For Parliament Sitting on 1 March 2018

Name and Constituency of MP
Assistant Professor Mahdev Mohan, Nominated Member of Parliament

Question
Acknowledging that the burden of maintaining market integrity no longer rests on regulatory bodies, but has substantially shifted to market participants who are expected to adhere to rules of responsible business conduct, I wish to ask PMO and MAS what is planned to promote good corporate governance practices among financial institutions.

Answer by Mr Ong Ye Kung, Minister for Education (Higher Education and Skills) and Second Minister for Defence, on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in charge of MAS:

1   Mr Speaker, I thank the member for sharing his views.  Maintaining market integrity is an important objective for the regulator. But there is only so much that supervision and enforcement can do. Integrity and good corporate governance have to be internalized by market participants, and have to be part of a deep and widespread corporate culture.

2   The responsibility for high ethical standards and sound business practices falls chiefly on the board, the senior management, as well as leadership at all levels of the organisation. It cannot be outsourced or devolved. The leaders have to take charge, put in place the structures and practices, and walk the talk. 

3   So good corporate governance is a combination of both effective supervisory efforts and corporate self discipline and leadership.  This is especially important for the financial sector, because the stability of our financial system depends critically on the trust and confidence that the public places in our financial institutions (FIs).

4   Fortunately, FIs in Singapore have generally acquitted themselves well. There have been occasional lapses and MAS takes them very seriously, working with the FIs concerned to ensure that they address the lapses and put in place measures to minimise recurrence.

5   Notwithstanding, MAS plays an active role to encourage and to foster such a culture amongst FIs. In fact, this has become an increasingly important dimension in MAS’ supervisory approach, which comprises three-prongs:

• Promote a culture of trust and ethical behaviour among FIs;
• Monitor and assess FIs’ culture and conduct; and
• Enforce against misconduct by FIs or their employees when necessary.

Let me talk about them in turn.

6   First, promote a culture of trust and ethical behavior.  MAS has been engaging FIs regularly, such as through dialogues with boards and senior management of the FIs, to promote desirable industry conduct, to understand their challenges, and also to facilitate sharing of best practices.

7   MAS has also published guidance on good practices observed from our thematic reviews, in areas such as corporate lending and anti-money laundering controls.  This will assist FIs in benchmarking their practices against best-in-class industry standards of conduct. In addition, MAS has collaborated with industry associations to promulgate good market practices. One example is the Singapore Foreign Exchange Market Committee Guide to Conduct & Market Practices for Treasury Activities, which is currently undergoing review.

8   Further, when we enact new legislation or guidelines, MAS will engage the industry, and explain the intent behind the changes and what problems they were intended to solve. That way, we hope the FIs have greater buy-in for the changes, and not comply for compliance’s sake.  MAS will soon be consulting on new guidelines to strengthen individual accountability and conduct across the financial industry.

9   Second, monitor and assess FIs’ culture and conduct.  This, in engineering terms, is like preventive maintenance. It is essential, because downstream control weaknesses and misconduct can be avoided if signs of weak culture or poor ethics are identified early.

10   In its inspections and supervisory reviews, MAS does not just review governance policies and control processes, but also evaluates if the FI has a supportive culture that incentivises the right behaviour.

11   For example, during inspections, MAS officers will meet with ground staff to assess if the “echo from the ground” resonates with the “tone from the top”. In other words, whether the desired culture and risk appetite determined by the board and senior management have been effectively cascaded throughout the organisation. MAS also looks out for potential red flags, such as whether risk and control functions have sufficient stature, and whether incentive structures bring about responsible risk-taking and ethical conduct.

12   MAS is also developing analytics capabilities to enhance its surveillance of FIs’ market conduct practices. This includes making better use of data from complaints, misconduct reports, and regulatory returns. 

13   Finally, enforce against misconduct. All said and done, this is still necessary and an integral part of our system to promote good corporate governance. Unlike culture which is implicit, this is the explicit part, where we have to take action when anyone flouts the rules and regulations.

14   MAS has a reputation of being a no nonsense regulator. It will come down on FIs when lapses lead to control deficiencies, regulatory breaches, or criminal offences. The enforcement actions taken by MAS in recent years have led to the removal of directors or executive officers, composition fines, revocation of  licence of FIs, as well as referral to the public prosecutor for criminal prosecution.  Not every one of these actions is published in the media but they have a salutary effect on the FIs concerned. 

15   Other than enforcement action, there is of course the lighter regime of the Code of Corporate Governance, which applies to listed companies on a comply-or-explain basis. 

16   MAS set up the Corporate Governance Council last year to review the Code.  It is timely to do so, given that we live in a rapidly evolving global business landscape, and the last review was done a number of years back, in 2012.    

17   The Council consulted many stakeholders, and studied the systems across various countries, including OECD Principles of Corporate Governance. On the OECD Guidelines mentioned by Assistant Professor Mahdev Mohan, some of the guidelines related to disclosures are already in the Securities and Futures Act and SGX Listing Rules. The SGX Listing Rules also contain other important safeguards that deal with self-dealing risks arising from related party transactions, and require listed companies to put in place robust and effective internal controls  to address financial, operational and compliance risks.

18   The Council’s recommendations are now undergoing public consultation. Some of these go to the heart of what Assistant Professor Mohan has raised including his question on how to promote responsible conduct among listed companies who may face pressure to show good financial performance. The Council will carefully evaluate the feedback received before making its final recommendations to MAS, which will in turn issue a revised Code in the later part of this year.

19   We will continue to maintain the current arrangement where FIs that are systemically important are subject to even higher corporate governance requirements compared to other listed companies, in terms of director independence, board composition, and the establishment of specific board committees. They are also expected to comply with more stringent disclosure requirements, such as in the areas of risk management and remuneration.

20   So in sum, getting governance, culture and conduct right is crucial to maintaining public trust in our FIs and the reputation of our financial sector. The board and senior management of FIs have a critical role to play, and MAS will continue to partner them to foster a strong culture and good practices.