Conduct issues will continue to remain high on the agenda of Asia's regulators, following a few high profile events that have unfolded in the financial markets in Singapore and Hong Kong, consultants said. This was evident from recent speeches by the governors of the Hong Kong Monetary Authority and the Monetary Authority of Singapore, they said.
MAS has expressed disappointment over how Singapore's financial system was used as a conduit for illicit fund flows in relation to Malaysia's troubled sovereign wealth fund, 1MDB. While Hong Kong has not been in the spotlight of late to the same extent as Singapore, the HKMA is working on cases involving around 10 banks which could potentially lead to their prosecution, sources said.
On 6 September, Norman Chan, chief executive of HKMA, and Ravi Menon, managing director of MAS, talked simultaneously about the importance of changing culture at banks, credibility and trust given both jurisdictions' status as leading financial centres in Asia.
Long-Lasting and Successful Brand
In the keynote speech at the Treasury Markets Summit in Hong Kong, Chan talked about the importance of credibility in financial markets, particularly in the context of Hong Kong developing itself into a long-lasting and successful "brand".
"While such needs [of customers] are always evolving, one thing never changes, and that is 'fair treatment of customers'. In the context of pricing, consumer/investor protection, distribution, dispute handling and resolution, the interests of the financial firms or intermediaries must not take precedence over those of the consumers or investors," he said in his address.
While recognising that this was a difficult task, Chan said it was imperative for Hong Kong's financial services sector to meet this challenge.
"To accomplish this task would require a robust and user-friendly regulatory regime, and a simultaneous change in the culture, values, mind-set and behaviour of financial firms and their staff," he said.
Culture within Banks
Speaking at the Foreign Correspondents Association of Singapore's lunch on the same day, Menon also stressed the importance of culture, which he defined as "shared values, attitudes and norms that guide behaviour".
"Ultimately, trust and conduct boil down to culture more than any externally imposed rules … Financial institutions must get the culture right. This requires setting the right moral tone from the top," he said.
Conduct High on Regulators' Agenda
Consultants said the fact that the governors of both central banks talked about trust, credibility and culture at this time demonstrated that conduct issues would continue to remain high on regulators' agenda.
Arnab Roychowdhury, associate director at KPMG China, said Chan made a bold statement in his speech talking about the importance of cultural change for banks.
"We are seeing an increasing focus on conduct issues. Banks will have to take that on board. This is an exciting time for conduct," he said.
Simon Topping, head of financial services, Asia Pacific at KPMG China, said the Hong Kong governor's focus on the importance of treating customers fairly showed Hong Kong was concerned about its competitiveness as a financial centre, (ie, its brand, in relation to countries such as Japan and Singapore).
Regulators' Dual Role
As jurisdictions in Asia vie to be the region's leading international financial centre, and particularly Hong Kong and Singapore, where regulators play dual roles in regulating and developing the financial services sector, this has also raised questions about whether regulators in some states might have pursued more assertive policies.
As Menon conceded in his recent speech, observers from abroad were sometimes intrigued by MAS' role as both regulator and developer of the financial sector.
"You will be forgiven to think that we are sometimes schizophrenic. In my meetings with foreign bank CEOs, I have sometimes, in the same breath, said we would like to see an improvement in the bank's risk management and internal controls and then asked what we could do to encourage the bank to expand its operations in Singapore – safely, of course." he said.
MAS may however be starting to pay the price for its approach. Sources attributed the recent spate of events surrounding the closure of Swiss merchant bank BSI and the investigations into the fund flows related to 1MDB as an inevitable consequence of Singapore's policy then to establish the island republic as Asia's leading private banking hub, among its various initiatives.
An industry official, who spoke on condition of anonymity, said when Switzerland tightened its rules several years ago, Singapore courted private banks and high-net-worth individuals, enticing them to set up operations or transfer their accounts to the city-state, respectively. In 2006, Singapore was just beginning to develop itself into Asia's private banking hub.
The official said there were likely to have been two strands to Singapore's approach: that its banking secrecy laws were similar to those of Switzerland and that accounts which moved from Switzerland to Singapore would avoid the same level of customer due diligence requirements as those set up in Singapore.
Lack of Red Flags
He said the lack of stringent customer due diligence requirements in Singapore at that time might have resulted in red flags not raised on certain accounts and that MAS might have taken insufficient steps to warn banks about the potential risks of acquiring such foreign accounts.
"If you take 10,000 accounts from another country, there is a likelihood that two to three out of the 10,000 accounts may come back and bite you one day. There is no direct evidence that this was what had happened to Singapore, leading to recent events such as the closure of BSI Bank and the investigations on the fund flows related to 1MDB, but who knows?" he said.
According to the consultant, regulators typically warned banks whenever accounts were transferred between different countries or when the latter acquired new businesses.
In its pursuit in maintaining Singapore's reputation as Asia's leading financial centre, MAS will continue to step up enforcement action against misconduct such as insider trading, false trading and front running by individuals and traders in the securities market, Menon said.