The Banking Act CP

The Banking Act CP contains wide-ranging proposals across different areas of banking regulation and supervision. More specifically, it proposes to:

• expand the grounds on which the MAS may revoke a bank’s licence. To more adequately reflect the breadth of regulatory requirements to which banks are subject, these grounds for revocation would be extended to include any breach of the Monetary Authority of Singapore Act (Cap. 186), any instance where an overseas parent of a Singapore-incorporated bank has its licence withdrawn, and when the MAS considers revocation to be in the public interest;
• introduce powers for the MAS to approve key appointment holders of credit card and charge card licensees. Key appointment holders would be the CEO, the deputy CEO, other prescribed persons, and (for Singapore-incorporated licensees) any director of the board and the chairman. The MAS would further be empowered to remove executive officers and (for Singapore-incorporated licensees) directors whom it considers not to be fit and proper. For Singapore-incorporated licensees, the MAS would also acquire the power to approve controllers of 20 per cent or more ownership. This framework would replace the notification requirements currently imposed on licensees in respect of such changes;
• require auditors to report material adverse developments relating to banks’ financial soundness. Currently, auditors are only required to report to the MAS where a bank incurs losses that reduce the bank’s capital funds by 50 per cent, and the MAS proposes to retain this requirement for banks incorporated in Singapore. Material adverse developments would include (without limitation) developments affecting a bank’s statement of financial position and its continued operations or viability (e.g., material losses and material uncertainty related to asset valuations, asset recoverability or funding adequacy);
• allow banks to publish their accounts (comprising the latest audited annual balance sheet, and profit and loss account, as well as other relevant information) on their websites rather than in a newspaper. Newspaper notifications alerting the public to the availability of the accounts on a bank’s website would still need to be published;
• strengthen MAS’ oversight of banks’ outsourcing arrangements. For further details of the MAS’ proposals in this area, please see the following section;
• allow employees of the Accounting and Corporate Regulatory Authority to obtain complete bank audit work papers to facilitate their inspection of external auditors of banks (notwithstanding that such papers may contain customer information);
• introduce a new statutory requirement for banks to have a stable and sustainable funding structure for their activities, and give the MAS the power to publicly disclose the manner in which the bank complies with such requirement and to secure the bank’s compliance therewith;
• formalise the MAS’ power to impose requirements on banks in respect of related party transactions. This measure will allow the MAS to support the new requirements regarding related party transactions, which will take effect under MAS Notice 643 on 1 July 2019. The MAS would also provide a consolidated list of persons subject to these requirements, and make certain definitional changes to relevant statutory provisions;
• allow the MAS to specify by notice the persons subject to large exposure limits;
• allow the MAS to impose additional leverage ratio requirements on banks incorporated in Singapore, within the same notice that already sets out the leverage ratio requirement; and
• make certain other technical and administrative amendments to the Banking Act.

The Outsourcing CP

The proposals in the Outsourcing CP supersede and replace the MAS’ proposal (consulted upon in September 2014) to issue an outsourcing notice setting out minimum standards for the outsourcing arrangements of financial institutions (FIs). Taking account of industry feedback to that previous proposal, the Outsourcing CP announces a more tailored approach to regulating outsourcing arrangements for specific classes of FIs.

Strengthened MAS oversight of outsourcing arrangements

To strengthen its oversight of outsourcing arrangements, the MAS proposes to introduce a new section in the Banking Act empowering it to direct banks to comply with requirements relating to outsourcing. This would allow the MAS to direct a bank to, for example, include certain terms in an outsourcing arrangement (e.g., relating to the protection of customer information or the right of the MAS to inspect or audit the service provider and its sub-contractors), conduct due diligence checks on the service provider and provide the MAS with documents or information relating to the outsourcing.

Outsourcing involving disclosure of customer information

In relation to both Singapore-licensed banks and approved merchant banks, the MAS proposes to introduce substantially identical notices setting out legally binding requirements in relation to outsourcing arrangements (together, the Outsourcing Notices). The Outsourcing Notices would impose minimum requirements on the management of material outsourcing arrangements, the assessment of service providers and audits.

