Banking (Amendment) Bill

Order for Second Reading read.

6.09 pm

The Minister for National Development (Mr Lawrence Wong): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second Time."

Over the years, the Monetary Authority of Singapore (MAS) has consistently held our banks to stringent capital and liquidity standards. This approach has served us well, as Singapore's banking system has remained resilient in the face of the Global Financial Crisis of 2008.

Following the crisis, MAS has been actively involved in coordinated efforts among international regulators to strengthen capital and liquidity standards for banks, and to create a more robust international banking system. Likewise within Singapore, MAS has been refining the regulatory and supervisory framework to strengthen the resilience of our financial institutions and to enhance the stability of the financial system as a whole. So, this Banking (Amendment) Bill forms part of the overall effort.

MAS has consulted extensively with the industry and the public on the policy changes and the draft Bill. It has studied the feedback received and incorporated it into the Bill where appropriate.

Mr Deputy Speaker, I will now go through the three broad areas of amendments in the Bill.

First, to strengthen prudential safeguards and enhance depositor protection. Currently, a foreign bank can choose to operate in Singapore as a branch or a locally incorporated subsidiary. A bank branch will rely on support from its head office, which is subject to capital and other requirements imposed by its home regulator on a group basis. In contrast, a locally incorporated subsidiary will have its own capital and be subject to MAS' capital and other regulatory requirements.

The Bill will empower MAS to require a foreign bank branch to incorporate all or part of its banking business, where it is in the interest of the public, the bank's depositors or the domestic financial system. This new regulatory power forms part of the suite of policy measures for domestic systemically important banks (D-SIBs). This was announced by MAS in April last year. In retail banking, in particular, a bank with significant retail presence – defined as having more than 3% of resident non-bank deposits, and more than 150,000 deposit accounts with balances below S$250,000 – will be designated a D-SIB and be required to subsidiarise its retail operations. The subsidiary will then be subject to MAS' own regulatory requirements, based on its risk profile.

The Bill will also empower MAS to impose prudential requirements that cap banks' leverage and ensure that they maintain sufficient liquidity. As I mentioned earlier, MAS has always maintained high standards of prudential regulation and supervision for our banks; in fact, somewhat higher than in most other jurisdictions. Over the years, we have developed a system of regulation that allows well-managed risk-taking and innovation, ensuring the stable and sustainable development of the financial services sector. This Bill will update our rules to reflect new international standards, which MAS has been involved in shaping through its participation in various international financial forums.

The second purpose of the Bill is to strengthen the corporate governance of banks. Effective corporate governance plays a critical role in ensuring robust risk management, decision-making and accountability within banks. The Bill will vest MAS with the power to direct a bank to remove key appointment holders, including its chief executive officer and deputy chief executive officer, if they are found not to be fit and proper. The grounds of removal will be aligned with the criteria for approving their appointments. To enhance MAS' oversight of these appointments, the Bill will require banks to notify MAS as soon as they become aware of any material information which may negatively affect the fitness or propriety of any director or executive officer whose appointment was approved by MAS.

The Bill will also repeal the provision that makes bank directors jointly and severally liable for any bank losses arising from credit facilities or exposures to the directors and their related parties. This provision was intended to emphasise the fiduciary duty that bank directors owed to their bank. However, based on feedback provided by the banks, this provision discourages candidates from taking up bank directorships and more importantly, MAS has also assessed that it does not provide effective oversight over banks' related party transactions (RPTs).

Instead, to address the potential conflicts of interest arising from RPTs, MAS will require a bank to conduct all such transactions on an arm's length basis and to obtain board approval before entering into such transactions that pose material risks to the bank. The Bill will also enhance MAS' powers to direct a bank to terminate, prohibit and restrict transactions that the bank enters into with its related parties, if these are deemed detrimental to depositors' interests.

The Bill will also enhance corporate governance of banks by reinforcing the complementary role of external auditors in assessing a bank's risks and internal controls. This will be done through a few key measures, such as the introduction of a safe harbour provision to protect banks' external auditors from liability where they disclose confidential information to MAS as part of their reporting obligations under the Banking Act. Furthermore, MAS will be empowered to direct a bank to remove its external auditors if they have not discharged their statutory duties satisfactorily.

