutions by having the senior staff set the appropriate culture, tone and practices at the top.
The Guidelines are aligned with worldwide efforts to instil a culture of individual accountability among senior staff members. Similar individual accountability regimes may be found in other major jurisdictions such as the United Kingdom, Hong Kong and Australia.
Financial Institutions with a headcount of 50 or more should take note of the Guidelines, and make the relevant preparations to ensure smooth compliance. While smaller Financial Institutions are not strictly required to follow the Guidelines, they should also strive to meet the five accountability and conduct outcomes. In this regard, the Guidelines would serve as useful guidance to achieving these outcomes.
A copy of the Guidelines may be obtained here.
1. Persons providing financial advisory services for up to 30 Accredited Investors ("AIs") under Regulation 27(1)(d) of the Financial Advisers Regulations.
2. Persons giving advice on corporate finance to only AIs, Expert Investors ("EIs") or Institutional Investors ("IIs") under Paragraph 7(1)(b) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations ("SFR").
3. Any practising solicitor, foreign practitioner, Singapore law practice, Joint Law Venture, Formal Law Alliance or Qualifying Foreign Law Practice carrying out trust business for up to 30 clients with each client's trust assets not exceeding S$2 million under Regulation 4(1)(b)(iv) of the Trust Companies (Exemption) Regulations.
4. Corporations carrying on business in dealing in capital markets products that are over-the-counter derivatives contracts with only AIs, EIs or IIs under Paragraph 3A(1)(d) of the Second Schedule to the SFR.
5. Corporations carrying on business in dealing in capital markets products that are block futures contracts with only AIs, EIs, or IIs under Paragraph 3(1)(d) of the Second Schedule to the SFR.
6. Persons exempted from the requirement to have a license to carry on a business of providing any payment service under Section 13 of the Payment Services Act 2019.
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