Financial Holding Companies Bill

Thank you, Madam. Allow me to declare my pecuniary interest as a banker. Mdm Speaker, following the Global Financial Crisis, the changes in the global financial landscape have been

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swift and active. In the West, many banks are deleveraging and shedding assets. In Asia, many banks are capitalising on domestic growth trends to grow their balance sheet. Though economic cycles may differ region to region, the potential international contagion arising from banks failing cannot be under-estimated. Hence, a well thought through regulatory framework that is cognisant of global trends and systemic risks and yet sensitive to the domestic needs of the industry is welcomed.

Specifically for this Bill, as the financial industry evolves either through organic or inorganic growth, it has become common for financial groups to be organised under holding companies. Although these Financial Holding Companies (FHCs) do not, themselves, conduct banking or insurance businesses, growing recognition of the role of the FHC has prompted global regulators to include the FHC in their scope of group supervision. As the Deputy Prime Minister pointed out, other countries like the US, Australia and Canada have done so.

In Singapore today, given that some financial groups are now organised under FHCs, I think it is timely that this Bill is proposed now. Apart from helping Singapore meet the international standards on group-wide supervision, this Bill will enable the MAS to strengthen prudential oversight of such FHCs here, and mitigate the risk of intra-group contagion. It will also provide greater clarity to the financial industry and other stakeholders on what standards should apply to FHCs here.

Mdm Speaker, I support this Bill and what it is trying to achieve. I also applaud the regulator for having conducted two rounds of consultation prior to this reading. However, I do have some feedback and suggestions on some of the methodologies or details of the Bill so please allow me to make a few points briefly.

Firstly, the issue of "smart regulation" versus "over-regulation". Here, allow me to refer to the keynote address made by Mr Ravi Menon, Managing Director of the MAS last month, at the IMAS conference. Mr Menon said that "a higher premium has been placed on well-regulated financial centres like Singapore, which sets high standards but implement them in a way that makes business sense. MAS pays close attention to the design of financial regulation to ensure they are risk-based and not more burdensome than necessary." This Bill is one such example. The powers to designate in this bill means the regulator has some flexibility to regulate at the right level and to concentrate regulatory

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resources only at entities which are systemically important to Singapore.

Secondly, this theme on "Smart Regulation" should continue to guide the MAS as they prescribe prudential requirements to support the safety and soundness of the FHC group. These will include the requirements on minimum liquid assets as well as the extent of leverage assumed. Here, may I suggest less reliance on a "strait jacket" regulatory approach but a focus on risk-based supervision with regulatory methodologies that take into account, and are tailored to accommodate, the risk profile of the FHC under review.

Thirdly, may I suggest that the Bill be cognisant of the fact that many FHCs operate under other jurisdictions, or they are already regulated. Many are also rated by international rating agencies. These rating agencies or rules promulgated by other jurisdictions already set expectations on permitted leverage and liquidity management. These should perhaps provide a good starting point for the MAS and it is important that these rules set are not, from the perspective of the FHC, inconsistent with those of other constituents. Level-playing field considerations should also be taken into account.

Mdm Speaker, the Financial Holding Companies Act was publicly consulted, allowing all constituents to provide feedback. May I ask that the same consultative approach should continue when the MAS formulates subsequent rules and directives pursuant to this Act?

In conclusion, Singapore's value proposition as a premier international financial centre rests on our pillars of transparency, sustainability, stability and international competitiveness. This Act will serve to enhance this value proposition and hence I fully support it.

Mdm Speaker, I welcome this Bill. It is a timely piece of legislation to support the growth, integrity and robustness of our financial sector. The justifications for regulating financial holding companies (FHCs) derive from the same need and imperative to regulate financial intermediaries directly.

The proposed legislation can provide for a more effective regulation of the financial sector, a vital part of our economy. Implicit in this Bill is the recognition that the regulation of banks and insurance companies as financial institutions is incomplete or inadequate. Indeed, we must assume that commonly

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controlled financial institutions will typically act in concert, with all the attendant challenges such as the need to preserve the solvency of the regulated entities, the need to prevent systemic disruptions through related entities acting in concert, and to prevent uncompetitive practices.

My interest in the Bill is not so much on the technical aspects. The Bill strikes me as being well drafted and comprehensive in its scope and coverage. Rather, my interest relates more to the guiding principles on regulating FHCs.

There are three areas of interest. The first revolves around the potential for regulatory gaps arising from overlapping or perhaps inconsistent regulatory structures as a consequence of FHCs having a presence in several jurisdictions. The second area coheres around how the proposed legislation would deal with variations in organisational form of FHCs. And the third area centres on the regulatory approach towards holding companies controlling different types of regulated entities. Let me deal with them in turn.

We should not be surprised that FHCs, local or foreign, will expand across jurisdictions. A basic assumption of holding company legislation is that regulatory controls of some sort must extend beyond the boundaries of regulatory entities and reach their corporate affiliates. Yet, international comity and the lack of enforcement reach require that laws with extra-territorial jurisdiction should be the exception rather than the rule.

