REGULATION OF FINANCIAL MARKET

REGULATION OF FINANCIAL MARKET:

(Post crisis): 4.

Mr Christopher de Souza asked the Senior Minister in view of the past year's global financial crisis (a) whether the level of Government regulation of our financial market will increase; and (b) whether the Government’s regulatory philosophy of the market has shifted due to the lessons gleaned from the crisis and, if so, (i) how has it shifted; and (ii) what have been the lessons gleaned.

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The Minister for Trade and Industry (Mr Lim Hng Kiang) (for the Senior Minister): Mr Speaker, Sir, the general view that has emerged from the financial crisis is that following a period of deregulation of financial markets and fairly benign economic conditions in advanced economies in the US and Europe, there has been an over-reliance on markets to self-correct and on financial institutions to manage their own risks. As a consequence, a variety of risks were under-estimated and when these risks materialised and interacted in unexpected ways, many financial institutions came under stress and had to be bailed out by their governments.

Mr de Souza asked what lessons we have drawn from the crisis and whether our regulatory philosophy has shifted. I should first point out that Singapore is at a different starting point from the advanced economies. We have always maintained a robust regulatory framework and a rigorous supervisory approach which helped our financial system to remain resilient throughout the crisis. We also believe that a stable and dynamic financial system that serves the needs of the economy and the public cannot be built on regulation alone. Responsible and competent board and senior management who manage the risks of their financial institutions well are also critical. In addition, MAS also promotes transparency and market discipline in our financial system. This will improve the quality and comparability of financial information available to the public and investors.

In short, Singapore's regulatory philosophy is to maintain a sound regulatory framework but to complement this with board and senior management responsibility at the various financial institutions as well as disclosure and market discipline. We believe that this continues to be relevant and appropriate.

Nevertheless, while our local financial institutions have generally weathered the

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financial crisis well, there is no room for complacency. International standard setters have been busy deliberating specific areas for strengthening regulation and board and senior management oversight, and MAS will continue to keep our regulations and industry abreast with global best practice. Let me explain more in greater detail what MAS is doing.

First, in the area of prudential regulation, MAS already requires our banks to meet minimum capital requirements which are higher than international standards as well as liquidity and provisioning requirements which were not widely adopted internationally prior to the crisis, but are now regarded as necessary and appropriate. In December 2009, the Basel Committee on Banking Supervision released a package of proposals to strengthen global capital and liquidity regulations for consultation. These are targeted for adoption internationally by end-2012. Our relatively conservative regulatory framework and the strong capital and liquidity positions of our financial institutions mean that we are well placed to meet these new stringent international regulatory standards. Over the next one to two years, as details of the international proposals are firmed up, we will consult widely with the public and the financial industry and ensure that we adopt the new international standards in ways that are appropriate to our context.

Second, the crisis has led regulators in many countries to re-examine aspects of their approach regarding the sale and marketing of structured products. In Singapore, MAS undertook a review of the regulatory regime governing the sale and marketing of unlisted investment products. In March last year, MAS published its policy consultation paper with proposals that covered issues such as promoting more effective disclosure, strengthening fair dealing in the sale and advisory process, introducing an enhanced regulatory regime for the sale of complex

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investment products, and enhancing MAS' powers. In its review, MAS has been careful not to come up with overly prescriptive rules and the approach is intended to continue giving Singaporeans choices in their investment options.

MAS' regulation cannot replace the primary role of the board and senior management to ensure that the requisite controls and risk processes are implemented robustly throughout their organisation. MAS will be reviewing the Corporate Governance Regulations and Guidelines for locally incorporated banks and significant life insurance companies. These Guidelines were introduced in 2005 and were implemented in 2007. So it is time for review. The review will focus on the effectiveness of risk management at the board level, including the role played by the boards in safeguarding the safety and soundness of their institutions, managing market conduct risks and setting remuneration policies to manage these risks effectively.

Mr Speaker, Sir, in summary, MAS and all financial sector stakeholders have important roles to play in strengthening financial stability and market confidence in our financial system. Investors too have a responsibility to understand the products they invest in.

MAS will take a balanced and pragmatic approach in reviewing any regulatory changes, and will complement this with a focus on board and senior management effectiveness, including their role in safeguarding the safety and soundness of their institutions and in delivering fair dealing outcomes to their customers.

Mr Christopher de Souza (Holland-Bukit Timah): Just one supplementary question. Minister, last year, in an essay in the Straits Times , the Minister for Finance said that our key tasks in financial regulation must be to devise a new

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framework that encourages innovation and an open global financial order while avoiding the build-up of systematic risks either nationally or globally. My question is, does the Government see more regulation going forward or is it the case that the Government sees the continued prompt and effective regulation when a crisis happens?

Mr Lim Hng Kiang: Mr Speaker, Sir, the gist of my answer was to reiterate that our overall regulatory posture has been proven to be appropriate. We started off more conservative than the other regulators and it turns out to be the right positioning. As a member of the international financial community, we have to recognise that the international rules will change over the next few months and years, and Singapore will have to position itself again within this new set of international regulations. There is a balance to be met in encouraging innovation, where innovation helps in the effectiveness and in reducing the cost of the financial system and, at the same time, not putting in place forces or measures which cause risk-taking to be taken to extremes. So there is a need for balance. But at the same time, we believe we are in a fairly good position to steer ourselves in this new environment.

Mdm Ho Geok Choo: I would like to ask the Minister to provide some insights on MAS' policy towards the relatively low interest rates offered by banks and whether this has an impact on the recent spree of property shopping by investors or buyers in Singapore in recent months.

Mr Lim Hng Kiang: The low interest rates experienced in Singapore is a reflection of the overall global conditions. With most central banks and governments putting in fiscal support policies and looser monetary policies in order to address the recession and to aid in the recovery, I think it is a well-known fact that the world right now is currently

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facing fairly accommodative monetary conditions. I think that applies to us too. One consequence of this global liquidity is of course that the funds are looking for ways to be deployed, and assets in strong, regulated markets are very attractive. So it is not a secret that the property market and other asset markets in Singapore have more than its fair share of attracting such funds.