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Internet Banking
Licensing and Regulatory Approach
MAS completed a review of its frameworks for licensing, and for prudential regulation
and supervision of banks last year to ensure their coutinued relevance in the light of developments in Internet banking. MAS is of the view that the risk considerations inherent in Internet banking are not new or fundamentally different from those posed in other forms of banking. MAS has therefore subjected Internet banking, including services offered by IOBs, to the same prudential standards as traditional banking. MAS' admission criteria for new licence applicants, and its regulatory and supervisory approach, would apply across the board.
Prior to the review, MAS already allowed all banks licensed in Singapore to use the Internet as a platform to provide their services. In July 2000, MAS announced that it was prepared to grant new banking licences to Singapore-incorporated banking groups to set up banking subsidiaries (including joint-venture entities) to pursue new business models, including Internet-only banking. Recognising that the existing $1.5 billion minimum capital requirement was a major hurdle for new IOBs, MAS instead set a reduced minimum paid-up capital requirement of $100 million on banking subsidiaries of Singapore-incorporated banks who had already met the $1.5 billion capital requirement. MAS was also prepared to admit branches of foreign-incorporated IOBs within the existing framework of admission for foreign banks.
MAS' view was that the current framework for prudential regulation and supervision already provided flexibility for innovation in new business models and technologies. There was no need for a new prudential framework to manage or mitigate the risks involved in Internet banking. MAS however highlighted that banks were responsible for assessing and managing the risks associated with their operations, including the adoption of new technologies and business models. Special attention had to be paid to accentuated risks, such as technology, security, liquidity and operational risks, in Internet banking.
Technology Risk Management Guidelines
In consultation with the financial sector and technology industry, MAS developed a set of best practice guidelines in respect of technology risk management and security practices pertaining to Internet banking. Issued on 29 March 2001, the guidelines require financial institutions to:
a) establish sound and robust technology risk management processes;
b) strengthen system availability, security and recovery capability; and
c) deploy strong cryptography to protect customers' data and transactions.
The Board and senior management of each financial institution are responsible for establishing a sound and robust risk management framework. As part of this process, they have to continually monitor the effectiveness of their risk management functions as well as implement compliance procedures to ensure that the MAS' technology risk management guidelines are adhered to.
Through its onsite supervision programmes and offsite review functions, MAS will closely monitor compliance with these guidelines by financial institutions, and ascertain that the financial institutions have in place the appropriate risk management practices, including internal and external audit functions to facilitate adherence to the guidelines.
Internet Trading
The full liberalisation of brokerage commissions from 1 October 2000 was widely expected to encourage growth in Internet trading. Statistics have shown that the adoption rate of securities transactions conducted online is on a steady increase. The adoption rate of securities transactions increased from 2.9% of total volume of trades in the first quarter of 2000 to 5.5% in the final quarter of 2000. As at end-May 2001, 14 brokers within the brokerage industry were offering online trading services, of which four offered mobile trading and nine offered voice-activated trading facilities. In
addition, stock alerts, research analyses and reports, as well as subscription of IPOs, were part of the other services offered over the Internet.
To assist member companies in building robust Internet trading systems, MAS in conjunction with SGX issued the Sound Practices Guidelines on Internet Trading in September 2000. The guidelines set out sound practices with a view to encourage member companies to:
a) Implement the sound Internet trading practices to the extent appropriate to their particular circumstances;
b) Carry out regular assessments of their Internet trading systems for adherence to the recommended best practices;
c) Commission independent expert assessment, wherever appropriate, to provide greater assurance of the quality of the assessment.
With immediate effect, a member company that proposes to introduce an Internet trading system is required to conduct a review of its Internet trading system for adherence to the guidelines. Member companies with existing Internet trading systems were required to carry out the requisite reviews of their systems and to notify SGX of the resulting conclusion of these reviews by 30 March 2001.
Globally, market practices on the application of "know your customer" principles have evolved to tap the potential of electronic trading. In concert with these developments, SGX issued its Guidelines on Account Opening Procedures in September 2000. These guidelines provide for alternative means of reasonably establishing the bona fide identity of clients. The overriding consideration is to bring more convenience to local and overseas investors, while maintaining adequate prudential checks.
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