Published Date: 13 March 2003

'Responsive Regulation'

Gala Dinner Speech by Shane Tregillis, Assistant Managing Director (Market Conduct), Monetary Authority of Singapore, at Retail Finance Asia-Pacific 2003 Conference, Singapore, 12 - 14 March 2003

1   Good evening.  The theme of this year's Retail Finance Asia-Pacific Conference is getting serious about the customer?.

2   'Getting serious about the customer' not only has important implications for how you go about your businesses as financial services providers: it also has significant implications for how we as regulators go about ours.  This evening I would like to share some thoughts on the interactions between changing consumer demands and expectations, how financial institutions are responding to these changes, and what this means for regulators and regulation.  In doing so, I propose to draw upon MAS' experience in adapting and fine-tuning Singapore's capital markets regulatory framework in recent years.

3   So what are some of the retail consumer trends in the region?  I am sure that these have been covered in previous days. But to quickly highlight some key developments relevant to my theme.

4   Asia's high rate of household savings, coupled with the region's traditional banking culture, means that banks still have plenty of scope to tap the lucrative consumer financial services market.  The potential of Asia's market for personal financial services remains strong. According to McKinsey, the average high-income Asian consumer owned 3.2 financial products in 2001, compared with 2.7 in 1998.  This is still less than half the number held by comparable consumers in the US. Furthermore, the balances held in these products in Asia have risen, as consumers become more willing to leverage and search for higher investment returns.

5   Traditional boundaries between financial services sectors, such as banking, asset management and insurance, have increasingly become blurred in recent years.  Consumers can now buy a much wider range of financial services through a greater array of distribution channels from a more diverse range of financial service providers. 

6   Also retail consumers can no longer be treated as a single, homogenous category.  Even segmentation by income or wealth does not work for many purposes.  Other factors such as the level of comfort with remote channels, such as the Internet, personal preferences for one-stop shopping and stage of life cycle have to be taken into account. 

7   Cost and quality of service and customer experiences have become critical differentiating factors in this more discriminating environment. 

Regulatory responses to the changing landscape of retail financial services

8   As a regulator, MAS' primary responsibilities include safeguarding market integrity and systemic stability, and ensuring proper treatment of investors and policyholders.  While our objectives remain the same, the changing financial services market place has some important consequences for how we go about achieving them.

9   In many ways life was somewhat simpler for regulators when banks mainly made loans and accepted deposits, insurance companies only sold non-investment linked insurance policies, and brokers and other capital markets participants operated in their distinct domains with their own clienteles. 

10   In this simpler world, regulation was structured along institutional and product lines with prudential and conduct requirements set out in distinct pieces of legislation that were administered separately by the regulator.  In many jurisdictions each sector even had its own separate, specialist regulator. 

11   As a regulator, there was less need to worry about the risks arising from an institution engaging in new areas of financial services beyond its core competencies. Sales and conduct requirements were specific to particular types of institutions or sectors.   Restrictions on activities that could be engaged in or on the types of products able to be sold in the market were also generally part and parcel of these types of regulatory regimes.

12   But while on the surface the world was simpler for the regulator, it became clear that regulation structured and administered along these lines was neither consistent with the emerging realities of the financial sector, nor conducive to facilitating financial sector innovation and development. 

13   So regulators and regulation have had to respond.  In the rest of my talk I would like to briefly comment on four ways in which regulators and regulation have been responding to these changes.  In summary these are:

  • a shift away from regulator as ?gatekeeper? to a greater focus on disclosure;
  • a move to more integrated rulebooks and consistent market conduct standards across institutions and sectors;
  • an emphasis by regulators on risk-based approaches, greater levels of transparency and more interactive relationships with market participants; and
  • a focus on helping investors to better look after themselves.

Shift from regulator as 'gatekeeper' to disclosure

14   In regulatory systems where the regulator operates as the 'gatekeeper', it is the regulator rather than the market that determines, to a very large extent, which products are available to investors, which institutions are able to access the market, and what changes by financial service providers to structures, services and systems are allowed. 

15   Most jurisdictions in this region and elsewhere operated to a significant extent on the basis of this 'gatekeeper' model of regulation.  With financial markets liberalising, consumers demanding more choice in financial products and institutions expanding their range of products and services on offer, the regulator-as-'gatekeeper' model has become increasingly inconsistent with fostering a dynamic and innovative financial sector.

16   The introduction of the disclosure-based regime under the Securities and Futures Act, or the SFA, marks another milestone in the fundamental shift away from this 'gatekeeper' role in Singapore.  Under the SFA, the regulator is not concerned with the merits of the particular product or service.  Rather, the focus is on ensuring that there is adequate disclosure of product features and risks to investors, sales practices are fair, and institutions understand and properly manage the risks they take on from these new products or services.

