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July 2010

Singapore Spells Out Six Tenets of Regulation

By Uday Chitale
Murtuza Vajihi
Chartered Accountants
Reading Time 4 mins

Accountant abroad

Post-crisis world requires high regulatory standards, while
also allowing for innovation and risk-taking

The recent global financial crisis, which resulted in the
failure of complex financial products and the collapse of several foreign banks
elsewhere, has led to calls here (in Singapore) and globally for tougher
regulation of financial institutions.

In a treatise released on June 8, the Monetary Authority of
Singapore (MAS) shed light on its own position, saying that regulations must not
become too stringent in an attempt to prevent any kind of company shortcoming or
failure. At the same time, it also warned that Singapore’s regulatory regime
should not swing too far in the opposite direction, with an overly dynamic
approach adopted at the expense of a stable financial system. Setting out what
it calls six ‘tenets of effective regulation’, it says it has to tread a middle
ground that sees high standards of regulation, while allowing well-managed
risk-taking and innovation.

Its so-called monograph comes at a time when international
regulatory standards are being reviewed and tightened worldwide by
policy-makers. Among other things, new capital rules — dubbed Basel III — are on
course to be implemented by major financial jurisdictions, including Singapore.
MAS said that while new international regulatory standards will mean some
tightening here, the shift will not be dramatic. It will use its tenets to
design regulation in the post-crisis world and help ensure its approach is
relevant and effective in achieving what it calls a sound and progressive
financial services sector.

In releasing the monograph, MAS said it is looking to foster
shared understanding and ‘shared ownership’ of its approach and objectives with
industry players. The six tenets that will be used to guide its actions are :

  • outcome focussed;

  • shared responsibility;

  • risk appropriate;

  • responsive to change and

  • impact sensitive; and

  • clear and consistent.

These six tenets or principles are seen as being at the heart
of MAS’ approach to regulation.

The ‘outcome focussed’ tenet is evident, for example,
in housing loan rules which serve to encourage prudent lending and proper credit
assessment by financial institutions. This is in line with MAS’ financial
stability objectives and the Government’s policy of promoting a stable and
sustainable property market. To meet these goals, MAS has put in place property
lending limits. The 80% loan-to-value regulatory limit, for example, requires
banks to maintain a ‘prudent buffer’ in their housing loan portfolios, and
encourages property buyers to be more circumspect when making purchases. The
‘shared responsibility’
tenet is demonstrated through the MAS guidelines on
fair dealing issued last year. They spell out the responsibilities of the boards
of directors and senior managements of financial institutions for delivering
fair dealing outcomes to customers.

In underlining its six tenets, MAS stressed that a balanced
regulatory approach was needed, with effective regulation guided by a range of
considerations. These include transparency and clarity, the balance of costs and
benefits, and meeting international standards while remaining appropriate in the
local context.

MAS’ monograph has met with a broadly positive industry
response. Barclays Capital economist Leong Wai Ho said that Singapore “was one
of the well-managed
economies” with a sound

system, and added
that the ‘mission statements’ were “really about MAS facing up to an evolving
landscape”. “Market players must play their part and share the responsibility to
ensconce a level playing field,” said Mr. Robson Lee, a partner at investment
banker Shook Lin & Bok.

And MAS deputy managing director Teo Swee Lian noted in a statement that success
in achieving effective regulation “requires more than MAS setting demanding
standards of itself”. He noted that the industry played a key role in the
implementation of regulation. They should not rely on the Government to
prescribe or legislate in a knee-jerk response whenever there are adverse market
developments. “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.”

(Source : The Straits Times, Money Supplement, 9-6-2010)

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