Guidelines on Individual Accountability and Conduct
On 10 September 2020, the Monetary Authority of Singapore (“MAS”) published new Guidelines on Individual Accountability and Conduct (“IAC Guidelines”). With these IAC Guidelines, MAS is bolstering culture and conduct in financial institutions similar to initiatives in other jurisdictions such as the United Kingdom, Hong Kong and Australia.
The objective of the IAC Guidelines is to assist financial institutions by providing a framework and best practices for strengthening accountability and standards of conduct. The IAC Guidelines set out five accountability and conduct outcomes and guidance for each of these five outcomes. Financial institutions must achieve all five outcomes and implement all guidance commensurate to the specific financial institution’s nature, size and complexity of business. The guidance in the IAC Guidelines is not intended to be exhaustive nor prescriptive. Financial institutions have the flexibility to adopt additional measures, enhance measures or not to adopt specific guidance that they have assessed to be irrelevant to their specific business. However, they should justify their decision not to adopt guidance, demonstrate how they achieve the relevant outcomes through other means and document their reasoning. Small financial institutions with fewer than fifty headcounts should achieve the five outcomes but will not ordinarily be expected to adopt the specific guidance described in the IAC Guidelines. MAS however has the power to mandate any financial institution to adopt specific guidance, irrespective of the financial institution’s size.
The IAC Guidelines will take effect on 10 September 2021 and apply to all types of financial institutions in Singapore, including banks, fund management companies, external asset managers, financial advisers, trust businesses, payment institutions including remittance and crypto exchanges. Specified exemptions however apply. Where the financial institution in Singapore is part of a group, MAS expects the group to also apply the IAC guidelines in all entities are held by the Singapore entity.
The board of directors and senior management are responsible for ensuring and overseeing the financial institutions implementation of the IAC Guidelines.
Outcome 1: Senior managers responsible for managing and conducting the financial institution’s core functions are clearly identified.
Clear roles and responsibilities are fundamental to an effective governance framework and facilitate greater transparency in the management and decision-making processes of the financial institution.
The financial institution should clearly identify senior managers who have responsibility for functions that are core to the management of the financial institution’s affairs, such as the chief executive officer, head of finance, head of risk, head of operations, head of information technology, chief data officer, heads of business functions, head of human resources, head of compliance, and head of internal audit. The respective positions identified and the allocation of responsibilities to them should reflect where the actual oversight responsibilities and decision-making authority of the financial institution reside in practice.
Senior managers should generally have direct reporting lines to the CEO and, where relevant to the performance of that function, to the board of directors.
Outcome 2: Senior managers are fit and proper for their roles and held responsible for the actions of their employees and the conduct of the business under their purview.
Outcome 3: The financial institution’s governance framework supports senior managers’ performance of their roles and responsibilities, with a clear and transparent management structure and reporting relationships.
MAS consolidated its discussion and guidance on outcomes 2 and 3.
Financial institutions must conduct due diligence prior to hiring senior managers. This due diligence should extend beyond the regular fit and proper assessment taking the specific position of the individual into consideration. Moreover, appropriate due diligence should be conducted on a regular basis throughout the senior manager’s appointment.
Financial institutions should establish appropriate governance policies and procedures to promote accountability and facilitate performance of roles by senior managers. A financial institution must have a clear framework that articulates its overall management structure and the roles and responsibilities of its senior managers. Corporate governance policies and processes, organisational charts and job descriptions should be in place documenting the management structure, including reporting relationships, and describing the roles and responsibilities of each senior manager. These should be approved by the board of directors. Each senior manager should also acknowledge his/her specified roles, responsibilities and reporting lines. A succession plan that is regularly updated should identify potential candidates and describe handover policies and procedures.
Appropriate incentive, escalation, and consequence management frameworks should hold senior managers accountable for the effective performance of their specified roles and responsibilities, including the actions and the conduct in the business under their purview.
Management committees add value by leveraging diverse views and expertise of the individual members in coming to a collective decision. In accordance with the mandate and the terms of reference of the committee, the committee is jointly accountable for the responsibilities of the committee and each manager individually for his/her role and responsibilities in the committee.
Outcome 4: Material risk personnel are fit and proper for their roles, and subject to effective risk governance, and appropriate incentive structures and standards of conduct.
The financial institution must identify its material risk personnel. This material risk personnel are individuals who have the authority to make decisions or conduct activities that can significantly impact the financial institution’s safety and soundness, or cause harm to a significant segment of the financial institution’s customers or other stakeholders. Material risk personnel are in front, middle and back office. In order to identify the material risk personnel, the board of directors and senior management should determine quantitative and qualitative criteria / thresholds.
The material risk personnel must be subject to appropriate due diligence at hiring and on a regular basis during their tenure. This due diligence should exceed the regular fit and proper assessment taking the specific role into consideration. Moreover, the financial institution should impose elevated standards of conduct, provide regular training on the competencies required for their roles and risk involved, and implement appropriate incentive structures encouraging behaviour that is consistent with the desired conduct outcomes.
In order to facilitate effective risk governance, the financial institution should designate appropriate mandates, decision making authority, risk limits and oversight to its material risk personnel.
Outcome 5: The financial institution has a framework that promotes and sustains among all employees the desired conduct.
Lead by the tone-from-the-top, in policies, systems and processes, the financial institutions must foster and embed values, attitude and behaviour meeting the desired conduct standards among its employees at all levels.
The financial institution should consistently and effectively communicate the expected standards of conduct in trainings at on-boarding and regularly thereafter. The financial institution should also put incentive structures in place considering risk and control objectives. Conversely, the financial institutions should implement appropriate policies, systems and processes to monitor, report and escalate conduct matters, including a consequence system. A formalised whistle-blower programme should be implemented to provide a channel to raise concerns.
The financial institution should also establish engagement strategies with key stakeholders, including customers, counterparties, shareholders and regulators to ensure transparent and timely communication of relevant material information. The board of directors and senior management should notify MAS as soon as they become aware of any material adverse developments including misconduct of senior management or material risk personnel, lapses in risk management and controls, breaches in legal and regulatory requirements that have a potentially significant impact on the financial institution’s day to day operations.
Overall, the IAC Guidelines give financial institutions significant flexibility how to implement the guidance and achieve the outcomes. This blessing may however also be a curse in disguise. The financial institution must find their ways to implement appropriate measures fitting its business. The design of the measures and their implementation require an understanding of the business, regulatory expectations as well as effort and time. Reach out to Ingenia for guidance on this process.