Practical Steps for Compliance with MAS’ IAC Guidelines

Grace Chong at global law firm Simmons & Simmons analyses the implications of MAS’ Individual Accountability and Conduct Guidelines, and sets out the practical steps to be taken.

On 6 June 2019,  MAS (Monetary Authority of Singapore) issued a consultation paper on the Proposed Scope of Application of the Guidelines on Individual Accountability and Conduct Act (“IAC Guidelines”).

The paper sets out how the scope of the IAC Guidelines will be expanded to include all the FIs that MAS 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 in April 2018, demonstrating MAS’ clear priority to clarify its expectations of the conduct of the entities it regulates.

The latest consultation paper is the most recent development in the regulatory landscape for senior management, and comes amidst a slew of similar regulatory changes that Regulation Asia, in collaboration with US regtech Starling, has covered targeting banking culture reform in the UK, Australia and Hong Kong.

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.

Purpose of the IAC Guidelines

Broadly, the IAC Guidelines aim to: (i) promote the individual accountability of senior managers; (ii) strengthen oversight of ‘Material Risk Personnel’; 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:

  • Outcome 1: Senior managers who have responsibility for the management and conduct of functions that are core to the FI’s operations are clearly identified.
  • 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.
  • 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.
  • 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.
  • Outcome 5: The FI has a framework that promotes and sustains the desired conduct among all employees.

Although MAS has not requested 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.

A key obligation that FIs must comply with is that of reporting and notification. 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.

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.

Extended scope of the IAC Guidelines

Initially, MAS proposed to apply the IAC Guidelines to a limited scope of eleven types of FIs. This primarily included lenders such as banks and finance companies, as well as local and foreign insurers. For these FIs which are locally-incorporated, the IAC Guidelines apply on a group basis.

In the capital markets sector, the IAC Guidelines apply to approved exchanges and clearing houses, approved holding companies, capital markets intermediaries, financial advisers and trust companies.

In the new consultation paper, MAS proposes 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):

  • Credit card and charge card issuers;
  • Registered fund management companies;
  • Approved trustees of unit trusts;
  • Recognised market operators and clearing houses;
  • Authorised or designated benchmark submitters;
  • Payment services licenses (including approved stored value facilities); and
  • Money-changers and remittance companies.

Conversely, certain entities are exempted from the IAC Guidelines because 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:

  • An exempt financial adviser;
  • An exempt corporate financial adviser;
  • An exempt over-the-counter derivatives broker;
  • An exempt futures broker;
  • A Recognised Market Operator or Recognised Clearing House incorporated outside Singapore;
  • A Licensed Foreign Trade Repository; and
  • 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. Its 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.

Persons subject to the IAC Guidelines

The individuals subject to the IAC Guidelines are: (i) ‘Material Risk Personnel’; and (ii) ‘Senior Managers’.

‘Material Risk Personnel’ are employees who perform material risk functions. These employees’ decisions or activities could impact a FI’s risk profile, regardless of whether they are senior managers or not.

Material Risk Personnel can include employees in executive, business, risk management, control, or support functions. Crucially, they must have the authority to make decisions or conduct activities that can significantly impact the FI’s safety and soundness, or cause harm to a significant segment of the FI’s customers or other stakeholders.

‘Senior managers’ are individuals employed in an executive capacity by, and who are principally responsible for the day-to-day management of, the FI.

Senior managers perform Core Management Functions. Examples include C-suite personnel, chief risk officers, heads of business functions, heads of human resources, and heads of compliance, among others.

Core Management Functions under the IAC Guidelines

In light of the nature of the newly-included FIs’ operations, the MAS has updated the list of Core Management Functions. This, in turn, will affect the identification of individuals as ‘senior managers’. These individuals will then be regulated by the IAC Guidelines.

Generally, the Core Management Functions are core functions that relate to the management of an FI’s day-to-day affairs.

For the role of ‘head of business function’ in particular, a type of ‘senior manager’, the individual must be principally responsible for the management and conduct of a function which undertakes the business activities of the FI.

That said, not all business functions of an FI are Core Management Functions. Specifically, for registered fund management companies, the functions include the regulated activity of fund management. Such activities include managing portfolios of capital markets products or entering into spot foreign exchange contracts for the purpose of managing the customer’s funds.

However, for these fund managers, management of real estate investment trusts is not a Core Management Function. Meanwhile, for approved trustees, their Core Management Functions would include them acting as a trustee for unit trusts.

For FIs which are payments services licensees, the individual undertaking the role of ‘head of financial crime prevention and/or compliance’ is considered to be performing a Core Management Function. In tandem with this responsibility, this individual must also discharge the proposed AML/CTF obligations. These obligations were set out in the recent MAS consultation paper and draft AML Notices published last week.

In light of the dual role and responsibility that the ‘head of financial crime prevention and/or compliance’ bears, extra care and consideration should be taken for selecting a candidate for this role. More importantly, their activities and responsibilities should be carefully scrutinised and regularly updated. This is because this role will have oversight over these critical responsibilities and be juggling these responsibilities concurrently. Any failures in compliance will have implications on the firm’s licensing status and operations in Singapore.

Under the draft AML Notices, 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.

Implications and Next Steps

Singapore’s enforcement agenda is increasingly focused on the responsibility and accountability of 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:

  • 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;
  • Organisational charts are updated to ensure that the FI’s management structure and reporting relationships are clear and transparent;
  • 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;
  • Senior management employment contracts are updated to reflect responsibilities and undertakings arising from the IAC Guidelines; and
  • 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.

Of special complexity are FIs with significant cross-border operations, where in practice, senior managers may be in geographical locations that are different from their subordinates. In spite of that, the FIs will also need to clearly consider whether their revised responsibility maps and statements accurately reflect the actual position in practice.

Ideally, doing so would ensure that the FIs meet the relevant criteria and can clearly articulate their employees’ roles and reporting relationships. However, in actuality, this may present political and practical difficulties for some organisations, which may need to consider changes in resource structures, incentive systems and disciplinary procedures.

Nonetheless, this move is a clear step in the right direction in improving standards of corporate governance. Going forward, MAS is open to feedback on its proposed regulations. Thus, FIs with concerns relating to the IAC Guidelines should make relevant submissions to MAS.

This commentary is adapted from a recent client bulletin first published by Jason Valoti, Jek-Aun Long, Grace Chong, and Calvin Tan at global law firm Simmons & Simmons.

 

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