MAS Issues Monograph on Tenets of Effective Regulation
Singapore, 8 June 2010… The Monetary Authority of Singapore (MAS) has issued a monograph “Tenets of Effective Regulation” to communicate MAS’ approach to developing effective regulation.
2 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 reviews1. 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.
3 The “Tenets of Effective Regulation” guide 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
Tenet 2: Shared Responsibility
Tenet 3: Risk Appropriate
Tenet 4: Responsive to Change and Cycles
Tenet 5: Impact Sensitive
Tenet 6: Clear and Consistent
4 These Tenets are intended to be generally applicable to all areas of our regulatory development work. The regulatory framework will be targeted at and sensitive to the risks it is aimed at, and more responsive to changes and risks in the industry. It will also be sufficiently flexible to set requirements that are commensurate with the risk profile and unique circumstances of particular financial institutions. Rules will be clear and not subject to frequent disruptive change as well as consistently applied to like activities conducted across sectors.
5 Teo Swee Lian, Deputy Managing Director, MAS, said, “Success in achieving effective regulation requires more than MAS setting demanding standards of itself. 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.”
1 MAS is a member of both the Financial Stability Board and the Basel Committee of Banking Supervision. Both bodies are at the fore of developing new international regulatory standards for banks.
Note to editor:
This monograph complements earlier monographs which set out MAS’ overall approach to financial supervision more broadly, namely the 2004 monograph “Objectives and Principles of Financial Supervision” and the 2007 monograph “MAS’ Framework for Impact and Risk Assessment of Financial Institutions”.
The Tenets of Effective Regulation
Tenet 1: “Outcome Focused” commits MAS to uphold sound regulation of a high standard but also acknowledges that there is no one way to do this. Good regulatory outcomes can sometimes be best achieved by prescriptive and clear rules, and at other times by laying down broad principles and placing responsibility on financial institutions to deliver the regulatory outcomes. There are also different circumstances when one-size-fits-all rules or alternatively, differentiated rules are more appropriate. Sometimes, regulation is aimed specifically at impacting market practices in a significant way and even changing them, and at other times the impact of regulation is more appropriately calibrated and mitigated. An outcome focused approach calls on MAS to give consideration to all of the six Tenets and to exercise appropriate judgement 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” describes our belief that regulation alone is insufficient and that in many instances, regulatory outcomes can be more effectively achieved with the MAS, financial institutions, investors and consumers each taking on specific responsibilities and shared ownership of supervisory objectives and outcomes. In addition to MAS’ prescription of specific behaviours through regulation, reliance and responsibility can also be placed where appropriate on financial institutions individually, their boards and senior management, through their governance, and on the industry collectively, to address supervisory concerns directly. Where appropriate and effective, we will also consider, as an alternative to regulating an activity, placing reliance on disclosure of timely and adequate information so that informed consumers, investors and other stakeholders may exercise choice and market discipline. The design of regulation should wherever appropriate provide for rather than take away from financial institutions and stakeholders’ responsibility and incentives to contribute towards regulatory outcomes.
Tenet 3: “Risk Appropriate”. Regulation should set standard, baseline requirements of broad application and provide for the exercise of supervisory judgement to set higher standards or permit exemptions when merited by the particular circumstances of a financial institution. For example, more demanding regulation may be appropriate for systemically important financial institutions whose failure can cause widespread disruption to the financial system compared to a small institution in the same licence category with simple operations.
Tenet 4: “Responsive to Change and Cycles”. Regulation should be updated expeditiously as industry and market practices change and as new risks emerge. Regulation should also require the pre-emptive build-up of prudential buffers in financial institutions to weather a downturn or stress event, and to effectively address macroprudential risks.
Tenet 5: “Impact Sensitive”. The costs and impact of regulation should be considered alongside the benefits and desired outcomes of regulation, so that the costs are not disproportionate to the benefits. Regulation should be targeted clearly at specific and material risks to the objectives of financial supervision. The design of regulation should take into account market realities so that unintended and unnecessary disruption to market practices is minimised. Even in instances where regulation is specifically aimed at changing market practices, care will be taken to avoid placing undue burden.
Tenet 6: “Clear and Consistent”. Regulation should be clear so that financial institutions have reasonable certainty as to their legal obligations. Regulation should not be subject to frequent and sudden changes that cause uncertainty and disruption to business and market practices. Where appropriate, like activities conducted by regulated institutions from different sectors should be subject to similar and consistent regulation.