IMPACT ANALYSIS: MAS issues guidelines to improve culture and accountability

The Monetary Authority of Singapore (MAS) has issued guidelines to strengthen the accountability of senior managers in financial institutions (FIs) and to promote ethical behaviour.

The Guidelines on Individual Accountability and Conduct require organisations to put in place procedures which promote individual accountability among senior managers, strengthen oversight in relation to risks and reinforce standards of honesty and integrity among all employees.

Background

MAS has been focusing on culture and conduct to ensure financial institutions have in place ethical practices which protect customers’ interests. The regulator is keen to ensure prudent risk-taking behaviour and risk management procedures to support the soundness of FIs. The guidelines are accompanied by a set of frequently asked questions and an information paper on culture and conduct practice. The guidelines emphasise that boards and senior managers are accountable for failures and for ensuring that the desired standards of conduct are embedded throughout the organisation. All threats and risks to a financial institution must be thought through.

Five accountability and conduct outcomes

The guidelines set out five “accountability and conduct outcomes”. MAS makes it clear that the guidelines are not intended to be exhaustive or prescriptive, and that organisations should not adopt a “check-box” mentality in applying them. Instead, the regulator expects FIs to identify what enhancements need to be made, based on the nature, size and complexity of their business. The guidelines require organisations to identify material risk personnel (MRP), i.e., those individuals with authority to make decisions that can significantly affect the FI’s safety and soundness or cause harm to its customers and stakeholders. The regulator may require larger organisations to submit quantitative indicators in relation to the impact of risk. Such organisations may therefore need to reexamine their governance to ensure effective management lines of accountability, especially where they operate in a corporate group or have downstream subsidiaries.

The five “accountability and conduct outcomes”

Outcome 1 — Senior managers are responsible for managing and conducting the FI’s core functions, which must be clearly identified.
Outcome 2 — Senior managers must be fit and proper for their roles and will be held responsible for their actions and for the conduct of the business under their purview.
Outcome 3 — The FI’s governance framework must support senior managers’ performance of their roles and responsibilities, with a clear and transparent management structure and reporting relationships.
Outcome 4 — Material risk personnel must be fit and proper for their roles, and subject to effective risk governance and appropriate incentive structures and standards of conduct.
Outcome 5 — The FI must have a framework that promotes and sustains the desired behaviour among all employees.

MAS has made it clear that the board and senior management are responsible for overseeing the way in which FIs oversee the guidelines. Where there are potential gaps in accountability and oversight, or if the nature of the FI’s operation is too complex, the MAS may require it to adopt specific guidance to ensure the objectives are met. The guidelines are intended to ensure proper conduct throughout the organisation, which includes the corporate group and all its subsidiaries. A senior manager’s responsibility must take into account the operations of the parent and, where applicable, any operations within a group. For example, where a person is identified as a group risk officer, then the FI must identify the monitoring and management of risks of the parent organisation, as well as the risks across the group of companies, which would include responsibility for material business functions.

Identification of functions — Outcomes 1 and 2

Organisations will need to identify clearly which senior managers have responsibility for functions that are core to the management of the organisation’s affairs. They will need to clarify individual responsibilities, and the overall management structure must ensure that “senior managers are held to account for matters under their purview”. MAS believes this will facilitate greater transparency in management and decision-making processes. The MAS wants senior managers “on the hook”, so that all functions within the organisation are covered. If FIs are unable to identify reporting roles clearly, they may have to reduce complexity within their
organisations and re-define reporting lines.

This is not limited to business functions. Any review should include the core management functions both in Singapore and across the group, MAS has said. Organisations may, for example, need to re-think positions and designate senior managers to functions that are not presently assigned to any one individual.

Governance framework to support senior managers’ roles and responsibilities — Outcome 3

As part of its governance framework, the MAS will expect financial institutions to articulate clearly the roles and responsibilities of all those in the overall senior management structure, and to maintain comprehensive records of those arrangements. The guidelines state that the MAS may engage with FIs about their screening and hiring processes for senior managers, and review the effectiveness of the governance framework including policies, systems and the relevant qualifications of senior managers to deal with their designated areas.

