The recent announcement of a USD 3 billion settlement involving Wells Fargo continues to highlight the costs for banks arising from misconduct. Reflecting its aim of continuing to safeguard client's interests and maintain Singapore's reputation as a leading wealth management hub, the Monetary Authority of Singapore (MAS) recently published its "Private Banking Sales and Advisory Practices - Observations and Supervisory Expectations from Thematic Inspections" Information Paper (PBIF)1. The findings of the sample-based review conducted in 2018 and 2019 suggest that Private Banking may be subject to many of the same potential misconduct issues that have been fertile ground for fines in the retail banking space. We discuss some of those areas and potential steps not just for Private Banks (PBs) but financial institutions generally to take in more detail below.
The MAS review underpinning the PBIF focused on four key themes that have been well trodden not only by the MAS but regulators in other jurisdictions. Those were:
(a) Governance - management oversight of the sale and advisory activities, including the extent to which relevant issues were escalated and deliberated upon by senior management, clarity of roles and responsibilities, as well as the establishment of appropriate frameworks and controls.
(b) Investment Suitability - frameworks and processes to ensure that clients receive appropriate financial advice and recommended products that are suitable, taking into account their risk appetites and investment profiles.
(c) Pricing Controls and disclosures - controls to promote transparency of fees on transactions, including disclosures to and communication with clients, and processes to ensure that pricing arrangements agreed with clients are adhered to.
(d) Culture and conduct - staff perceptions of front office culture, as well as tone-from-the top on organisation values and desired employee behaviour.
The MAS also took the opportunity to review remuneration processes that were not otherwise considered as part of the preparation of its separate 2019 "Incentives Structures in the Banking Industry – Fostering Sound Behaviour and Conduct" Information Paper2.
MAS observed that whilst PBs have largely adopted investment suitability and pricing disclosure standards set out in the Private Banking Code of Conduct3 and Guidance on Private Banking Controls4, the efficacy and rigor of these controls was not consistent across the sample group. Some PBs had good approaches that should be emulated whilst others required improvement. The results of the review included findings that:
- Clients were charged higher fees than agreed in advance without being informed or their consent having been obtained;
- Market movements to the client's advantage between the PBs advising an execution price and actually executing the trade were not passed on and the benefit was kept by the PBs without disclosure to or agreement by the client;
- Processes and procedures were not adequate to identify that incorrect fees had actually been charged and resolve the situation in a timely way;
- Clients were marketed products with higher risk than the client risk assessment rating allowed and there was failure to have adequate pre or post trade monitoring processes to prevent or detect and address the mismatch in a timely manner;
- There was a view by some PBs employees that completing a risk appetite statement for a client was a mere paper exercise (and it was not meant to influence or impede sale of products to the client); and
- There was failure to promote an appropriate culture within the organisation including lack of clarity between financial and non-financial or behavioural targets and front office staff not being able to translate organisational values into day-to-day behaviours for their roles.
Actions to Consider
Based on its findings the MAS has published six categories (referred to as Box 1- 6) of key desired outcomes. The MAS expects financial institutions to benchmark to address any gaps. Financial Institutions, regardless of whether they are a Private Bank, premier or priority bank service should at a minimum:
- Review the PBIF in detail and identify relevant internal processes and procedures that are associated with addressing each of the MAS defined Boxes;
- Undertake and document a gap analysis between the current state compared to the MAS' expected state (including the basis for any conclusions reached);
- Determine the appropriate methodology and necessary timelines to remediate any identified gaps or client impacts and ensure that they are communicated appropriately to and overseen by senior management and, if necessary, communicated to the MAS as part of any breach reporting processes; and
- Ensure that senior management are communicating these actions to all employees and the employees understand the importance of complying and underlying reasons for them.
The MAS has stated its intention to engage in further discussions regarding its PBIF findings with financial institutions as part of any future reviews. Failure to undertake a timely appropriate internal review and identify and initiate remediation steps will expose a financial institution not only to regulatory enforcement risk, but also to client complaints and potential litigation with associated reputational damage. themselves against these outcomes and take steps in a risk-appropriate manner
1 Private Banking Sales and Advisory Practices, Monetary Authority of Singapore.
2 Incentive Structures in the Banking Industry: Fostering Sound Behaviour and Conduct, Monetary Authority of Singapore, 2019.
3 Code of Conduct, Private Banking in Singapore.
4 Guidance on Private Banking Controls, Monetary Authority of Singapore, 2014.