17   As a result, retail investors here in Singapore now have access to a wider array of innovative capital market products, beyond the straight-forward buying and selling of equities on the stock exchange and plain vanilla unit trusts with which they are familiar. 

18   Take for example hedge funds, which were once considered too complex and risky a product for the average investor but are now available to retail investors.  Following a revision of MAS' guidelines for retail hedge funds in December last year, there are already four hedge funds approved for offer to the public.

19   To ensure that retail investors fully understand the nature and extent of the risks involved with such products, we have put in place enhanced disclosure requirements for prospectuses and marketing materials of retail hedge funds.  Specific information that must be disclosed include the material differences between the hedge fund offered and traditional funds, the fees and charges, and for funds of hedge funds ? the method of diversification being employed.  Whether or not retail investors then show interest in hedge funds would, of course, depend on their own risk appetite.

20   Another example is the expanded investment menu offered by the Singapore Exchange to retail investors.  The exchange has introduced exchange-traded funds and stock index futures, and its exchange linkage with the Australian Stock Exchange has also expanded investors? choices.  It has also liberalized the listing requirements for structured warrants.  Such products were previously the preserve of corporate and institutional investors only.

Integrated rulebooks and consistent market conduct standards across institutions and sectors

21   The SFA and the Financial Advisers Act, or FAA, implement a single rulebook for capital markets activities and common conduct standards for the provision of investment advice across the financial sector.  The SFA consolidates two pieces of legislation while the FAA brings together previous regulatory regimes for investment advice which spanned three different Acts: the Securities Industry Act, Futures Trading Act and Insurance Intermediaries Act.

22   The harmonised legislative and regulatory framework is a response to the emergence of new and complex financial products, the blurring of product lines and the increasing use of non-traditional distribution channels to meet customer needs.  Unit trusts can now be purchased directly from fund managers, banks, stock-broking firms or Internet portals.  Life insurance companies are relying on external parties to market their policies. Financial intermediaries are developing capabilities to provide one-stop service. 

23   The ability to hold a single licence to engage in advisory services over a wider array of products, instead of multiple licences under the previous regime, will reduce the administrative and compliance costs for industry participants.  Distributors and product manufacturers are now able to cross-sell one another's products.

24   Just as the shift to a disclosure-based regime under the SFA has widened investor choice, the new integrated structure of the FAA benefits retail investors by promoting higher standards of service and better quality of advice on investment products.  Under the FAA, all financial advisers, regardless of the institution through which the advice is provided, are now subject to the same business conduct rules and regulations.  This reduces the scope for regulatory arbitrage, levels the playing field and helps to maintain consistency in standards and quality of advice provided. 

25   High professional standards in the financial advisory industry will serve to build up trust between financial advisory providers and their customers.  This sets off a virtuous cycle for the industry.

A greater emphasis by regulators on risk based approaches, greater levels of transparency and more interactive relationships with market participants

26   The changing financial landscape is not only altering the content of regulation and what we do as regulators, but also how we do it.  One change is the move to more integrated risk-based supervision.  As this is a large topic that deserves a whole talk by itself, I will leave this to another occasion. 

27   My focus tonight is on regulatory transparency and a more interactive style of working with market participants.  Public agencies are not immune from the customer service revolution, with demands that public sector agencies become more responsive and adopt many of the techniques used in the private sector by successful customer-focussed commercial enterprises.  There are some important lessons to be learnt and techniques that can be usefully adapted from these models to all our organisations.

28   But at the same time, we also need to be aware of some important differences, even among types of public agencies, when we attempt to adopt these models.  For example, as an agency with regulatory functions, we are not so much a provider of goods or services.  Rather, we are in the business of imposing obligations upon sometimes less-than-willing market participants.  So this means that the language of customer service and some of the associated quality improvement techniques and metrics do not neatly fit our type of regulatory business.

29   But once we understand and clearly articulate that we, as regulators, are in the business of imposing obligations upon market participants, this in itself brings its own set of demands for regulatory responsiveness.  This is something we have to bear in mind in going about our day-to-day regulatory and supervisory work.  This is because all regulatory obligations impose a cost on business.  We need to be careful that these costs are not disproportionate to the risks they are designed to address. Our rules should be carefully crafted so that they do not impede innovation, do not have unintended effects or do not impose unnecessary costs that reduce the attractiveness of this jurisdiction as a regional financial centre. 

30   As failure to comply with these regulatory obligations can result in penalties and reputational consequences, it is important that regulatory obligations be clearly communicated and information about them readily available to all market participants.  One important element is to ensure an effective consultation process with market participants when new regulations are introduced and for the regulations, rules and guidance that institutions operate under to be publicly available.  This will help us better understand the practical implications of our proposals and help us fine-tune them so that they achieve their regulatory outcomes at least cost to market participants.

