Banking Act amended to rationalise banking regulation and enhance prudential oversight

7 July 2021

On 1 July 2021, the Banking Act (“BA”) was amended by the Banking (Amendment) Act 2020 (“Amendment Act”) to rationalise banking regulation by removing the divide between the Domestic Banking Unit (“DBU”) and the Asian Currency Unit (“ACU”), and to consolidate the licensing and regulation of merchant banks (“MBs”) under the BA. In addition, the Monetary Authority of Singapore (“MAS”) has enhanced the prudential oversight of banks and MBs by expanding the grounds for revoking bank licences and introducing new powers to regulate banks’ outsourcing arrangements.

Background

MAS consulted on the major policy changes and draft legislative amendments for banks and MBs in February 2019 and May 2019 respectively. MAS’ response was issued on 5 November 2019 and the Amendment Act was gazetted in February 2020. The provisions of the Amendment Act that were legislatively and operationally straightforward and did not require further consultation commenced on 1 October 2020.

On 2 December 2020, MAS issued a further consultation paper in which it sought feedback on proposed amendments to regulations, notices and guidelines arising from the Amendment Act and other changes. MAS’ response to feedback received from this consultation (“Response”) was issued on 30 June 2021.

Removal of DBU-ACU divide

Banks previously had to maintain two accounting units: the DBU and the ACU. Due to market developments and enhancements in regulatory standards, this divide has lost its relevance. 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 Amendment Act has therefore removed the DBU-ACU divide and made 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 imposed on branches of banks incorporated outside Singapore.

In its Response, MAS clarified that with the removal of the DBU-ACU divide, the asset maintenance requirements previously imposed in respect of deposit liabilities incurred by a bank in Singapore with non-bank customers in the DBU or ACU will now instead be imposed in respect of deposit liabilities incurred by the bank with non-bank customers which are incurred in Singapore dollars (SGD) and foreign currencies (FCY) respectively.

Consolidation of regulation of MBs under BA

Previously, MBs were subject to an approval regime under the Monetary Authority of Singapore Act (“MAS Act”) but conducted the bulk of their operations through the ACU, which was regulated under the BA.

To streamline the regulatory framework governing banks and MBs, the BA has been amended to streamline the licensing and prudential regulation of MBs under the BA. The new licensing framework for MBs is set out in the new Part VIIB of the BA.

The new legislative structure for MBs largely mirrors that for banks (i.e. the BA, regulations under the BA and notices). The relevant requirements under the directives for MBs are now set out under the BA, regulations or notices issued under the BA.

Expansion of grounds for licence revocation

The BA has been amended to widen the circumstances under which MAS may revoke a bank licence. Apart from the existing grounds, MAS will now be able to 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.

Strengthening of oversight of outsourcing arrangements of banks and MBs

The BA has been amended to give MAS new powers to strengthen its supervisory oversight of banks’ and MBs’ relevant services, such as outsourcing arrangements. Under the new section 47A of the BA, 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.

Other amendments

Other amendments to the BA which took effect on 1 July 2021 include the following:

• 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.
• Disclosure of customer information: The provisions governing the disclosure of customer information have been 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.
• Anti-commingling framework: Revisions to MAS’ anti-commingling policy to make it easier for banks to conduct or invest in permissible non-financial businesses have entered into force. The revised criteria are set out in the amended regulation 23G and new regulation 23H of the Banking Regulations.

Reference materials

The following reference materials are available from Singapore Statutes Online sso.agc.gov.sg:

• Banking (Amendment) Act 2020
• Banking (Amendment) Act 2020 (Commencement) Notification 2021
• Banking (Amendment) Regulations 2021

The Response is available on the MAS website www.mas.gov.sg. The list of amended, cancelled and new instruments is set out in Annex A to the Response.