This article comes courtesy of Shook Lin & Bok LLP. One of the leading and full-service commercial law firms in Singapore with a strong Asian presence and global reach. They have close to a century of rich legal heritage with a number of partners who are eminent lawyers in their respective areas of expertise. They have been recognised by reputable legal directories for their expertise in their major areas of practice including banking and finance, capital markets, corporate mergers and acquisitions, corporate real estate, employment, international arbitration, litigation and dispute resolution, regulatory, restructuring and insolvency, technology, media and telecommunications, and trust, asset and wealth management.
Client Update | Regulatory | May 2016
By Eric Chan and Agnes Lim
The Monetary Authority of Singapore (“MAS”) has issued a consultation paper on 29 April 2016 proposing legislative amendments to Parts IVA and IVB of the MAS Act (the “Act”), the MAS (Control and Resolution of Financial Institutions) Regulations 2013 (the “Regulations”), as well as to issue a Notice and Guidelines on recovery and resolution planning for banks. The proposed amendments follow from and will effect MAS’ earlier proposal in its policy consultation of 23 June 2015 to enhance the resolution regime for financial institutions (“FIs”) in Singapore.
This note summarises the key changes and amendments that will likely be made.
Proposed Amendments to the Act
MAS has proposed the following amendments to strengthen its powers to resolve distressed FIs while ensuring continuity of their critical economic functions:
(a) Recovery and Resolution Planning (“RRP”)
MAS has proposed a new Division 2 under Part IVA of the Act under which notified FIs which are systematically important or that maintain critical functions (ie. pertinent FIs and insurers) will be subject to RRP requirements. Specifically, the notified FIs will be required to:
(i) Formulate and maintain recovery plans setting out procedures and systems necessary to stablilise and restore its financial strength and viability in the event of financial pressure or stress;
(ii) Implement recovery measures, where necessary;
(iii) Adopt measures to address material deficiencies in its recovery plan and to remove material impediments to implementation or orderly resolution, where necessary to comply with any direction issued by MAS; and
(iv) Furnish information or documents required by MAS for the purpose of resolution planning.
Proposed Notice and Guidelines on RRP
In connection with the above, MAS has proposed a set of draft Notice and Guidelines setting out the technical details on the development and maintenance of recovery plans by a notified bank. In particular, a notified bank is required, as part of the RRP process, to:
(i) Establish a recovery plan (“RCP”) which has been approved or endorsed by the management;
(ii) Update the RCP on an on-going basis and to furnish the RCP to MAS as required;
(iii) Establish a framework to regularly test the feasibility and effectiveness of its RCP;
(iv) Maintain and submit data and information to MAS to facilitate resolution planning, resolvability assessment and the conduct of resolution;
(v) Appoint an executive officer to oversee the RRP process
(vi) Inform MAS of any material changes to its business or structure, or where its viability is or is potentially threatened;
(vii) Maintain management information systems to produce in a timely manner, information required for RRP, resolvability assessment and the conduct of resolution, and provide information on such systems upon MAS’ request; and
(viii) Implement measures to ensure that outsourcing arrangements which support critical functions and shared services can be maintained in crisis situations and in resolution.
(b) Temporary Stays on Termination Rights
The proposed inclusion of a new Division 4B in Part VIB of the Act would confer upon MAS the statutory powers to temporarily stay early termination rights of counterparties to financial and non-financial contracts (including reinsurance contracts) entered into with a pertinent FI or insurer over which MAS has exercised its resolution powers. Temporary stays will be effected by way of notification in the Government Gazette specifying the relevant counterparties and contracts that the stay would be applicable to, except where:
(i) The termination right becomes exercisable independent of MAS’ exercise of powers; or
(ii) The termination right arises under a contract held by prescribed excluded parties.
The temporary stay will be for up to 2 business days (subject to certain safeguards), although in the case reinsurance contracts, this will be separately prescribed. Under the new Division 4B, MAS will also have powers to prescribe the contractual provisions to be included in specified contracts by a pertinent FI or insurer.
(c) Statutory Bail-In-Regime
MAS has proposed to include a new Division 4A in Part IVB of the Act implementing the statutory bail-in regime for Singapore-incorporated banks and bank holding companies. The amendments under the new Division will empower MAS to:
(i) Write down or convert into equity or other instruments of ownership, all or part of unsecured subordinated debt and unsecured subordinated loans;
(ii) Bail-in contingent convertible instruments and contractual bail-in instruments, whose terms have not been triggered prior to resolution;
(iii) Require via regulations, contractual recognition clauses for liabilities falling within the scope of MAS’ statutory bail-in powers but which are governed by foreign laws, so as to support the cross-border enforceability of MAS’ bail-in actions.
