Keynote Address by Andrew Khoo Assistant Managing Director MAS
Good afternoon. I am very pleased to join you at the second edition of this IBF compliance seminar.
As the theme of this seminar suggests, the reform of the global financial regulatory framework following the crisis is still work in progress. Some of these discussions are more advanced than others. For example, under the proposals issued for consultation by the Basel Committee on Banking Supervision in December last year, revisions to banks’ capital and liquidity requirements can be expected, although the exact amounts have not been finalised.
There is, however, still continuing discussion on a wide range of reform proposals. As a member of the Financial Stability Board, the Basel Committee on Banking Supervision and other fora, MAS is participating actively in discussions that are shaping the future financial regulatory landscape.
MAS’ Approach to Regulatory Reform
Industry practitioners, including compliance professionals, are understandably anxious about the final outcomes of these regulatory reforms. MAS will maintain our balanced, open and consultative approach in implementing changes to the regulatory framework. We are committed to establishing sensible rules to achieve our objectives for the financial sector. MAS’ approach to rule-making is focused on achieving good regulatory outcomes and seeks to promote sustainable development of the financial sector and the real economy.
A focus on outcomes means that MAS appreciates that the risk profiles of financial institutions differ, and will apply regulation that is appropriate to the scale and impact of their activities. Let me cite a recent example: MAS’ proposed enhancements to the regulatory regime for fund management companies and exempt financial intermediaries. The proposals enhance supervisory oversight of entities currently operating under the exemption regime, and seek to raise the quality of the fund management industry through proposed changes to competency, business conduct and capital requirements. The different tiers of licensing recognise the varying risk profiles of these entities and have been designed to be commensurate with the scale and impact of their activities.
Strengthening Risk Management
There is much work being done on the regulatory front. Financial institutions should also learn from the crisis and prepare themselves for the future regulatory landscape.
The failure of systems and processes featured strongly in the recent financial crisis. Failure by Boards and senior management to exercise effective risk management oversight led to serious consequences for some financial institutions. Strengthening of systems and processes has to start at the top. The Boards and senior management of financial institutions must take ownership of and responsibility for managing risks. They play a vital role by setting the risk appetite, remuneration policies, strategic directions and other key policies of their institutions, and in encouraging a strong risk management culture throughout their institutions. In this regard, MAS has recently proposed a number of enhancements to the corporate governance framework for locally incorporated banks and direct insurers.
In the area of stress testing, financial institutions should use the lessons from the crisis to design and identify scenarios that could severely impact them. If done well, stress testing can effectively complement risk management processes and help question assumptions, and uncover hidden risks and inter-linkages between risk factors. In the area of back-testing, the crisis should also be viewed as a valuable opportunity for financial institutions to review how their valuation models, methods and assumptions have held up during the crisis and assess if changes are required.
It is not sufficient to have good systems and processes in place. They must be staffed by suitably trained and experienced people. The financial crisis has demonstrated the need for the growth of the industry to be matched by growth in the capabilities of the financial sector workforce.
The effort to develop people also has to start from the top. The Boards and senior management of financial institutions need to have the requisite knowledge, skills and experience to discharge their responsibilities effectively. Therefore, one of the key proposed enhancements to the corporate governance framework for locally incorporated banks and direct insurers is the requirement for financial institutions to assess the skills of their Boards on an ongoing basis, and to establish a continuing development programme for all their directors. Similarly, risk management professionals need to keep pace with the evolution of this new financial landscape, and build the necessary competencies and capabilities to support their institution for the future.
It will be clear from what I have just spoken about, that there is a shared responsibility for both the regulator and the industry to achieve the desired regulatory outcomes.
The same applies in the market conduct area. Financial institutions need to take active ownership of regulatory outcomes in order to enhance investor confidence. The Guidelines on Fair Dealing issued by MAS in April last year called for financial institutions to move beyond mere compliance with regulatory requirements and emphasized the responsibilities of Boards and senior management in delivering fair dealing outcomes when providing financial advisory services to customers.
Financial institutions will need to be supported by effective compliance functions to be able to partner MAS to take on such shared responsibilities. It is thus necessary for the Board and senior management to put in place an effective compliance arrangement, relevant to the institution’s business model and risks, so as to support the institution’s compliance with regulatory requirements, and evaluate the compliance arrangement over time as business models and risks evolve. We expect financial institutions to set a high standard of compliance, and engage compliance professionals with the relevant experience and expertise. Only under the right management culture, with the appropriate mandate, resources and stature will compliance professionals in financial institutions be able to perform their functions properly. An effective compliance arrangement is an essential part of good corporate governance and helps protect the reputation of financial institutions.
As the financial industry evolves post-crisis and new regulatory rules emerge, it is clear that more will be expected of financial institutions in the areas of corporate governance and risk management. Financial institutions should take this opportunity to establish stronger systems and processes, and develop the right qualities and capabilities in their people. The compliance role is important to help financial institutions achieve necessary change in behaviours and risk management to deliver the firm’s regulatory responsibilities. The IBF plays an important role in supporting financial institutions’ efforts in developing the competencies and capabilities of their people. Forums such as this seminar help promote industry best practices. Another major area of the IBF’s work, the Financial Industry Competency Standards (FICS), provides for the continual development and enhancement of the quality of our financial workforce.