31   MAS has recently formalised its operating procedures for industry consultation and availability of its rules and regulations as part of its move to achieve greater transparency in its regulatory approach.  These procedures include guidelines on the minimum time period for submissions in response to our public consultations, and requirements to ensure we provide proper feedback on comments we receive. 

32   We have also taken other steps, such as seeking structured feedback from market participants, to help us assess and benchmark our activities.  These are some initial steps to enhance our regulatory responsiveness.  We will need to embed an attitude of responsiveness throughout the entire organisation and in all our dealings with market participants.  This will take time. 

33   We will continue to explore how best we can engage market participants in an efficient and effective dialogue on important regulatory issues.

A greater focus on helping investors to better look after themselves

34   While regulations can help to promote fair dealings by institutions with their customers, even in the new environment, individual investors should still take primary responsibility for their investment choices and planning for their longer-term financial security.

35   To safely navigate the ever-expanding range of products available and to plan wisely for their retirement needs, retail investors need to take on the responsibility of educating themselves on financial matters and keeping abreast of developments that have an impact on their investments.  They can do this by enhancing their product knowledge, enquiring about effective rates and hidden charges, reading all the fine print, dealing only with properly licensed or exempted operators and investing only in products which they understand sufficiently and which suit their risk profile. 

36   Like many regulators in other jurisdictions, MAS is working with other agencies to see how we can act as a catalyst to achieve greater impact by better coordination of, and focus in, current investor education efforts in Singapore.  We can also do more to help investors understand how our rules and regulations operate so they can in turn demand the quality of disclosure and advice they need to make properly-considered investment choices.  But we have to be realistic about what we can achieve in the short term. 

37   Market participants also have an important role to play in this area.  Beyond marketing specific financial products and services, industry players have a responsibility to ensure that retail investors are equipped with the necessary information and knowledge to make well-informed decisions.  They can contribute via their professional associations towards cultivating a financially literate and investment-savvy population by contributing towards more broad-based investor education programmes.  

38   In the long run, the whole industry will benefit.

Shorter Regulatory Life Cycle

39   In much the same way that the product life cycle for financial service products and services has been dramatically reduced from what it was even 10 or 15 years ago, the same is true for regulation.  The world is changing at a rapid pace and the financial services sector tends to be at the forefront of many of these changes.  Accordingly, it is important that we keep our regulatory regime under continuous review to ensure it keeps up with market developments. 

40   At times I am sure we all wish, and this is true for those of us who work as regulators as well as market participants, that we could just put in place regulations and leave them for the next 10 years, while we all get on with other important activities.  But it is not possible to stand still or to put in place regulation today that can anticipate all changes that will happen in the future.

41   What we can do is to build into the legislation itself flexibility to accommodate innovation and market change.  Where amendments to primary legislation are required, we also need to keep in mind that change itself involves costs for market participants and seek to keep these costs to a minimum.  We should also take the opportunity of regular reviews to get rid of outdated and redundant provisions that no longer serve any good regulatory purpose.

42   When the SFA and FAA were introduced in 2001, it was announced that MAS would review the legislation after 12 months of operation to make any necessary refinements and adjustments.  We will be seeking formal industry comments and looking to actively engage market participants on policy issues later this year, with any legislative amendments targeted for introduction in mid 2004. 


43   These are testing times for capital markets and regulators around the world.  An enormous amount of wealth has been wiped out by the steep declines in global stock markets; growth in the major economies of US, Europe and Japan is tepid and the global economic outlook is uncertain.  We have witnessed a number of major corporate scandals and flurry of regulatory responses to address these, particularly, but not exclusively, in the United States. 

44   Despite this, the outlook for retail financial services in the medium term in the region is bright with good prospects for continued growth.  Market participants who start getting serious about the customer today are those who will be best placed to take advantage of these opportunities and to grow and prosper.

45   In the new market environment, lines have become blurred not only between product classes and institutions domestically, but also across markets and jurisdictions as well.  This is already true for financial institutions where the quality of regulation and the regulator, along with cost, is an important consideration in determining which jurisdictions they will base their activities in.  Increasingly, retail investors have similar choices of where to invest.

46   Over the last few years, MAS has put in place a capital markets regulatory framework responsive to changes in the financial services market.  We now have, with the SFA and FAA, a capital markets regulatory framework that enables new products, business models and innovative distribution methods to operate in a way that balances financial sector growth with systemic stability, market integrity and adequate safeguards for retail investors.  We consider this to be a strong basis for continuing growth and development of Singapore as a regional financial centre.

47   We will continue to actively seek feedback from market participants and work with them to ensure that the regulatory framework and the way we administer it remains responsive to changing industry and customer demands in our financial services industry. 

48   Thank you.