Third, to reinforce banks' risk management controls. This is the third broad area of amendments. These amendments will formalise MAS' expectation that banks establish risk management systems and controls that are commensurate with their business profiles and operations. MAS will be able to impose penalties on banks that fail to do so.

The Bill will also require banks to seek MAS' approval to establish new places of business where certain non-banking activities, such as money-changing and remittance business, are conducted. This will allow MAS to exercise better oversight of banks' activities at such locations. For example, MAS will be able to require a bank to institute adequate safeguards against money laundering and terrorism financing, before it can commence money-changing and remittance businesses at new locations.

Besides these three broad areas which I have just outlined, there are also several significant amendments to update the banking regulatory framework.

First, the Bill will introduce a requirement for banks to immediately inform MAS of adverse developments that may materially affect them. In the case of a bank incorporated in Singapore, this extends to any adverse developments that may materially affect related entities of the bank. This will allow MAS to take the necessary supervisory action in a timely manner.

Second, the Bill will empower MAS to inspect the local and overseas subsidiaries of a bank incorporated in Singapore. It will also allow the parent supervisory authority of a foreign bank or merchant bank to inspect all financial activities of the bank or merchant bank in Singapore, upon MAS' approval. So, the parent based overseas can inspect the financial activities of the bank or merchant bank in Singapore, subject to MAS' approval. These changes will facilitate the consolidated supervision of internationally active banks and merchant banks.

Finally, amendments have been made to rationalise the penalty provisions for the contravention of the various requirements in the Act.

Mr Deputy Speaker, Sir, a sound and progressive financial sector will create a strong foundation for sustainable economic growth. These amendments to the Banking Act will help strengthen the banking industry and align our regulatory regime with international best practices. Sir, I beg to move.

Question proposed.

Mr Deputy Speaker: Mr Leon Perera.

6.17 pm

Mr Leon Perera (Non-Constituency Member): Mr Deputy Speaker, it is important for MAS to be sufficiently empowered to take a proactive stance in regulating the banking sector. The Global Financial Crisis showed the world how high the stakes are in getting our banking regulatory frameworks right.

Prudential safeguards, such as empowering MAS to require a bank to incorporate locally in certain cases, only allowing fit and proper people to own significant stakes in banks, or to be a controller of the bank and providing safe harbour protection for external auditors who whistle blow, all these will enhance the ability of MAS to protect banking customers, as well as the stability and safety of the overall banking system.

Having said this, we must ensure the continued competitiveness of our banking sector. Singapore's financial services sector makes a very significant contribution to jobs and the gross domestic product (GDP) in Singapore. Regulations should be framed and implemented in such a way as to minimise ambiguity. This would ensure that banks do not "overegg the pudding" so as to drive up compliance costs that could end up being passed onto the end-customers of banking products, not to mention crimping the job-creation engine of the sector, however slightly.

In this context, while supporting the Bill, I would like to pose a few clarifying questions and make some suggestions with respect to implementing specific provisions of the Bill.

The Bill imposes new requirements and expanded penalties for engaging in related party transactions that are detrimental to the interests of depositors, including non-exposure transactions. If MAS uses this power to direct a bank to terminate a transaction with its related party, for example, that act could conceivably result in a financial loss much bigger than the $250,000 fine that is associated with this provision. Such a decision could also inflict reputational damage on the bank.

In relation to this provision – clause 17 – there is a risk that if banks do not clearly understand the guidelines which MAS will use to exercise its power to terminate transactions or eliminate exposures, this may create a culture of excessive notification and consultation with MAS at best, or excessive risk-aversion at worst.

The Bill also requires banks to immediately notify MAS of any developments that would adversely and materially affect its financial soundness, reputation and ability to conduct business.

In relation to this provision – clause 34 – there is a risk that if the banks do not clearly understand what needs and what does not need to be reported to MAS, this will create a burden of excessive notification which may raise compliance costs, however slightly. And these compliance costs may end up being passed onto end-consumers.

Mr Deputy Speaker, Sir, in respect of these two provisions – clauses 17 and 34 – I would like to ask if MAS will provide banks with guidelines that it will use to determine what constitutes a transaction or exposure that could be potentially terminated by MAS and what constitutes a notifiable material development. Will MAS, for instance, be publishing a guidance document on how it will operationalise these powers, similar to the guidance published on anti-money laundering and terrorism finance last year and private banking controls in 2014?