Organisations must have appropriate standards in place to assess the propriety of senior manager appointments and have clear specifications about the areas for which they are responsible, together with appropriate reporting lines and comprehensive records of the arrangements. Financial institutions must have relevant management committees, together with mandated terms of reference and reporting lines for each committee. The emphasis on individual accountability will not, however, absolve management committees of collective responsibility. The regulator will expect to see a strong culture of accountability which brings committees and skillsets together to make collective decisions.

Material risk personnel are fit and proper for their roles — Outcome 4

MAS wants the board and senior management to identify material risk personnel and assess whether they are appropriate appointees, having regard to the specific risk implications attached to their roles. Material risk personnel must have appropriate mandates, risk limits and supervisory oversight in relation to their activities. The guidelines also provide that FIs must set out standards of conduct for their MRPs, ensure there is regular training on competencies and risk, and that an appropriate incentive structure is in place. Boards and senior management must establish criteria that consider both the financial and non-financial risk to which organisations may be exposed, and the “materiality” of the impact that MRPs’ decisions could have on an organisation’s risk, based on appropriate
quantitative and quality indicators. MAS has made it clear that the onus is on FIs’ board and senior management to determine the appropriate threshold and indicators, based upon the risk, nature and scale of the organisation’s activities.

A framework that promotes and sustains the desired conduct for all employees — Outcome 5

MAS has emphasised that the board and senior management have a critical role to play in defining and embedding the standards they expect of all employees. These standards include, but are not limited to: honesty; 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 laws and regulations.

The regulator has stressed the importance of the tone from the top, which should be reinforced by systems and processes to ensure the desired conduct standards cascade down to all employees and become embedded in the organisation. Expected standards may include, but are not limited to: regular monitoring, reporting and escalation; an incentive structure which considers risks; transparent investigation and disciplinary procedures; an effective whistle-blowing program; and engagement with stakeholders. MAS expects the board and senior management to notify it of any material adverse issues in relation to the organisation.

Corporate groups

One of the main objectives of the guidelines is to ensure FIs have effective management oversight of all material aspects of their operations, from the parent company to its subsidiaries to other entities, whether located in Singapore or overseas. Under the guidelines, each significant “downstream entity” is considered to be a material business function. These functions could have a bearing on the group’s safety and soundness. Financial institutions must therefore ensure effective senior management accountability in all material business functions and identify the respective senior managers responsible for such cross-border functions.

Longevity

The MAS guidelines are clearly written and will help financial institutions, senior management and employees to embed a strong culture of responsibility and ethical behaviour, thus ensuring better outcomes for customers and stakeholders while at the same time helping to preserve the longevity of the organisation.

Niall Coburn is the Regulatory Intelligence Expert at Thomson Reuters in the Asia-Pacific region and a Barrister at the Queensland Bar.

As an expert on regulatory issues at Thomson Reuters, Niall writes articles, white papers, gives presentations in the region and liaises with the banking industry internationally concerning regulatory developments in the Asia-Pacific region.

Prior to joining Thomson Reuters, he was the regional Managing Director at FTI consulting, responsible for leading its Regulatory and Forensic Investigation Practice in Australia. FTI is a global consulting firm listed on the New York Stock Exchange with 500 offices worldwide.

Niall was also a Senior Lawyer and Specialist Adviser at the Australian Securities and Investments Commission. In this role he led high-profile investigations into complex corporate crime cases. He has also worked internationally, being part of a team that created the regulatory structure for the Dubai International Financial Centre (DIFC).

Niall was appointed Director of Enforcement at the DIFC in 2003 and worked with international law enforcement agencies to combat financial crime.

Niall has also worked in the Asia-Pacific region in his own consultancy, Coburn Intelligence in China and Hong Kong, investigating major frauds and misleading conduct in the investment industry.

Niall was awarded an Australia Day Honour from the Commonwealth Government for his work leading major criminal investigations at ASIC. He is a Barrister of the High Court of Australia and a member of the Queensland Bar Association and the International Bar Association.

 

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