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Monograph on Tenets of Effective Regulation

In June 2010, MAS issued a monograph “Tenets of Effective Regulation” to communicate MAS’ approach to developing effective regulation.

Following the global financial crisis of 2008/09, the importance of regulation to a stable financial system has taken on renewed importance. International regulatory standards are now being reviewed and tightened significantly. MAS supports and participates in these international reviews. While new international regulatory standards will mean some tightening too in Singapore, the shift will not be dramatic. This is because in Singapore, our regulatory framework is prudent and the financial system is stable.

The “Tenets of Effective Regulation” guides the design and formulation of regulation and explains our balanced regulatory approach, which continues to be relevant and effective in achieving the outcome of a sound and progressive financial services sector. The six Tenets are:

Tenet 1: “Outcome Focused” requires MAS to uphold sound regulation of a high standard and to give consideration to all of the six Tenets concurrently. Where the Tenets do not pull in the same direction, to exercise appropriate judgment as to how and in what measure the Tenets should be applied in the particular circumstances of each new regulation so that good regulatory outcomes can be achieved.

Tenet 2: “Shared Responsibility” acknowledges that regulation alone is insufficient to deliver good regulatory outcomes. In many areas, good outcomes are most effectively achieved with MAS, financial institutions, investors and consumers each taking on specific responsibilities for and shared ownership of regulatory objectives and outcomes.

Tenet 3: “Risk Appropriate” advocates that while MAS establishes standard, baseline regulatory requirements for broad application, it should be able to exercise supervisory judgment to set higher standards or to grant exemptions, where justified, in the particular circumstances of an individual financial institution or transaction. The consequences for regulatory breaches should be proportionate to the risks posed to regulatory objectives.

Tenet 4: “Responsive to Change and Cycles” recognises the need for the regulatory framework to be updated to keep pace with changes in the industry and as new risks emerge. Regulations should also require the pre-emptive build-up of prudential buffers in financial institutions to weather a downturn or stress events, including financial, operational and business conduct risk events, as well as be able to respond to macroprudential risks across the financial system.

Tenet 5: “Impact Sensitive” requires that the costs and impact of major new regulatory initiatives be assessed and a judgment made of the balance of costs and benefits. Regulation should be targeted clearly at specific and material risks to the objectives of financial supervision. Regulation should be designed with due regard to its market and cost impact so that it is not unduly burdensome whilst maintaining a high standard consistent with established international standards and practices.

Tenet 6: “Clear and Consistent” explains that regulation should be clear so that institutions have certainty and predictability as to their legal obligations. Regulation should be consistent over time and not be subject to frequent or sudden change that causes disruption. Where appropriate, there should be consistent treatment of like activities conducted by institutions of different sectors.

These Tenets are intended to be generally applicable to all areas of our regulatory development work. This means that, in totality, we strive to achieve a sound regulatory framework which is consistent with international standards, with shared responsibility for regulatory outcomes among financial institutions and other stakeholders, which is sensitive to the risks it is aimed at and the impact it creates, as well as more responsive to changes in the industry, risks and cycles, and which also provides sufficient flexibility to set requirements that are commensurate with the risk profile and unique circumstances of a particular financial institution.

Success in achieving effective regulation requires more than MAS setting demanding standards of itself. The industry has a critical role to play by taking shared responsibility for and ownership of the regulatory objectives, as well as instituting high standards of governance and controls for itself. Articulating this set of Tenets is a further step towards fostering shared understanding and ownership of our regulatory approach and objectives.

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