On April 26, 2018, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on Proposed Guidelines on Individual Accountability and Conduct (Consultation Paper). In it, the MAS proposes to issue a set of guidelines (Proposed Guidelines) to reinforce financial institutions’ (FI) responsibilities in three key areas.
(i) promoting the individual accountability of senior managers
(ii) strengthening the oversight of employees in material risk functions (MRFs)
(iii) establishing standards of proper conduct for all employees
The Proposed Guidelines set out five accountability and conduct outcomes that FIs are expected to work toward. FIs have the flexibility to explore different means of achieving the outcomes, taking into account their specific organizational structure, business model and context. The Proposed Guidelines are intended to supplement the existing regulatory framework and will not supersede existing laws and regulations. This update focuses only on the proposals that may affect Singapore fund management companies (FMCs) that hold a capital markets services license (CMS Licensees) and is not exhaustive.
We set out in the table below a summary of the key proposals in the Consultation Paper.
Key Proposals in the Consultation Paper
|Scope of application
|Outcome 1: Senior managers1 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 relationship are clear and transparent.
(i) clear specification of each senior manager’s individual areas of responsibility and his or her appointment and responsibilities in management committees
(ii) appropriate delineation of the FI’s overall management structure, including the reporting relationship among senior managers and management committees, between senior managers or management committees and the Board, and across entities within the group, as applicable
(iii) acknowledgment by each senior manager of his or her specified roles and responsibilities and reporting lines
(iv) approval by the Board or head office, as applicable, of each senior manager’s specified roles and responsibilities and the FI’s overall management structure
(v) documentation of each senior manager’s specified roles and responsibilities and the FI’s overall management structure, including timely updates where there have been material changes
(vi) appropriate incentive, escalation, and consequence management frameworks that hold senior managers accountable for the effective performance of their specified roles and responsibilities, including the actions of their staff and the conduct of the business under their purview, and
(vii) a succession plan that is regularly reviewed and updated, including the identification of potential candidates in the pipeline and appropriate handover policies and procedures to facilitate smooth transition in the senior management team
(a) The collective accountability of management committees is not absolved by the emphasis on individual accountability and vice versa.
(b) In setting up management committees, FIs should establish a formal mandate and articulate the terms of reference and reporting lines for each committee.
(c) Individual senior managers constituting a management committee are expected to have a robust understanding of the matters under their purview, and how these matters affect the FI’s business and risks. Accordingly, it is the responsibility of each senior manager to determine the issues that ought to be raised at relevant committee meetings and make constructive contributions to the discussions at these meetings, so as to facilitate more informed decision-making by the committee collectively.
|Outcome 4: Employees in MRFs are fit and proper for their roles and subject to effective risk governance as well as the appropriate standards of conduct and incentive structure
(i) identify employees in MRFs, including establishing the relevant criteria for identifying such employees
(ii) assess the fitness and propriety of employees in MRFs, prior to their appointment and on an ongoing basis thereafter, taking into account the specific nature and risk implications of their roles
(iii) facilitate effective risk governance, including
a. subjecting employees in MRFs to the appropriate mandates, decision-making authority, risk limits, and supervisory oversight as relevant to the type(s) of activities they undertake, and
b. according the necessary stature and authority to employees in MRFs where such employees perform risk management or control functions, and
(iv) subject employees in MRFs to
a. standards of proper conduct in relation to the type(s) of activities they undertake
b. continuing training on the competencies required for their role, risk implications of their activities, and standards of proper conduct, and
c. an appropriate incentive structure, including performance evaluation, compensation and promotion, that is aligned with the nature and time horizon of risks and effective in encouraging behavior consistent with the desired conduct outcomes.
|Outcome 5: The FI has a framework that promotes and sustains the desired conduct among all employees.
(i) the standards of conduct expected of all employees, including but not limited to standards on honesty and integrity, due care and diligence, fair dealing (treating customers fairly), management of conflicts of interest, competence and continuous development, adequate risk management and compliance with applicable laws and regulations
(ii) consistent and effective communication of the expected standards of conduct, such as through a code of conduct, onboarding and continuous training programs, and sharing of lessons learned where misconduct has occurred, to ensure that employees understand and observe these standards
(iii) appropriate policies, systems and processes to enforce the expected standards of conduct, including
a. regular monitoring, reporting and escalation to the Board and senior management of matters relating to the FI’s and employees’ conduct
b. an incentive structure that considers risk and control objectives as well as feedback from human resources, compliance, risk management, internal audit, and other control or support functions as applicable to the FI, in performance evaluation, compensation and promotion decisions;
c. a consequence management system, including transparent investigation and disciplinary procedures
d. a formalized whistleblowing channel, including procedures to ensure adequate protection of employees who raise concerns over the FI’s policies, practices and activities via this channel, and
(iv) engagement strategies with key stakeholders, including investors, corporate and institutional clients and counterparties, shareholders and regulators, to ensure transparent and timely communication of relevant material information
Invitation for Comments
Please refer to the Consultation Paper for full details on the Proposed Guidelines. The deadline for comments and feedback to be submitted to the MAS is May 25. We are collating comments from clients and industry participants for submission to the MAS. If you have comments on the proposals that you would like us to submit on your behalf, please contact any of the lawyers listed below.