Let me illustrate with an example. If a holding company in country A acquires a regulated entity in Singapore, the logic of holding company regulation requires that regulatory authorities in country A concern themselves with the activities and conduct of the holding company in its home jurisdiction, country A. However, if Singapore's regulatory authorities apply our holding company laws to the said firm, the potential for overlapping and inconsistent regulatory structures arises.

If Singapore defers to country A's regulatory system, the supervision of the holding company may then be inadequate and the supervisory policies of Singapore may be undermined.

Even if the differences in supervisory regimes are not substantial, Singapore-based financial institutions may well, understandably so, object to a more lenient regulatory regime for foreign-based holding companies. So, I think here is a question of whether the law is over-inclusive or under-inclusive.

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Madam, I acknowledge that such a "regulatory gap", if it can be described as such, is unavoidable. Perhaps, with time, harmonised systems of holding company regulation may evolve. Nonetheless, I would like to ask the Deputy Prime Minister: how does the Monetary Authority of Singapore (MAS) intend to deal with such regulatory gaps?

Notwithstanding the limitations, the legal, political and practical problems of maintaining an effective system of holding company regulation in a multi-national global economy bear close watch. We must be mindful that FHCs may engage in "regulatory arbitrage" whereby FHCs seek out and take advantage of loopholes and differences in regulatory systems to avoid certain types of regulation.

In this connection, can I ask the Deputy Prime Minister what are the ballpark numbers on foreign and local FHCs that are likely to fall within the jurisdiction of the proposed law? I note that the law applies only to local FHCs.

In the second area relating to organisation forms, it is conceivable that, besides the traditional holding company structure, alternative organisational forms for a FHC are possible and likely. This could be in the form of affiliations through downstream subsidiaries, or expanded activities conducted within a single regulated entity, otherwise known as the universal banking model. Each organisational form presents different regulatory pressure points and concerns.

As such, I would like to ask: how does the proposed legislation deal with variations in organisational form of the FHCs? Can the proposed regulatory regime manage different types of organisational structures that FHCs are organised under?

The third broad area of interest relates to the appropriate regulation of financial holding companies with controlling interests in diverse regulated entities, such as banking, insurance, and securities. Where a holding company controls different types of regulated entities, two overlapping and potentially inconsistent systems of holding company regulation may well apply.

What legal rules should take precedence and apply in this context? Does our regulatory regime envisage differential treatment of say, a holding company with a single banking subsidiary vis-a-vis a firm with both banking and insurance subsidiaries?

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Questions of fairness and efficiency and effectiveness naturally present themselves in such situations. Should we work towards a harmonised system of holding company regulation without also first making changes in the direct regulation of financial intermediaries?

Overall, this Bill adds to our regulatory arsenal. We should not be afraid of prudent and sensitive regulation given that there are many benefits for financial institutions operating in Singapore. I regard such regulation as being necessary if we are to ensure that our financial sector continues to inspire trust and confidence of all stakeholders. The Bill is, in my view, necessary to protect against anti-competitive harms and to ensure that there is systemic robustness in our financial institutions and financial system. Going forward, the ability of the MAS and other regulatory agencies to regulate with the right dose of prudence, firmness and integrity is vital. Madam, on that note, I support this Bill.

Mdm Speaker, I thank Ms Tan Su Shan and Asst Prof Tan for their comments on the FHC Bill. Ms Tan referred to "smart regulation", or regulation that is no more burdensome than is necessary to achieve our regulatory objectives. That is indeed, as she mentioned, the MAS' approach and we will continue to take that approach. In other words, maintain high standards of regulation while ensuring that the application of regulation, be it liquidity requirements or leverage caps as she mentioned, is risk-appropriate, that is appropriate to the risks posed by the institution or the group and proportionate to those risks.

The FHC framework was therefore designed such that FHCs in Singapore are not automatically subject to regulation. MAS will designate an FHC for regulation only where doing so can enhance the effectiveness of prudential oversight of the financial group. Let me explain further.

Under international supervisory standards, the supervisor in the jurisdiction where the ultimate parent FHC is based is expected to carry out consolidated supervision of the financial group. MAS will therefore designate for regulation FHC of a financial group that is headquartered in Singapore. An example would be DBS Holdings Ltd.

By this same principle, the home supervisor of a parent group to which a foreign-owned FHC belongs is also expected to carry out consolidated supervision of its financial group, including the group's entities operating in

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Singapore. However, MAS may also designate a foreign-owned FHC in Singapore for regulation in two situations. The first situation is where the foreign bank or insurance company in Singapore is significant to our financial system. The second situation is where the bank or insurance subsidiary is significant to a subgroup of related companies, in other words, to an intermediate FHC group based in Singapore. MAS will designate such a foreign-owned FHC for regulation if doing so can enhance prudential oversight of the financial group and provide assurance to Singapore depositors or policy holders that potential intra-group risks posed to the Singapore bank or insurance company are adequately supervised.

