A few days ago, MAS issued a monograph “Tenets of Effective Regulation” to communicate MAS’ approach to developing effective regulation.
Very nice from a management and KPI point of view but I think at the end of the day, most investors will be concerned about the bottom line. Will this change what MAS has done in the past and how will this affect them?
The best regulations in the world will be of limited help if certain investment products fall outside (and continue to fall outside) the supervision of MAS in the first place. Things like wine and land investments immediately come to mind.
Also, regulation can only be effective if it is applied consistently across all platforms.
For example, if a financial adviser sells you some unit trusts via an investment-linked insurance product (ILP), he is not required to monitor the fund’s performance for you according to this statement from LIA.
Yet, if he sells you the exact same unit trust via a normal unit trust platform, he has a higher duty of care to do so.
This is not very consistent.
Anyway, the description of the six tenets can be found below:
Tenet 1: “Outcome Focused” commits MAS to uphold sound regulation of a high standard but also acknowledges that there is no one way to do this. Good regulatory outcomes can sometimes be best achieved by prescriptive and clear rules, and at other times by laying down broad principles and placing responsibility on financial institutions to deliver the regulatory outcomes. There are also different circumstances when one-size-fits-all rules or alternatively, differentiated rules are more appropriate.
Sometimes, regulation is aimed specifically at impacting market practices in a significant way and even changing them, and at other times the impact of regulation is more appropriately calibrated and mitigated. An outcome focused approach calls on MAS to give consideration to all of the six Tenets and to exercise appropriate judgement as to how and in what measure the Tenets should be applied in the particular circumstances of each new regulation so that good regulatory outcomes can be achieved.
Tenet 2: “Shared Responsibility” describes our belief that regulation alone is insufficient and that in many instances, regulatory outcomes can be more effectively achieved with the MAS, financial institutions, investors and consumers each taking on specific responsibilities and shared ownership of supervisory objectives and outcomes.
In addition to MAS’ prescription of specific behaviours through regulation, reliance and responsibility can also be placed where appropriate on financial institutions individually, their boards and senior management, through their governance, and on the industry collectively, to address supervisory concerns directly.
Where appropriate and effective, we will also consider, as an alternative to regulating an activity, placing reliance on disclosure of timely and adequate information so that informed consumers, investors and other stakeholders may exercise choice and market discipline. The design of regulation should wherever appropriate provide for rather than take away from financial institutions and stakeholders’ responsibility and incentives to contribute towards regulatory outcomes.
Tenet 3: “Risk Appropriate”.
Regulation should set standard, baseline requirements of broad application and provide for the exercise of supervisory judgement to set higher standards or permit exemptions when merited by the particular circumstances of a financial institution. For example, more demanding regulation may be appropriate for systemically important financial institutions whose failure can cause widespread disruption to the financial system compared to a small institution in the same licence category with simple operations.
Tenet 4: “Responsive to Change and Cycles”.
Regulation should be updated expeditiously as industry and market practices change and as new risks emerge. Regulation should also require the pre-emptive build-up of prudential buffers in financial institutions to weather a downturn or stress event, and to effectively address macroprudential risks.
Tenet 5: “Impact Sensitive”.
The costs and impact of regulation should be considered alongside the benefits and desired outcomes of regulation, so that the costs are not disproportionate to the benefits. Regulation should be targeted clearly at specific and material risks to the objectives of financial supervision. The design of regulation should take into account market realities so that unintended and unnecessary disruption to market practices is minimised. Even in instances where regulation is specifically aimed at changing market practices, care will be taken to avoid placing undue burden.
Tenet 6: “Clear and Consistent”.
Regulation should be clear so that financial institutions have reasonable certainty as to their legal obligations. Regulation should not be subject to frequent and sudden changes that cause uncertainty and disruption to business and market practices. Where appropriate, like activities conducted by regulated institutions from different sectors should be subject to similar and consistent regulation.