"The Financial Holding Companies Bill 2013" - Second Reading Speech by Mr Tharman Shanmugaratnam, Deputy Prime Minister, Minister in charge of MAS

This is an official speech published on Monetary Authority of Singapore website.

The Financial Holding Companies Bill introduces a regulatory framework for the Monetary Authority of Singapore (MAS) to regulate financial holding companies (FHCs) and their financial groups. For the purpose of the Bill, an FHC is a non-operating holding company which is incorporated in Singapore and holds a Singapore bank or insurance subsidiary, or both.

The FHC Bill will provide greater clarity to the industry and other stakeholders on the rules and standards applicable to financial groups organised under FHCs in Singapore. It is common for internationally active financial groups to be organised under holding companies. As Singapore develops as an international financial centre, more global banks and insurance companies are locating parts of their global operations in Singapore. At the same time, our domestic financial institutions are growing regionally and some may find a holding company structure more suited to their purpose.  

The Bill will clarify and ensure appropriate MAS’ prudential oversight of financial groups in Singapore. Group-wide supervision allows MAS to assess the impact that a financial institution’s relationships with other entities in the group may have on its safety and soundness. The concept of group supervision is of course not new. Financial groups in Singapore are mostly headed by banks, and are already subject to group-wide supervision by MAS. The Bill extends group-wide supervision by MAS to an FHC and its financial group. It is aimed at mitigating intra-group contagion risks, preventing the multiple use of capital within the group, and limiting concentration risks at the group level.

The FHC Bill is in line with international regulatory developments. Key international supervisory committees such as the Joint Forum have called for greater oversight of unregulated entities in financial groups, in particular the parent FHC.² The IMF has also cited the limited legal authority over FHCs of cross-sector financial groups as a weakness in some financial systems. Many regulators are therefore widening their scope of group-wide supervision to include FHCs, either directly through an FHC regulatory framework or indirectly through a regulated entity like a bank or insurance subsidiary. Australia, Canada and the US are among the countries that have established legal frameworks for FHCs. The EU is moving in the same direction of strengthening regulatory authority over FHCs. 

However, the introduction of this Bill does not mean that MAS is advocating a holding company structure for financial institutions in Singapore. Whether a financial group organises itself under an FHC or is held directly by a bank or insurance company is a business decision. MAS, as the financial regulator, needs to ensure that all financial groups in Singapore, regardless of their holding structure, can be effectively regulated and supervised under an appropriate regulatory framework.

MAS has consulted the industry on the FHC regulatory framework. The first consultation in February 2012 sought views on the broad policy and regulatory principles underpinning the framework. The second consultation in October 2012 invited comments on the draft FHC Bill. MAS has considered the views and feedback received and taken them into account in refining the FHC Bill, where appropriate. 

Mdm Speaker, let me expand on the key provisions of the Bill.

KEY PROVISIONS IN THE FHC BILL

FHC Bill Complements Banking and Insurance Acts

The FHC Bill draws upon the same regulatory toolkit as in the Banking Act (BA) and Insurance Act (IA). These tools will include requiring regulatory approval for acquiring or holding of major shareholdings in an FHC; putting in place limits on an FHC’s credit and investment exposures, and giving MAS powers relating to key appointments, supervision, and inspection.

Scope of Regulation

The Bill does not require every FHC in Singapore to be regulated by MAS. Unlike banks and insurance companies, an FHC is a non-operating holding company, and will not engage in financial transactions directly with the public. It may also not be exposed to the same risks that a bank or insurance company may encounter in the course of business. In deciding which FHCs to regulate, MAS will consider how the regulation of the FHC and its financial group can enhance the effectiveness of prudential oversight of the financial group. 

The FHC Bill sets out the following criteria by which MAS will assess whether an FHC should be designated for regulation.  

(a) Ultimate parent of Singapore financial groups MAS will regulate an FHC if it is the ultimate parent of a financial group with a bank or insurance subsidiary in Singapore. In such cases, MAS is the home supervisor of the financial group and has responsibility for group-wide supervision of the financial group.

(b) Intermediate FHCs within financial groupsThere are FHCs that are themselves subsidiaries of a parent FHC or financial institution. For these intermediate FHCs, MAS will assess the importance of the FHC’s bank or insurance subsidiary to Singapore’s financial system, or to the intermediate FHC group, when deciding whether to regulate the FHC. For foreign-owned FHCs, an additional consideration will be the extent to which the parent holding company incorporated overseas is subject to effective group-wide supervision by its home supervisor.

MAS will list the names of FHCs designated for regulation in an order published in the Gazette. 

While FHCs that are not designated will not be regulated under the FHC Bill, MAS may require these FHCs to provide information necessary for MAS’ surveillance and supervision functions. 

Control of Shareholdings

Major shareholders of an FHC may be in a position to exercise indirect influence or control over its bank or insurance subsidiaries through their shareholding interests in the FHC. Hence it is necessary to require shareholders with substantial or controlling interests in designated FHCs to obtain approval for their shareholding interests, just as the BA and IA currently require for significant stakes in Singapore-incorporated banks and insurance companies. The shareholding and control thresholds at which approval will be required will be consistent with existing thresholds under the BA and the IA. MAS will consider whether the shareholders are “fit-and-proper” and the nature of their likely influence over the conduct of the FHC when assessing applications for approval.  

It is also vital that the directors and senior management of the designated FHC carry out their functions in a responsible and prudent manner. The FHC Bill provides for the application of corporate governance regulations on the FHC.

Regulation and Supervision of FHC Groups

Besides regulatory requirements on the designated FHC itself, the FHC Bill sets out requirements at the FHC group level. To achieve alignment in the regulatory approach towards financial groups, whether they are held under a bank, an insurance company or a designated FHC, regulatory requirements under the BA and IA will be mirrored in the FHC Bill, where appropriate. The FHC’s bank and insurance subsidiaries in Singapore will continue to be regulated under the BA and IA, respectively. 

The FHC Bill empowers MAS to prescribe rules to support the safety and soundness of the FHC group. Several of these rules are also present in the BA and IA and will be extended to designated FHCs. The FHC Bill also provides for MAS to conduct on-site inspections and investigations of the FHC and its subsidiaries. 

Administrative Provisions

Further, to support MAS’ administration of the FHC regulatory and supervisory framework, the FHC Bill contains administrative provisions, including powers to:

• make regulations, and issue directions and notices to designated FHCs;
• require the submission of annual audited accounts of the FHC and FHC group; and
• impose penalties on the FHC and individuals for the contravention of FHC regulations.

CONCLUSION

Mdm Speaker, let me conclude. Singapore’s financial system has held up well amid the turbulence of the global financial crisis of the past few years. It is important that MAS continues to have the appropriate and necessary regulatory tools to discharge its responsibilities as the financial landscape evolves. The introduction of the FHC Bill represents the continuous effort by MAS to ensure its regulations stay relevant to developments and challenges in the financial system.