Regulatory Thought Leadership

The evolving banking landscape

Regulatory reform will continue to top the agenda for banks and regulators this year

By Chris Matten is a partner, Financial Services Industry Practice, PwC Singapore LLP and Radish Singh is associate director, Financial ServicesIndustry Practice, PwC Singapore LLP

This article was contributed and first published in The Business Times on 23 January 2013.

IN the last few years since the global financial crisis and through 2012, regulatory reform has topped the agenda for Financial Institutions (FIs). It has and continues to change the banking landscape dramatically as regulators take a more intrusive approach to supervision, focusing on understanding and potentially containing any systemic risks and protecting domestic or national interests, as well as ensuring that taxpayers will not be called upon again to rescue failing banks.

Has the one size fits all approach taken by regulations - in response to the global financial crisis - benefited the market and its players where standard setting agencies and the G-20 continue to push for reforms?

The question remains tacitly unanswered, particularly in Singapore where banks were always conservative, well-capitalised and governed. In addition, the recent adjustment of the "liquidity coverage ratio" and four-year delay in full implementation creates pressure for the Basel Committee. A flip-flop in any policy is never reassuring, bringing attention to whether one had the policy correct from the onset.

It is increasingly important for regulators of major regional markets such as Singapore, Hong Kong and Japan to push towards greater cooperation in order to respond to extra-territorial regulations in a formidable fashion.

The region has to voice out its distinctiveness and uniqueness of Asian markets over its western counterparts. Although a difficult path to tread as all regulators would want to demonstrate commitment to global trends and treaties, Asian regulators must carry on effectively utilising the international standard setting architecture to have their case heard.

Having said that, the fact remains that regulatory reform will continue to top the agenda for banks and regulators this year. Some of the key areas that would remain on the radar for 2013 are as follows:

  • Greater vigilance in the Anti-Money Laundering (AML) space. Given that Switzerland is trying to move away from its tax haven image, it is said that Singapore is the next business destination. Singapore is committed to ward off tax evaders and has accordingly beefed up its regime. This will be an area for banks to enhance within their existing client on-boarding and due diligence frameworks and we see this to be beyond just tax evasion.
  • Enhancement of governance, risk and culture - for example the MAS recently issued a consultation paper on "related party transactions". The MAS has also impressed that it intends to engage with boards and management on instilling a proper culture and ethical conduct within FIs. Elsewhere in Asia, India is stepping up to strengthen corporate governance within companies by matching best global practices and win back investor confidence. It is imperative for boards to understand the effectiveness of governance and controls within the organisation as well as have a holistic view of risks and their inter-linkages.
  • Recovery and resolution planning. In protecting domestic interest, it will become increasingly important for regulators to understand the risks inherent in the operations of FIs, how such FIs would fare in the event of a crisis, and how the domestic operations, depositors and investors would be dealt with and the legal reach of regulators to protect assets of the FI. The focus would be on "G-SIFIs" and "D-SIFIs" (Globally or Domestically Systemically Important FIs - that is, those that are deemed too big to fail in either the global or national context).
  • Basel III staggered implementation - Singapore remains among the very few jurisdictions globally which have published their detailed Basel III rules. It will be a year of continued implementation and understanding the impact of the enhanced regime. Ironically, Asian banks arguably are better capitalised and were not the cause of the global financial crisis, yet the major Asian financial centres have been quicker to respond to the international call to enhance the capital and liquidity of banks.
  • Emphasis on investor protection to continue to gain greater investor confidence - be it oversight of sales practices, compensation and remuneration, suitability assessments, narrowing the gap between retail and professional clients or complaints management as well as require greater transparency and disclosure. For example, the MAS has recently issued a suite of recommendations to strengthen practices in the financial advisory industry.
  • The banking industry hopes that regulators will not create an overly restrictive OTC derivatives regime which in turn would stunt the growth of the market and hedging activities. On the other hand, there is global push to centrally clear OTC derivatives. The question really is whether the relatively small OTC derivatives market in Asia (which including Japan accounts for only 8 per cent out of the global OTC trades) warrants such regulations?
  • Shadow banking regulation - the Global Shadow Banking Monitoring Report noted a general consensus that showed monitoring of the shadow banking sector needs to be enhanced although no significant risks have arisen at present.
  • Extra territorial regulations - this is the most interesting section given that the non-US banks operating in Singapore and in fact anywhere outside the US would be expected to comply with these regulations - namely FATCA (Foreign Account Tax Compliance Act) and certain provisions in Dodd Frank.

While regulators are in the overdrive mode in ensuring reforms for stronger and credible markets, some of the pain points for regional banks are noted here.

Firstly, a focus on long-term strategy where regulators feel that banks should prioritise risks, simplify investment banking, focus on core business and key strengths to formulate a business model which will also involve firm-wide coordination.

Besides managing the diversity between rules and regulators in Asia, FIs need to be proactive as opposed to reactive, keeping track of regulations and understanding priorities as well as spotting the next big development.

Re-modelling compliance requires investing in infrastructure and technology resulting in escalating costs. FIs need to balance cost reduction and effective use of capital versus business growth while dealing with new regulations, impact of cross border business, and greater protection of domestic depositors and investors.

Lastly, FIs should have an appropriate technology infrastructure in place to ensure regulatory compliance and provide customers with greater satisfaction in products and services offered and better management of outsourced functions particularly where it involves material functions. This may be done through a review of the skills and competency of resources of internal reporting and oversight processes.

Regulatory changes cannot be looked at any longer in a silo fashion as navigating through this ocean of rules impacts the firm as a whole from business strategy, IT, compliance, risk, governance and culture, resourcing and skills, liquidity and capital, bottom-line, to compensation and benefits - to name a few.

Straight away
Personal Data Protection Act 2012 (“PDPA”)

October 2012

In October 2012 the Singapore Parliament passed the personal data protection bill. The bill is designed to safeguard an individual's personal data against misuse. There will be an 18 month sunrise period before the Personal Data Protection Act (“PDPA”) takes effect, starting January 2013. The Do Not Call (“DNC”) Registry is expected to be set up and operational in early 2014. The Act covers all private sector organisations in Singapore as well as all organisations located outside of Singapore that are engaged in data collection, processing or disclosure of such data within Singapore. This Straight away two-pager covers the impact for the financial institutions.