Moving onto the next part of my speech, there are certain provisions in the Bill which I do not oppose. Nevertheless, these provisions would give MAS additional powers over banks and in some cases, these powers may lengthen the turnaround time for decisions, limit business flexibility and, therefore, raise the cost of doing business, however slightly.

Therefore, in the interest of transparency, I would like to pose some questions to better understand – and for the banking community and stakeholders to better understand – the Government's thinking in relation to these issues and to ask what facts prompted the Government to include these provisions in the Bill. This information may be relevant to other national sectors, other than just the banking sector.

Clause 46, which inserts a new section 57EA, requires banks, credit and charge card issuers to obtain approval from MAS for places where they intend to conduct certain businesses.

I would like to ask what facts or trends have prompted the Government to impose a requirement that banks seek the approval of MAS for these decisions, as opposed to just notifying MAS. It would be helpful for the public to better understand what facts MAS is detecting about such practices by banking businesses as it may have implications for other sectors of society.

For instance, is MAS detecting overly aggressive marketing practices for credit or charge cards that may be fuelling unsustainable over-spending by at-risk families? If so, it would be useful to highlight this. Non-government organisations and voluntary welfare organisations working with at-risk families and at-risk individuals could help to provide feedback to MAS if they notice such unhealthy card marketing practices on the ground. This could help MAS to decide which locations are appropriate locations to allow credit or charge card-related or marketing activities, for example.

The Bill also requires banks to seek MAS approval for changing locations or adding locations for non-banking activities, including money-changing and remittance services, as the Minister observed in his speech earlier. Unlike wealth management products under the Financial Advisers Act with risk of capital loss, money-changing and remittance are considered non-banking activities. Once again, I would like to ask what facts or trends have prompted the Government to impose a requirement that banks seek the approval of MAS for location choice for these non-banking activities, as opposed to just notifying MAS. Mr Deputy Speaker, Sir, with that, I support the Bill.

Mr Deputy Speaker: Mr Ong Teng Koon.

6.23 pm

Mr Ong Teng Koon (Marsiling-Yew Tee): Mr Deputy Speaker, thank you for allowing me to speak today. To Mr Leon Perera's point on having card institutions needing to seek the approval of MAS for conduct of business in certain jurisdictions, I actually support the point because my credit card just had a charge from Azerbaijan and I have no idea how it came forth. So, I do support having MAS put in more controls on credit card companies' places of business.

Mr Deputy Speaker, I rise to speak today on some recent developments in our local business and SME funding landscape. These past few years have seen the rise of new financing arrangements and initiatives, providing businesses with alternatives to obtaining loans from banks or personal contacts. The specific arrangements that I would like to focus on today are the peer-to-peer lending platforms, or P2P platforms for short.

Very briefly, a company that wants to take a loan approaches the platform, which then offers the opportunity to its members. Members can choose to offer as much or as little as they are comfortable lending, within the guidelines of the platform. The platform will then aggregate contributions from many individual lenders into one single large loan to the company.

Such services are growing rapidly globally. According to PricewaterhouseCoopers (PwC), the United States (US) P2P lending market is expected to grow from US$5.5 billion in loans issued in 2014 to US$150 billion in 2025. Growth in the United Kingdom (UK) has been similarly explosive, with business P2P lending growing sevenfold from £200 million in 2013 to £1.5 billion in 2015. In Singapore, there are at least five such sites, which have collectively raised more than $10 million for their clients in 2015.

P2P lending is an example of the transformative power of the Internet – the business model simply could not work without fast and efficient communication and the ability to transact with multiple individuals. They benefit both sides. For upcoming businesses, it opens up new channels for funding, given that banks are typically reluctant to lend to companies with a limited track record.

Harnessing the "wisdom of crowds", individual lenders offering smaller sums could be better at allocating capital towards future potential, thereby improving the odds of success for the start-ups and small and medium enterprises (SMEs) that we need to drive our economy forward. For lenders, such platforms offer a rare chance for them to earn higher returns on their money, typically above 10%, albeit with higher risks.

