Singapore Regulator Clarifies Powers to Revoke Bank Licence under Banking Act

This article was first published on Feb 27 2019 by Thomson Reuters Regulatory Intelligence

In a move that seeks to enhance its powers to revoke a bank's licence, the Monetary Authority of Singapore (MAS) has proposed to expand the grounds for such revocation under the Banking Act.

In a consultation paper published on February 7, MAS has sought to clarify the circumstances under which it may revoke a bank's licence. It has therefore proposed to expand the grounds set out in s 20 of the Banking Act to include: breaches of provisions of the Monetary Authority of Singapore Act (MAS Act), which contains such requirements relating to anti-money laundering; MAS' powers over a foreign-owned bank incorporated in the city-state whose parent bank's licence has been withdrawn (this is so as to be in line with MAS' powers over foreign bank branches in Singapore); and situations where it is in the public interest to do so, a ground currently available for the cancellation, revocation, or withdrawal of licences as well as approvals or recognition in respect of most other financial institutions.

In explaining its latest proposals, MAS said: "Over time, some important bank regulations have been introduced in the Monetary Authority of Singapore Act — for instance, anti-money laundering requirements. Additionally, several foreign bank branches have incorporated all or part of their business in Singapore. However, MAS has no express power currently to revoke a bank's licence for breaches of the MAS Act or if the parent bank of a Singapore-incorporated foreign bank has had its licence withdrawn."

Providing clarity

Under the MAS Act, MAS does not have powers to revoke licences for contraventions or breaches, but it does have powers to do so under the Banking Act, said Grace Tan, partner, risk consulting at KPMG in Singapore.

"MAS is providing further clarity about its express powers to revoke bank licenses. This should not come as a surprise to the industry. When MAS revoked the license of Falcon Bank and BSI a few years ago, it did so under the Banking Act due to AML breaches. MAS' latest proposals are retrospective; it just wanted to be clear. It is also part of its periodic review and to ensure the legislation is up-to-date," she said.

The absence of specific provisions may sometimes render it difficult for MAS to justify the revocation of a bank's licence because it would need to demonstrate that such decisions were taken due to certain activities carried out by the bank which were deemed detrimental to depositors' interests, and the scope of such activities can be quite wide, said Nizam Ismail, head of financial services at RHTLaw Taylor Wessing in Singapore.

"MAS wanted to be explicit that it has the power to revoke banks' licences, specifically its ability to do so in relation to breaches of AML/CFT requirements. This was a very real concern when MAS revoked the licences of Falcon Bank and BSI a few years ago because of AML/CFT-related breaches. The absence of explicit provisions [then] did not hinder MAS from exercising its powers to revoke the licences previously. In my view, MAS' latest proposals seek to send a signal, by making it very explicit that any breach of AML/CFT requirements can lead to revocation of bank licences," he said.

Egregious AML breaches versus minor ones

Banks contravene MAS' regulations in a variety of ways, some of which are minor, others egregious. For example, when a bank fails to obtain complete documentation from a client, it could technically be in breach of MAS notice 626 and this is considered a relatively minor breach, but poor compliance culture leading to serious or repeated AML breaches would be considered serious contraventions, Nizam said.

"MAS is now proposing to expand the grounds for the revocation of bank licences to include requirements and provisions on AML. But the intent is not to show that MAS can exercise its authority over any breach of AML/CFT requirements, which will be draconian, but rather to show that MAS' power to revoke banking licences is possible for egregious AML breaches, as opposed to breaches that are less serious or technical in nature," he said.

Increased focus on audit quality of financial institutions

One of the proposed amendments to the Banking Act which requires banks' external auditors to report material adverse developments is also striking, reflecting regulators' increased focus worldwide on the audit quality of financial institutions.

Statutory auditors are playing an increasingly important role as regulators now expect them to ensure the soundness of financial institutions and the financial system, according to Tan.

"As part of our role as external auditors, there are expectations on us to identify material adverse developments. Should we fail to report any material adverse developments to MAS, we may be penalised for not fulfilling our obligations under the Banking Act. MAS is [placing] the onus [on] external auditors," she said.

Definition of material adverse developments needs clarification

While it is impractical for MAS to provide an exhaustive list of what constitutes material adverse developments, the definition needs to be clarified, without which it becomes a judgement call on the part of auditors, Tan said.

"From a statutory auditor's perspective, we are more concerned about the financial position and performance of banks, such as whether they have stated the numbers fairly. That is the key role of statutory auditors. When MAS proposed to require auditors to identify material adverse developments relating to banks' financial soundness, am I only to report material adverse developments that affect banks' continued operations or viability?" she said.

"As an independent third party, auditors review financial institutions to ensure they put in place appropriate controls to manage the integrity of their financial data. But from the regulator's standpoint, it seems it is now the responsibility of statutory auditors to also identify non-financial indicators which may impact the financial soundness of financial institutions," she said.

· Patricia Lee is chief correspondent, banking and securities regulation, Asia