Regulators are consulting on how to enhance trust business regulation, introduce new omnibus legislation, and encourage best practices in sustainable banking.

This blog post summarises key regulatory developments in Hong Kong and Singapore during July 2020, including:

• The HKMA’s publication of examples of good practices for green and sustainable banking adopted by various major international banks, which the HKMA has encouraged banks to review and consider in connection with managing climate change risks
• The HKMA’s consultation proposing new measures to better regulate and supervise trust business, which will be particularly relevant to the wealth management sector
• The MAS’s consultation on new omnibus legislation designed to enhance the effectiveness of addressing financial sector-wide risks

Hong Kong

1. The HKMA issues a circular on best practices for managing climate risks by major international banks

The Hong Kong Monetary Authority (HKMA) has published a circular featuring good practices adopted by major banks to manage climate risks categorised by reference to the nine guiding principles outlined in the HKMA’s prior white paper on its supervisory expectations on green and sustainable banking.

Governance

• Principle 1: Board’s accountability in climate resilience
  • The boards of some banks have formally expanded their mandates to include accountability for overseeing the management of climate risks and for providing direction to address the impact of climate change.
• Principle 2: Board’s oversight of climate strategy development and implementation
  • The boards of some banks have approved a specific climate risk management framework or a refined environmental, social, and governance (ESG) framework with climate considerations embedded.
  • The more advanced banks also use an array of tools for tracking and monitoring their performance with regard to achieving specific climate change targets.

Strategy

• Principle 3: Formulation
  • More advanced banks are progressively designating climate risks and low carbon emissions as strategic priorities at a firm-wide level, and developing concrete action plans to deploy resources and capital to achieve those goals.
• Principle 4: Implementation
  • More advanced banks recognise that structural transformations may be needed to align their business strategies with the transition to a low-carbon economy and to adapt to the impacts of climate change.
  • Organisational structure designs include implementing three lines of defence to execute risk analysis to identify climate risks for credit decisions at the business team, risk department, and audit function levels.

Risk Management

• Principle 5: Identification
  • More advanced banks have started to review the direct and indirect exposures of their businesses’ portfolios, their clients’ sector exposures (e.g., clients operating in carbon-intensive sectors), and their own operations (e.g., whether they have critical operations in areas vulnerable to frequent and severe climate events).
• Principle 6: Measurement
  • More advanced banks have adopted an integrated approach to developing and conducting scenario assessments and analyses to help measure climate change risks and to address a range of plausible outcomes to quantify potential exposures to climate risks.
• Principle 7: Monitoring and Reporting
  • More advanced banks have adopted a range of qualitative or quantitative tools to monitor climate risks in line with their board-approved risk appetite and strategy, including the use of sector and portfolio metrics and by developing climate risk indicators at the client level.
• Principle 8: Control and Mitigation
  • More advanced banks embed climate considerations into the existing framework for management of specific risks (e.g., credit and market risks) rather than merely treating climate change as a source of reputational risk. Such banks also are seeking to implement measures to mitigate the impact of climate risks and enhance their own resilience.

Disclosure

• Principle 9: Disclosure
  • More advanced banks are devoting efforts to supporting the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, which aims to develop a voluntary, consistent climate-related financial risk disclosure framework for banks to provide information to stakeholders.

The circular is not intended to be prescriptive; rather, it aims to encourage Hong Kong banks to consider these good practices when developing their own approaches to managing climate risks.

As a next step, the HKMA will invite banks to participate in a pilot climate change stress testing exercise, with a view to assessing sector-wide climate resilience. The HKMA will first collect feedback from the participating banks on the scope, scenario, and outputs of the exercise before launching the pilot climate change stress testing exercise in 2021.

2. The HKMA consults on enhancing the regulation and supervision of trust business

The HKMA has issued a consultation paper setting out its proposals for better regulating and supervising trust business in Hong Kong, especially trust businesses conducted by banks for wealth management purposes. The consultation is open for comments until 9 October 2020.

The HKMA proposes to introduce a Code of Practice for Trust Business (Code) to enhance protection of client assets held on trust, better align with the international standards and practices, and promote a customer-centric culture in the trust business. In turn, clients would gain more confidence entrusting assets to trustees in Hong Kong, thereby reinforcing Hong Kong’s position as a leading asset and wealth management centre.

The HKMA notes certain limitations of the current regulatory regime for trust businesses. In particular, the HKMA has not issued any conduct requirements specific to trust businesses conducted by Hong Kong banks or their subsidiaries. Although the Hong Kong Trustees Association has issued industry guides, compliance with those guides is voluntary.