However, as with any new financial innovation, this raises concern about the appropriate extent of regulation, in order to both safeguard the financial system and protect the interests of lenders. MAS is currently in the process of drafting the required regulations and, hence, the platforms are effectively operating in a regulatory vacuum. We understand, of course, that the speed of innovation can make it challenging for the regulatory authorities to keep up. At the same time, an appropriate regulatory regime is urgently needed to reduce uncertainty and maximise benefits for all parties.

What are the key elements of an appropriate regulatory framework for P2P lending? If we start from the perspective of risks, P2P lending seems unlikely to be a source of systemic threat to the overall banking system in Singapore, at least for now, given that they are still small in comparison to commercial banks. The greatest risk, therefore, falls on the individual lenders, who risk losing all or part of their investment if the loan goes into default before the principal is repaid. How should we protect such individuals without inadvertently introducing moral hazard by creating the impression that such loans are iron-clad and can never go wrong?

The key piece of regulation should focus on preventing fraud by the platform. We need to ensure that the platforms are legitimate and are not operating pyramid schemes or funnelling funds towards uses other than what the individual lenders signed up for.

This brings to mind China's Ezubao P2P lending scheme for example, which turned out to be a US$7.6 billion Ponzi scheme. On the other hand, we need to ensure that the platforms have systems in place to prevent money laundering. This suggests the need for a licensing regime to ensure that the proper processes and accountability systems are in place at the platforms. A clear licensing regime helps reduce uncertainty and ambiguity on the part of the platforms. However, given that these companies will often be themselves startups, the requirements should not be so onerous as to stifle innovation.

Regulations should not go so far as to eliminate all risk from the transaction, as that would itself create unhealthy behaviours as people chase high interest rates while assuming they will be protected should something go wrong. There is also the need to balance access and protection. If, as has been proposed, we restrict participation to Accredited Investors or Institutions, we would be protecting the average man in the street, but also preventing them from accessing a potentially beneficial asset class. Here, we can take inspiration from the various consumer protection rules already in place across the financial industry, such as "cooling-off periods" where they can change their minds without penalty. This will, hopefully, reduce the risk that retail investors might invest in inappropriate products.

One key area is to ensure that the lenders are able to collectively pursue action should there be a default, just as any institutional creditor would. Each individual share may be too small to find it worthwhile to bear the cost and effort of pursuing a claim. Hence, collective instruments for protecting the interests of all lenders need to be put in place. Perhaps we could explore making the platforms pay part of their revenues into a national fund to create an industry body that can help lenders pursue their claims.

We have also seen that some P2P lenders in developed countries, such as Zopa in the UK, proactively designate a portion of their funds to provide a form of insurance to safeguard the interests of lenders in the event of a default. By addressing the concerns of potential lenders, this will, in turn, help convince more to participate and accelerate the growth of the industry.

Like it or not, technological innovation in the financial industry is going to grow and we should not stand in the way of initiatives that facilitate the creation of good businesses and jobs. Given that economic dark clouds are gathering, it is particularly key to maintain financing channels for SMEs, which are often not a target segment for major banks, as this could serve as a lifeline in tough times. What is important is to make sure the public is well-informed and that the P2P lenders operate in a regulatory environment that provides clear guidelines without being overly burdensome. Mr Deputy Speaker, I support the Bill.

Mr Deputy Speaker: Minister Lawrence Wong.

6.31 pm

Mr Lawrence Wong: Mr Deputy Speaker, I thank the Members for their comments and support of the Bill.

I would, first, address Mr Leon Perera's point about finding the right balance. I fully agree with the Member that there is a need to find a balance between ensuring adequate prudential safeguards and ensuring the competitiveness of the financial sector in Singapore. I hope the Member agrees that we have, in fact, been doing so over the past few years, and we have managed it, I think, better than most other financial jurisdictions, if we look at it. After the Global Financial Crisis in 2008, we saw many global financial institutions downsizing their global operations significantly. Singapore has not been spared, but I would say, if we look at the scale of the downsizing at the international level, the impact on Singapore has been relatively contained.

In fact, our financial sector continued to post healthy employment gains in recent years. We have − 3,600 new jobs on a net basis over the first three quarters of 2015. This shows that while we have taken a path to find a balance with adequate strong safeguards, we also ensure that our financial sector is competitive and able to retain good jobs and generate good jobs for Singaporeans.

