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In its oversight of the financial services sector, the Monetary Authority of Singapore (MAS) is guided by objectives and principles set out in a 2004 monograph. They are covered briefly in the course "Financial Sector Oversight in Singapore" and represented schematically in the following graphic.
In this module, you will learn about the tenets or principles that guide the design and formulation of regulation, one of MAS' key functions as the financial sector regulator.
As set out in the 2010 monograph "Tenets of Effective Regulation", MAS is guided by six tenets in its regulatory approach:
1. Outcome focused
2. Shared responsibility
3. Risk appropriate
4. Responsive to change and cycles
5. Impact sensitive
6. Clear and consistent
Our intention is to communicate more clearly to financial institutions (FIs) our approach towards developing effective regulation, our interest in working in partnership with the industry and our expectations of the respective responsibilities of MAS and industry.
With regards to consumers, users of financial services and stakeholders, the monograph is intended to raise awareness of the role of regulation in the supervisory process, the competing considerations that MAS has to weigh, and the Tenets that guide our work when determining how to intervene in the market.
To promote a stable, competitive and innovative financial services sector, an outcome focused approach to regulation is needed. This requires a prudent regulatory framework that is focused on delivering good regulatory outcomes for a progressive financial services sector.
Where there are sufficient incentives and hence shared ownership of regulatory outcomes on the FIs' part, it could be more effective to rely on FIs to address these regulatory issues either:
individually through internal practices or
collectively through industry initiatives such as industry rules and codes of practice
as an alternative to regulation. This can be achieved by placing explicit responsibility on FIs to achieve such regulatory outcomes.
Regulatory support can be provided through industry-driven initiatives by giving recognition to sound internal practices in FIs.
MAS recognises that a one-size-fits-all regulation can be too blunt. To promulgate risk appropriate regulation, MAS permits a sliding scale of requirements depending on its assessment of an institution’s risk profile and governance, control and risk management capabilities. For example, MAS differentiates the liquidity and capital requirements for different banks.
Innovation in the financial services industry may defy traditional regulation and render regulation inappropriate or irrelevant. To allow regulation to achieve its objectives in a fast-changing and volatile environment, regulation should provide for prudential buffers (capital, provisions and reserves) in FIs to cater for unexpected losses through an economic cycle or stress event.
These buffers should be built up during periods of profitability so that they are available to absorb losses during downturns.
MAS also recognises the need for the regulatory framework to be continually updated to keep pace with changes in the industry.
Regulation is introduced to address existing or emerging risks. However, it also imposes costs on FIs, market practices and consumers. Appropriate regulation should be made after balancing the risks, costs and benefits.
MAS will give due care to the design of regulation to avoid unintended market impact whilst ensuring that the regulation achieves its objective effectively.
Regulation should be clear so that FIs:
have certainty and predictability as to their legal obligations
are able to assess under what circumstances they will be in breach of their legal obligations.
MAS recognises that regulation based on principles and self-regulatory approaches can be effective and appropriate. However, the industry has given feedback that clarity in regulation is preferred over flexibility of interpretation and implementation. This is because of the concomitant unlevel playing field as well as legal and compliance risks.
The financial services industry needs to have shared ownership of the regulatory objectives and outcomes that MAS has established, and be effective in achieving such regulatory outcomes.
FIs should participate constructively in dialogue and consultation with MAS, to offer ideas to improve the effectiveness of the regulatory framework.
FIs need to maintain and raise their standards of governance, controls and risk management practices. This would give MAS confidence to rely less on prescriptive regulation, as well as foster greater trust with customers and stakeholders.