The statutory bail-in powers will be applied on a prospective basis, to liabilities issued or contracted after the effective date of the relevant legislative amendments implementing the statutory bail-in regime. The scope of liabilities falling within, and the classes of FIs that are subject to the statutory bail-in regime will be prescribed by MAS in regulations.
In exercising its bail-in powers, MAS will have regard to the principles of respecting the hierarchy of claims in liquidation and equal treatment of creditors of the same class, the application of which would in turn depend on various factors including the systemic impact of the FI’s failure, maximisation of value for the benefit of creditors, and public interest.
All shareholders’ voting rights on matters requiring shareholders’ approval will be suspended in the event of a bail-in, until an assessment has been made as to whether any new shareholders, arising from the conversion of creditor claims into shares, can become substantial shareholders or controlling shareholders. Such amendment is in line with the requirement that only fit and proper persons can exercise voting rights attached to substantial or controlling stakes in the FI.
(d) Cross-Border Recognition of Resolution Actions
MAS has also proposed a new sub-division of Division 5 of Part IVB of the MAS Act implementing the statutory framework for cross-border recognition of foreign resolution actions. A resolution by a foreign resolution authority may be recognised provided that certain conditions are fulfilled, including in particular that the recognition of the foreign resolution action would not:
(i) Have a widespread adverse effect (directly or indirectly) on the financial system or economy of Singapore;
(ii) Result in inequitable treatment of any Singapore creditor relative to a foreign creditor;
(iii) Be contrary to the national or public interest; and
(iv) Have material fiscal implications.
The new sub-division also provides for the circumstances under which MAS may render assistance to a foreign resolution authority to enable it to deal with the resolution of a FI, in addition to its existing powers to take supportive measures to achieve a cooperative solution with foreign resolution authorities in a group-wide resolution of cross-border FIs.
(e) Creditor Compensation Framework
MAS’ proposed creditor compensation framework will be established by way of a new Division 5A under Part IVB of the Act. Under the proposed creditor compensation framework, pre-resolution creditors (including shareholders) who have been rendered worse off under a resolution strategy have a right to compensation for the difference between what they had received under resolution of a FI and what they would have received had the FI been liquidated.
The creditor compensation framework sets out, amongst others, matters relating to:
(i) The appointment and removal of a valuer by the Minister to assess the eligibility of pre-resolution creditors and the amount of compensation to be paid to such persons;
(ii) MAS’ powers to prescribe in regulations, the criteria based on which the valuer shall be appointed or removed;
(iii) MAS’ powers to prescribe in regulations, the valuation principles to be applied by the valuer and the information which the valuation report shall specify;
(iv) Payment of the remuneration and expenses of the valuer;
(v) Access of the valuer to information and facilities required to conduct the valuation;
(vi) Safeguards as to confidentiality in the use of information by the valuer;
(vii) Disclosure of the valuation report to the FI, any eligible pre-resolution creditor or the public, subject to MAS’ approval; and
(viii) The right of pre-resolution creditors to appeal against their determined compensation eligibility or entitlement.
(f) Resolution Funding Arrangements
Proposed resolution funding arrangements by MAS will be established under a new Division 5B of the Act. A resolution fund will be established and administered by MAS in accordance with the rules under the new Division 5B for the purposes of ensuring timely access to funds to implement resolution measures. Resolution costs incurred in the implementation of a resolution measure would be recovered via an ex post recovery mechanism. In order that the residual value of the FI may be used to offset the cost of resolution, provisions have also been proposed to accord the resolution funding arrangement priority to the assets of the FI in liquidation, ahead of unsecured creditors and equity holders.
In this regard, related amendments to the Banking Act, the Insurance Act, the Finance Companies Act and the Deposit Insurance and Policy Owners’ Protection Schemes Act will also be made.
Proposed Amendments to the Regulations
Lastly, amendments to the Regulations have been proposed to ensure that set-off and netting arrangements in contractual agreements entered into by the FI (including transactions cleared on an approved clearing house) are not defeated or affected by MAS’ exercise of resolution powers under the Act, in particular where there is a transfer of only part but not whole of the business of a pertinent FI.
The consultation period ends on 30 May 2016.
For more information, please contact:
T: +65 6439 0788
E: [email protected]
This information is provided for general information and does not constitute legal or other professional advice. Specific advice should always be sought in relation to any legal issue. Shook Lin & Bok LLP does not accept any responsibility for any loss which may arise from reliance on the above information.
This article is written by Eric Chan from Shook Lin & Bok LLP.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.