Bill to amend Banking Act introduced to rationalise banking regulation and enhance prudential oversight

13 November 2019

On 4 November 2019, the Banking (Amendment) Bill (“Bill”) was introduced in Parliament. Among other things, the Bill seeks to rationalise banking regulation by removing the divide between the Domestic Banking Unit (“DBU”) and the Asian Currency Unit (“ACU”), and consolidate the licensing and regulation of merchant banks (“MBs”) under the Banking Act (“BA”). Other key amendments include enhancing the prudential oversight of banks and MBs by the Monetary Authority of Singapore (“MAS”) by expanding the grounds for revoking bank licences and introducing new powers to regulate banks’ outsourcing arrangements.

MAS consulted the industry and public on the major policy changes and draft legislative amendments for banks and MBs in February 2019 and May 2019 respectively. In an Explanatory Brief issued by MAS on 4 November 2019, MAS stated that feedback from the consultations was largely supportive, and that MAS made refinements, where appropriate, in finalising the Bill. On 5 November 2019, MAS released its response (“Response”) to feedback received on both consultations, where comments of wider interest were addressed.

Remove DBU-ACU divide

Currently, banks have to maintain two accounting units: the DBU and the ACU. However, this divide has lost its relevance due to market developments and enhancements in regulatory standards. In particular, the divide between domestic and offshore banking has become increasingly porous, and banks’ offshore activities have been subjected to requirements broadly similar to those of their domestic business.

The Bill will thus remove the DBU-ACU divide and make consequential amendments to other provisions in the BA. These include amendments to:

• rank uninsured non-bank deposits in insolvency by the currency denomination of the deposits;
• apply asset maintenance ratios on Singapore dollar non-bank deposits, instead of DBU non-bank deposits; and
• remove the general limits on equity investments, immovable property and large exposures that are currently imposed on branches of banks incorporated outside Singapore.

Consolidate regulation of MBs under BA

Currently, MBs are subject to an approval regime under the Monetary Authority of Singapore Act (“MAS Act”) but conduct the bulk of their operations through the ACU, which is regulated under the BA.

To streamline the existing regulatory framework governing banks and MBs, the Bill will consolidate the licensing and prudential regulation of MBs under the BA. Under the Bill, a new Part VIIB of the BA will be introduced to set out the provisions that apply to MBs.

The legislative structure for MBs will largely mirror that for banks (i.e. the BA, Banking Regulations and Notices). Existing relevant requirements under the directives for MBs will be set out under the BA, regulations or Notices issued under the BA. In its Response, MAS said that it will consult on the Regulations and Notices for MBs at a later stage.

Expand grounds for licence revocation

The Bill will widen the circumstances under which MAS may revoke a bank licence. Apart from the existing grounds, MAS may revoke a bank licence if:

• it is satisfied that the bank holding the licence is contravening or has contravened any provision of the MAS Act or any direction issued under that Act;
• (where the bank holding the licence is a foreign-owned bank incorporated in Singapore) the parent supervisory authority of the bank has withdrawn the licence or authority to operate of the parent bank of the bank; or
• it is satisfied that it is in the public interest to do so.

Strengthen oversight of outsourcing arrangements of banks and MBs

The Bill will also give MAS new powers to strengthen its supervisory oversight of banks’ and MBs’ relevant services such as outsourcing arrangements. Under the Bill, a bank in Singapore and an MB in Singapore must comply with certain requirements before obtaining any relevant service from its branch or office that is located outside Singapore, or from a person. In addition to certain due diligence requirements, such a bank or MB must implement policies and procedures (where the relevant service is obtained from its branch or office) or enter into a contract (where the relevant service is obtained from a person) that meets requirements specified by MAS by written notice. For example, contracts which banks and MBs enter into with service providers may have to contain terms relating to:

• the right of MAS to audit the service provider;
• the protection of customer information against unauthorised disclosure, retention or use; and
• termination of the contract under specified circumstances.

Proposed revisions to the regime governing banks’ and MBs’ outsourcing arrangements were the subject of a consultation paper issued by MAS on 7 February 2019. In its Response to Feedback Received on Outsourcing by Banks and Merchant Banks issued on 5 November 2019 (“Response to Feedback on Outsourcing”), MAS stated that it intends to operationalise the requirements in relation to relevant services only in respect of:

• material outsourcing arrangements, which will only comprise ongoing arrangements; and
• other arrangements which involve the disclosure of customer information (whether ongoing or otherwise).

The Response to Feedback on Outsourcing also addresses feedback on matters such as due diligence checks on service providers and sub-contractors, the protection of customer data, and termination and exit of outsourcing. MAS states that it intends to seek feedback on the draft Notice on Outsourcing for banks and MBs, and on the requirements that will apply to other classes of financial institutions (where relevant), at a later date. In the meantime, financial institutions should continue to observe the Guidelines on Outsourcing.

Other amendments

Other amendments introduced by the Bill include the following:

• Stable funding requirements: MAS will be empowered to impose stable funding requirements on banks and MBs.
• Related party transactions: MAS may issue a written notice imposing requirements that are reasonably necessary for the purposes of identifying credit facilities, exposures and transactions to or with certain persons, branches, entities or head offices that may give rise to any conflict of interest, and for monitoring, limiting and restricting such credit facilities, exposures and transactions.
• Credit card and charge card licensees: Credit card and charge card licensees will be required to seek MAS’ approval before appointing key appointment holders such as directors, the chairman of the board and the chief executive officer. In considering whether to grant an approval, MAS may consider if the person is fit and proper to hold the appointment, having regard to its Guidelines on Fit and Proper Criteria. In addition, a new 20% limit on shareholding or control of voting power in a licensee will be introduced. MAS’ approval will be required before a person becomes a 20% controller of a licensee. 
• Disclosure of customer information: The provisions governing the disclosure of customer information will be refined. For example, an auditor to whom customer information is disclosed by a bank or MB may further disclose the information to an employee of the Accounting and Corporate Regulatory Authority appointed to carry out a practice review of the auditor.