1 “Senior managers” refers to individuals who are employed in an executive capacity by, and are principally responsible for the day-to-day management of, the FI. These include, but are not limited to, the senior managers performing core management functions as described in Annex A. Where “senior management” is used, this refers to an FI’s team of senior managers collectively.
2 For example, the head of internal audit (paragraph 1(l) of Annex A) should have a direct reporting line to the Board Audit Committee or the FI’s head office, as applicable.
3 For example, a decision on onboarding politically exposed persons as clients, or retaining customers with higher money laundering or terrorism financing risks, would normally involve the head of the relevant business function (paragraph 1(h) of Annex A) and the heads of compliance and/or financial crime prevention (paragraph 1(j) and 1(k), respectively, of Annex A).
4 FIs may consider various metrics in identifying functions that are material to their business. These may include, but are not limited to, the relative size of a function vis-à-vis other functions in terms of its number of employees, assets, profit or revenue contribution, capital attribution or assets under management, as applicable to the FI.
5 These include the Securities and Futures Act, Financial Advisers Act, the Securities and Futures (Corporate Governance) Regulations, Securities and Futures (Licensing and Conduct of Business) Regulations, Guidelines on Risk Management Practices and Guidelines on Fair Dealing – Board and Senior Management Responsibilities for Delivering Fair Dealing Outcomes to Customers, as applicable to the relevant FI.
6 STRs are filed with the Suspicious Transactions Reporting Office, which is part of the Singapore Police Force’s Commercial Affairs Department.
CORE MANAGEMENT FUNCTIONS
In the Proposed Guidelines, “core management functions” include the following persons, by whatever name described –
(a) CEO or “chief executive officer,” who is principally responsible for the overall management and conduct of the business of the FI, including its subsidiaries and branches if any, in accordance with the strategy and risk appetite approved by the Board or head office, as applicable
(b) “chief financial officer” or “head of finance,” who is principally responsible for managing the financial resources and financial reporting processes of the FI
(c) “chief risk officer” or “head of risk,” who is principally responsible for establishing and implementing the risk management framework to identify, monitor and manage the risks of the FI
(d) “chief operating officer” or “head of operations,” who is principally responsible for managing the day-to-day operations of the FI
(e) “chief information officer,” “chief technology officer” or “head of information technology,” who is principally responsible for establishing and implementing the overall information technology strategy, overseeing the day-to-day information technology operations and managing the information technology risks of the FI
(f) “chief information security officer” or “head of information security,” principally responsible for establishing and implementing the information security program of the FI, including but not limited to information security policies and procedures to safeguard information assets, information security controls and the management of information security breaches
(g) “chief data officer,” who is principally responsible for establishing and implementing the policies, systems and processes of the FI as regard the governance, use and analysis of data
(h) “head of business function,” principally responsible for the management and conduct of a function that undertakes risk-taking activities in relation to the business of the FI, including in relation to a CMS Licensee, the functions involving any regulated activity specified in the Second Schedule of the Securities and Futures Act and any other material function
(i) “head of human resources,” who is principally responsible for establishing and implementing the FI’s employment policies and processes, including on recruitment, onboarding, continuous training, performance evaluation, compensation, promotion, consequence management, and termination
(j) “head of compliance,” who is principally responsible for managing the FI’s compliance with the applicable laws and regulations as well as internal policies and procedures
(k) “head of financial crime prevention,” who is principally responsible for establishing and managing the policies, systems and processes to counter the risks of the FI’s involvement in money laundering, terrorism financing, weapons proliferation and sanctions evasion, bribery and corruption as well as for filing suspicious transactions reports (STRs)6
(l) “head of internal audit,” who is principally responsible for ensuring the adequacy and effectiveness of the FI’s internal controls, and reports directly to the Board Audit Committee or the FI’s head office, as appropriate, on these matters.
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