Published July 17, 2009

MAS to look at how FIs pay staff, manage risks

Regulator will focus on new products but says primary responsibility rests with firms

By CONRAD TAN

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(SINGAPORE) The Monetary Authority of Singapore will review how the boards of banks and life insurers here manage risks and set pay policies, MAS managing director Heng Swee Keat said yesterday. This is to strengthen the corporate governance of financial firms.

Mr Heng: Board and management must ensure controls and processes are implemented robustly

MAS will also step up its supervision of financial institutions (FIs) in the sale of investment products, following an outcry by people who bought structured notes linked to Lehman Brothers thinking they were safe investments, only to suffer heavy losses when the bank collapsed.

Mr Heng rejected suggestions that MAS should shoulder part of the blame for the scandal, in which some investors said they were misled by sales staff into buying the notes.

'Operational lapses' uncovered by MAS's investigation of the sales and marketing practices at the 10 financial firms that sold the notes were the responsibility of the companies' boards and senior executives, he said.

'MAS's supervision cannot replace the primary role of the board and senior management to ensure that controls and processes are implemented robustly by all their staff.

'We will therefore scrutinise the steps being taken by board and senior management to ensure fair dealing by the financial institution with its customers.'

Mr Heng said this will include due diligence before a product is approved for sale, as well as pay and incentive structures for sales and advisory staff, and their training and supervision.

But MAS needs to be careful not to create an 'overly legalistic and combative relationship' with the firms it regulates, he added.

In future, the regulator will focus on new products when they are launched, he said. 'We would like to see financial institutions organise educational initiatives in partnership with independent experts, when they launch products with features or structures that are new to the market.'

As part of a broader review of existing corporate governance guidelines for local banks and insurers, MAS will look at how effectively their boards manage risk, Mr Heng said.

'This will include a review of the board's role in setting remuneration policies to manage risks effectively.'

But the review of compensation practices is unlikely to result in anything as drastic as pay caps for senior executives at banks here.

Teo Swee Lian, MAS deputy managing director in charge of prudential supervision, stressed that the review will cover how boards set banks' pay policies for all staff, not just senior executives.

'I really don't think there are large gaps here, but we want to make sure our banks follow best practices,' she said.

The review comes after the international Financial Stability Board (FSB) published a set of principles in April for 'sound compensation practices intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes'.

The FSB said then the boards at many financial firms 'viewed compensation systems as being largely unrelated to risk management and risk governance'.

It said pay practices at large financial firms were a contributing factor to the financial crisis, as generous bonuses tied to short-term profits led some staff to take excessive risks.