In developing the proposed Code, the HKMA has referred to relevant local and international standards. The Code will apply to banks and subsidiaries of locally incorporated banks that conduct trust businesses in Hong Kong. Other trustees and trust companies are encouraged to adopt the proposed Code on a voluntary basis.

The Code sets out the following six general principles.

1. Fairness, honesty, and integrity: A trustee should act honestly, fairly, and with integrity in conducting its trust business.
2. Due skill, care, and diligence: A trustee, in conducting its trust business, should act with due skill, care and diligence, and in the interests of its customers. A trustee should ensure that the entity through which trust business is conducted and all relevant staff are fit and proper to perform their roles and functions.
3. Management and control of trust assets: A trustee should exercise due care in understanding, managing, and controlling all assets held within the trust in full conformity with its fiduciary obligations.
4. Corporate governance and internal controls: A trustee should establish a proper corporate governance structure and implement adequate internal controls and risk management systems to ensure that its trust business is effectively managed.
5. Compliance with legal and regulatory requirements and standards: A trustee should comply with relevant legal and regulatory requirements and standards applicable to the conduct of its trust business activities.
6. Co-operation with regulators: A trustee should deal with relevant regulators in an open and co-operative manner.

The HKMA has observed that the proposed principles and standards are already being widely applied in the financial services industry; thus, it is anticipated that the implementation of the proposed Code should not present material challenges.

The HKMA has proposed that banks and their subsidiaries should comply with the finalised Code as soon as practicable, and not later than six months after the finalised Code is issued.

Singapore

3. The MAS consults on new powers to enhance effectiveness in addressing financial sector-wide risks

The Monetary Authority of Singapore (MAS) has issued a consultation paper proposing enhanced powers to address emerging risks and challenges that can undermine the financial sector. The MAS intends to introduce a new omnibus act (the Omnibus Act) for the financial sector, based on its recognition of the increasing need for a sector-wide regulatory approach complementing the MAS’ entity and activity-based regulation. The consultation is open for comments until 20 August 2020.

The Omnibus Act will consolidate similar provisions for various classes of financial institutions in the Monetary Authority of Singapore Act (Cap 186) into a single piece of legislation.

In particular, the Omnibus Act will provide the following powers:

• Harmonised and expanded power to issue prohibition orders (POs): To preserve trust and deter misconduct in Singapore’s financial sector, the MAS proposes to broaden the categories of persons who may be subject to POs, rationalise the grounds for issuing POs (from a list of specific criteria into a single fit and proper test), and widen the scope of prohibition. The new powers will enable the MAS to adopt a holistic and risk-proportionate assessment of a person’s misconduct.

• Anti-money laundering and countering of financing of terrorism (AML/CFT) regulation of virtual asset service providers (VASPs) created in Singapore that provide digital token services overseas: The existing legislation (comprising the Payment Services Act 2019 (Act 2 of 2019), Securities and Futures Act (Cap 289), and Financial Advisers Act (Cap 110), together, the Existing Legislation) regulates entities providing virtual asset activities in Singapore.

However, given the virtual nature of such operations, certain entities may not be captured by the Existing Legislation — including those entities established in Singapore that offer such services internationally, rather than domestically. The Omnibus Act thus regulates such entities for AML/CFT purposes.

This approach is consistent with the latest revision to the Financial Action Task Force Standards, which specifies that a VASP must be regulated and supervised by the jurisdiction in which it was created. The provision aims to ensure that every VASP will be regulated by at least one jurisdiction, regardless of where it conducts its businesses or where its customers are located.

The Omnibus Act imposes licensing and ongoing requirements on VASPs to ensure that they have a meaningful presence in Singapore, thereby enabling the MAS to have adequate supervisory oversight over them even though they provide digital token services internationally. Based on the consultation paper, the proposal appears to be that such licensing and ongoing requirements are independent of the requirements under the Payment Services Act 2019 (Act 2 of 2019) regulating VASPs that provide digital token services in Singapore.

• Harmonised power to impose requirements pertaining to technology risk management on all regulated financial institutions: The Omnibus Act also increases the maximum penalty to SGD 1 million for any contravention of such requirements, given the growing sophistication of cyber threats and the pervasive use of technology.
• An approved dispute resolution scheme providing mediators, adjudicators, and employees of an operator with statutory protection from liability: This provision will improve the confidence of such parties to act independently in resolving consumers’ disputes with financial institutions.