On the other points that the Member raised, I will address them specifically. On new requirements, the Member mentioned clauses 17 and 34 on related party transactions and the need for guidelines and the concerns over burden and compliance costs. MAS has been very mindful of ensuring that it does not add unnecessary compliance costs for banks and that is why I am coming up with this set of amendments. MAS consulted the industry extensively and, where appropriate, had, indeed, made adjustments to the requirements.

For example, as I mentioned just now, on the related party transaction provisions, we are not just adding more rules but we have, in fact, repealed an existing provision that makes bank directors jointly and severally liable for the bank losses arising from credit facilities or exposures to their directors and their related parties. So, we have repealed an existing provision which we have assessed to be not so effective. Instead, we have put in place other requirements to ensure and safeguard against related party transactions. MAS will, certainly, be mindful of implementing this well and providing sufficient transition time to the banks to make sure that they are able to have sufficient time to transit to meet the new requirements.

Mr Leon Perera had suggested having prescribed or detailed guidelines. MAS will consider this, but it is not always possible to prescribe each and every scenario where there are related party transactions, because there could be many circumstances under which they can happen. So, in some instances, it may be based on principles that are set out, and adequate consultation and engagement will be done with the banks to ensure that they are able to implement. That is the same approach we will take with regard to the initiatives or new provisions that Mr Perera had highlighted. He mentioned clause 46 with regard to place of business and the concerns that this may raise the cost of doing business. He also asked whether there were any trends, in particular, that had sparked off such a new provision.

Sir, the new provisions that had been put in place were not so much in response to any particular new trends that had emerged but were really with regard to looking at how MAS can provide better oversight over non-banking businesses conducted by the banks. MAS is looking at how we can do it in a more comprehensive way and to, again, ensure that we maintain our high prudential standards. The Member had suggested that this can be done just through notification. But notification alone may not be sufficient for MAS and will not give MAS the powers to act just on the basis of a notification. Whereas, with this amendment, MAS will now have more powers, more ability, to ensure that prudential standards are in place and to also supervise the conduct of non-banking businesses.

These are new and necessary measures that are needed to ensure that our prudential standards are maintained and held to a high standard. I would also add that many of the new measures that are being proposed are not just being done by MAS alone, but they are also measures that are done internationally. These are not done unilaterally by us, but they are measures that have been discussed in international financial forums which MAS has been active in. MAS has also played an active role in shaping these international standards, which are progressively being implemented in other jurisdictions as well.

Mr Ong Teng Koon talked about a new area of risk on P2P lending. It is potentially a benefit as well as an opportunity but, as he highlighted, it is also a new area of risk. I should, at the outset, clarify that P2P activities are not directly within the scope of the Banking Act, which focuses on the regulatory framework for banks involved in the business of taking deposits and lending funds. So, P2P lending may not be directly covered within the scope of the Banking Act. This is an area which is new, and it is a new form of financing globally. Within Singapore it is still at a nascent stage. But it is an area which is gaining more interest and attention, and we are certainly paying attention to it.

As the Member had noted, while these platforms add to the diversity of the financial landscape, investors participating in P2P platforms should be aware of the risks, and there are considerable risks involved. These include risks that the crowdfunding proposals may be fraudulent or that the promised returns do not materialise. Also, it is because crowdfunding is commonly used by startup businesses to raise funds for the initial stages of a business cycle, lenders would also be exposed to the higher failure rates associated with startups. So, these are the risks involved in P2P lending.

The regulatory framework for P2P lending must therefore address both the risks posed by such platforms, and strike a balance between that and allowing for innovation. So, we must strike a balance between investor protection and innovation. And that is why with this balance in mind, MAS had put up a consultation paper that the Member had alluded to. This was done in February last year. It was a consultation paper on securities-based crowdfunding. MAS had proposed to facilitate such securities-based crowdfunding offerings to accredited investors and institutional investors in the first instance, but not to retail investors because they may not fully appreciate the risks involved in P2P lending.

Sir, I would like to thank the Members for their comments. I believe I have addressed their questions and I hope that Members will support the amendment Bill that is being tabled.

For our financial system to remain stable and secure and to support economic development, the banking sector must be well-managed and remain resilient to shocks. That is the objective of the Banking Act amendments we have proposed today.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Lawrence Wong.]

Bill considered in Committee; reported without amendment; read a Third time and passed.