The Outsourcing Notices would also incorporate the requirements contained in MAS Notice 634 and MAS Notice 1108, which set out the conditions that banks and merchant banks must comply with in order to disclose customer information to overseas service providers performing outsourced operational functions (in reliance on the corresponding banking secrecy exception in the Third Schedule to the Banking Act). These existing notices would be repealed, and the Outsourcing Notices would also expand the application of the existing disclosure conditions by making them applicable irrespective of the location of the service provider.

Further, under the revised Banking Act and the Outsourcing Notices, all outsourcing arrangements involving the disclosure of customer information will be considered material outsourcing arrangements, irrespective of their tenure and the impact of any unauthorised access or any disclosure, loss or theft of such customer information, and notwithstanding that the relevant customers may have given their prior written consent to the disclosure.

The MAS proposes to give banks and merchant banks a transitional period of 12 months from issuance of the Outsourcing Notices to make the required implementation arrangements.

Practical implications

The proposals in the Banking Act CP are wide-ranging in their nature and likely practical impact, and would therefore have differing compliance implications for affected FIs. Some proposed changes would be unlikely to have a day-to-day compliance impact (e.g., the broadening of the MAS’ powers to revoke a bank’s licence), whereas others would likely facilitate compliance (e.g., the proposed option for banks to publish their accounts on their websites). Other changes would materially increase the compliance burden (e.g., the MAS approval requirements in relation to changes to key appointment holders and  controllers of 20 per cent or more ownership of credit card and charge card licensees).

While the proposals in the Outsourcing CP would introduce significant changes to the outsourcing framework for banks and merchant banks, the practical impact will differ for each bank and merchant bank depending on the approach it already takes to managing its outsourcing arrangements. Key factors to consider include the following:

• Outsourcing rules for FIs are currently set out principally in the MAS Guidelines on Outsourcing, which are not legally binding but which FIs are expected to comply with. The introduction of the legally binding Outsourcing Notices will heighten the compliance burden for banks and merchant banks.
• Banks and merchant banks will need to give particular scrutiny to any arrangements with service providers which involve the disclosure of customer information, as it is proposed that these will qualify as material outsourcing arrangements and would therefore be subject to the strictest requirements under the revised framework.
• The conditions in MAS Notice 634 and MAS Notice 1108 apply only where a bank or merchant bank needs to rely on the banking secrecy exception for the disclosure of customer information in connection with the outsourcing of operational functions under item 3 of Part II of the Third Schedule to the Banking Act. In practice, these conditions are onerous to comply with, and they are proposed to comply in a broader set of circumstances under the Outsourcing Notices. However, the conditions will not apply where a different banking secrecy exception applies, e.g., where prior written customer consent to disclosure has been obtained. To the extent that banks and merchant banks have obtained such consent, they should not be impacted by MAS Notice 634 or MAS Notice 1108, or the corresponding conditions in the Outsourcing Notices.
• Service providers appointed under outsourcing arrangements will likely also be affected by the MAS’ proposals, as banks and merchant banks will generally seek to reflect their compliance obligations with regard to outsourcing in their agreements with services providers. The proposals in the Outsourcing CP could require some existing outsourcing agreements to be amended.
• Some aspects of the proposals remain unclear, and FIs may wish to seek clarification on these in the consultation and legislative process. For example, it is unclear to what extent the Outsourcing Notices will incorporate the provisions of the draft outsourcing notice published in September 2014 (e.g., whether the full set of provisions on the protection of customer data will be retained), and whether the Outsourcing Notices will require banks and merchant banks which disclose customer information to a service provider under item 3 of Part II of the Third Schedule to the Banking Act to notify the MAS where the service provider is in Singapore.

Banks, merchant banks, credit card and charge card licensees, outsourced service providers, auditors and other interested parties may wish to consider conducting a high-level gap analysis between their existing compliance arrangements and the MAS’ proposals, with a view to identifying any prospective practical compliance issues and feeding any comments back to the MAS by 8 March 2019.

Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter together, Reed Smith). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith’s Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.

Client Alert 2019-038