With regard to Asst Prof Tan's question of how many FHCs we envisage being subject to regulation under the Bill, at this point in time, there are five FHCs that meet the criteria to be designated for regulation under the Bill. All five are FHCs of banking and insurance groups that are headquartered here.

Ms Tan also commented on the need for consistency with international regulatory norms. That is key to MAS' approach. The FHC Bill is consistent with international regulatory developments on and standards for group supervision.

Let me now address the specific areas raised by Asst Prof Tan and Ms Tan.

Asst Prof Tan spoke about the possibility of "overlapping regulation" or "regulatory gaps" arising from differences in regulatory regimes in different jurisdictions. He gave the illustration of an overseas financial holding company in Country A, subject to Country A's regulation, which acquires a regulated entity in Singapore, subject to MAS' regulation.

Let me explain how the regulatory regimes across jurisdictions interact. MAS will impose regulatory standards on the solo regulated entity in Singapore, which may be a bank or insurance company licensed under the Banking Act or Insurance Act. The foreign regulatory authority in Country A, the home jurisdiction, will exercise regulatory oversight over the FHC, including the regulated entity in Singapore, at the group consolidation level. So, there is a division of responsibilities in the regulation of the solo entity and the regulation of the group.

There could indeed be overlapping regulation with regard to the regulated entity in Singapore due to MAS and the foreign regulatory authority addressing risks at different levels, namely the solo and the group levels.

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However, in respect of the regulated entity in Singapore, MAS as host regulator would not defer to the foreign regulator with regard to the solo regulation of the bank or insurance company. The entity is subject to MAS' minimum regulatory standards. MAS' FHC regulations will nevertheless not apply to the FHC itself in this instance, as it is not incorporated in Singapore.

Further, amongst banking and insurance regulators – and Asst Prof Tan rightly points to the potential for overlapping regulation or regulatory gaps − there are well-established principles for cross-border collaboration and cooperation, not perfect, but they are working principles, including information sharing, to facilitate effective group supervision of cross-border financial groups. In fact, this has been a very important emphasis, post-financial crisis – getting more effective, international collaboration for the supervision of cross-border and cross-sectoral financial groups. So, MAS will collaborate actively with its regulatory counterparts to ensure adequate supervision of the bank or insurance subsidiaries in Singapore.

I should add that MAS will also apply similar regulatory standards to solo entities in Singapore, regardless of whether the bank or insurance company is held by a holding company based in Singapore or overseas.

Next, Asst Prof Tan also asked about how the proposed FHC Bill would deal with various organisational forms of financial groups. Related to this, Ms Tan had also commented on the need for a level playing field.

The FHC Bill sets out MAS' regulatory approach and powers for financial groups that are organised under a non-operating FHC. As Asst Prof Tan mentioned, financial groups or downstream financial subsidiaries could also be held under a Singapore-regulated operating entity such as a bank or insurance company.

Regardless of organisational forms, MAS, as the financial regulator, seeks to ensure a consistent regulatory approach. For example, a banking group organised under a non-operating FHC will be subject to rules at the group level that are consistent with rules that apply to a bank-held financial group regulated under the Banking Act. That is the basic principle. To achieve this, the regulatory requirements for a bank under the Banking Act are mirrored in the FHC Bill, where appropriate.

Finally, Asst Prof Tan asked about the regulatory approach for FHCs of mixed groups; in other words, groups which operate businesses in more than

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one regulated sector, in particular in both banking and insurance. That is a good question. We will use a predominance test to assess whether at the group level, the FHC is principally engaged in banking or insurance business. An FHC group that is assessed to be predominately banking, for example, will be required to adhere to potential rules governing the banking sector at the group level, such as large exposure limits. In practice, the financial groups in Singapore are either predominantly banking or insurance. However, this could evolve over time and there could be hybrid groups where there may be more of a balance between banking and insurance. It is entirely possible. In all instances, MAS will assess the group in totality to obtain a holistic picture of its risks and determine the appropriate regulatory or supervisory treatment. So, it is not a binary treatment where it is either banking regulation or insurance regulation. There will be hybrids and we will have to look at the group in totality.

In summary, MAS has proposed a single piece of legislation, in the form of this FHC Bill, to strengthen MAS' prudential oversight of financial groups in Singapore. A single Bill to regulate all FHC group structures offers clarity and consistency, as far as is appropriate, in our regulatory approach to bank groups, insurance groups and mixed financial groups held under an FHC.

Going forward, MAS will formulate the detailed regulations to bring into operation the FHC Bill. And we will, as Ms Tan suggested, continue to, first, consult widely; and second, to ensure that we apply a risk-appropriate approach. Over the course of the past year, as I mentioned, we have consulted the industry on both the broad policy proposals as well as the draft Bill. And when it comes down to the detailed regulations, we will engage in more specific discussions with the lawyers, the individual institutions and all other stakeholders.

*Question put, and agreed to.*

*Bill accordingly read a Second time and committed to a Committee of the whole House.*

*The House immediately resolved itself into a Committee on the Bill. – [Mr Tharman Shanmugaratnam].*

*Bill considered in Committee; reported without amendment; read a Third time and passed.*

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