Singapore’s status as a premier financial hub places it at the crossroads of increasing capital flows between developed economies and re-emergent markets. While fund managers seek to ride this wave of opportunity, it is important to manage the costs of compliance and balance it with regulatory requirements and expectations of the Monetary Authority of Singapore (MAS) to protect the reputation of our Little Red Dot as a preferred financial investment destination.
As the preeminent financial hub in South-east Asia, Singapore is uniquely positioned to be a safe haven of political stability and economic prosperity. This has been achieved through a risk-based approach towards governance and incorporating global regulations as domestic benchmarks.
There is a saying that “the only thing that is constant is change”. The unprecedented global trend in tighter regulations and more intensive compliance oversight will be the new norm for financial institutions (FIs) as regulators seek to fine-tune their regulatory tools to address emerging risks in the global and local marketplace.
After the 2008 global financial crisis, both governments and regulators are better aligned in their drive to reduce risks in global financial markets — but this comes with significant compliance implications for the FIs.
There is a traditional mindset that it is often “better to be safe than sorry”. The costs of non-compliance can be crippling and catastrophic for many FIs. For instance in 2013, the Bank of America and JP Morgan were fined for malfeasance and eventually agreed to a US$13 billion settlement with the US government for wrongdoings related to their mortgage-backed securities businesses.
In Singapore, MAS has not been taking compliance breaches lightly. Actions have been taken against both individuals and institutions for breaches related to insider trading, manipulation and deception, to name a few. These are enforced through reprimands, fines and suspensions.
In 2014, MAS fined an errant individual S$3 million for insider trading and manipulative/deceptive devices in connection with the purchase and sale of securities. Between April 2014 and March 2015, a total of 23 cases of breaches were met with formal enforcement actions meted out by MAS in the form of reprimands, composition fines, civil penalties and prohibition order. Within the same period, another 365 cases were faced with regulatory and administrative action.
It is therefore no surprise that fund managers should take compliance seriously and tend to err on the side of caution.
Over the course of 2015, there has been an increasing impact from disruptive business trends, socio-economic instability and changing tides of trade flows on fund investments and their compliance plans.
While the United States and Europe have been leading the charge and setting generally accepted standards, there is growing pressure to align best practices across jurisdictions and this is especially pertinent for Singapore in South-east Asia. The rise of China as an economic powerhouse has also been accompanied by a growing emphasis on transparency, accountability and corporate governance.
Cross-border transactions across different jurisdictions add to the complex equation for fund managers who are internationally positioned — examples include private equity players involved in transnational mergers and acquisitions.
Some market watchers have likened growing regulations to a tsunami that washes in, and wreaks havoc (to bottom-line costs and topline earnings) before going out; others have associated these regulations with global warming instead, where the tide keeps rising and never goes out.
Our home ground advantage
Singapore’s rise as the regional financial hub is undeniably the product of a long-term strategy of fostering strong governance coupled with pro-business policies. Singapore was ranked seventh globally on Transparency International’s Corruption Perception Index in 2014. This is a strong testament to the success of this balanced approach.
There is a delicate balance between ensuring a rigorous regulatory compliance regime and ensuring that the Singapore business environment and reputation continue to attract investors.
What does this mean for fund managers based in Singapore? We propose that you:
- Change your mindset and expectations — do you see compliance as an impediment and/or unavoidable business cost? Or do you see it as a complementary function that gives your regulators and clients added comfort?
- Avoid kneejerk reactions in the form of overzealous expenditure on compliance. It can be counterproductive if unskilled personnel are hired for compliance roles and you need to spend additional resources on recovery efforts.
- Consider whether your existing risk management framework is too generic and not responsive to your key business risks. Have you identified the real risks and how effective/timely you are in monitoring them?
- Be responsive and proactive in the official consultative process around any proposed changes to financial regulations. This fosters a stronger ecosystem where stakeholders are part of the process of designing standards and guidelines that are effective.
- Embrace and leverage information technology and the importance of data security and privacy by engineering preventive measures into new or enhanced trading and operating systems.
What are the value propositions of the compliance function in your business?
First, a strong compliance track record enhances business credibility by showing that measures implemented to protect investors are taken seriously.
Secondly, the compliance function can help your staff change their mindset and foster a culture of discipline and accountability at the same time.
Finally, compliance can manage business costs through adequate checks and balances that prevent penalties and fines to enhance your business competitiveness.
In our view, compliance should be seen as a powerful enabler. Fund managers should embrace global sentiments on compliance, marry it with a transformational mindset and unlock enterprise value. Compliance, it seems, does go beyond the cost agenda.
This article was written by Partner Dennis Lee, Senior Manager Daniel Lim and Assistant Manager Alvin Mun of our Risk Advisory division and published in the Business Times on 23 December 2015.