Singapore and Hong Kong regulators propose enhanced enforcement powers to tackle bad apples
On 21 July 2020, the Monetary Authority of Singapore (MAS) issued a consultation paper on a new omnibus act (Omnibus Act) for the financial sector. The Omnibus Act will harmonise and expand MAS' power to issue prohibition orders (PO), among other things.
On 6 August 2020, the Singapore Exchange Regulation (SGX RegCo) issued a consultation paper on changes to the Listing Rules governing enforcement actions for greater and swifter accountability, and clarity, in the securities market.
On 7 August 2020, the Stock Exchange of Hong Kong Limited (SEHK) published a consultation paper on proposed changes to its disciplinary regime by strengthening the SEHK’s powers to hold accountable, and impose appropriate sanctions on, individuals responsible for misconduct and breaches of the listing rules.
The consultation papers reaffirm the regulators’ continued focus on culture and conduct, and keeping ‘bad apples’ out of the financial institutions (FI) and public companies.
MAS Omnibus Act
Expansion of scope of persons who can be issued with a PO
MAS’ current PO powers reside only in the Securities and Futures Act (Cap 289), the Financial Advisers Act (Cap 110) and the Insurance Act (Cap 142). This means that MAS cannot issue POs to persons regulated under other Acts administered by MAS even if they have committed serious misconduct in the financial industry.
Under the Omnibus Act’s expanded scope, MAS may issue a PO against any person, particularly those who have demonstrated by their misconduct that they have the potential to cause harm. This significantly broadens the categories of persons who may be subject to a PO. In particular, MAS envisages that persons who could cause harm would primarily be former, existing or prospective participants in the financial industry, including employees and service providers of FIs.
Grounds for issuing a PO
Under the Omnibus Act, MAS proposes to use the fit and proper criteria as the sole ground for which a PO is to be issued. The fit and proper criteria is set out in MAS’ Guidelines on Fit and Proper Criteria [FSG-G01], and comprises the following elements:
honesty, integrity and reputation;
competence and capability; and
Expansion of effect of a PO
MAS stated in the consultation paper that the existing PO powers do not comprehensively address risks as they only prohibit the subject from carrying out a limited scope of regulated activities. MAS proposes to add specified functions to the scope of prohibition under a PO. These are:
handling of funds, including safeguarding or administration of a digital payment token or digital payment token instrument;
risk management and control; and
critical system administration.
MAS proposes to also include a power to prescribe additional specified functions in subsidiary legislation, which would allow MAS to respond swiftly to include new functions as the financial industry develops and new risks emerge.
What does this mean for FIs
MAS’ proposal to expand its power to issue POs reaffirms MAS’ continued focus on culture and conduct, and keeping ‘bad apples’ out of senior management and in some cases, the financial industry altogether. This latest proposal sits alongside measures in MAS’ proposed Guidelines on Individual Accountability and Conduct (IAC Guidelines) (see our bulletin here) that require FIs to ensure senior managers’ and material risk personnel’s fitness and propriety, and MAS’ proposed requirements for FIs to conduct and respond to reference checks on representatives (see our bulletin here), to ensure that misconduct does not perpetuate in the financial industry.
SGX RegCo enhancements to enforcement framework
Proposed enhancements to Listing Rules on enforcement
Under the existing enforcement framework, public enforcement actions, such as public reprimands, are only exercisable by the Listings Disciplinary Committee (LDC) whereas SGX RegCo’s current range of direct enforcement powers is mainly confined to private actions, which are not disclosed to the public. This limits the extent to which SGX RegCo can provide clear, transparent and robust outcomes for the wide range of disciplinary cases that it encounters.
As such, SGX RegCo is proposing to widen its range of direct enforcement powers to include the following, which are currently only exercisable by the LDC:
(a) issuing a public reprimand against an issuer, its directors, executive officers, and issue managers;
(b) in the case of an issuer:
(i) issuing an order for the denial of facilities of the market, prohibiting an issuer from accessing the facilities of the market for a specified period; and
(ii) requiring an issuer to comply with conditions on the activities undertaken by the issuer; and
(c) in the case of a director or executive officer of an issuer:
(i) requiring the resignation of the director or executive officer from an existing position with any issuer listed on the Exchange; and
(ii) prohibiting any issuer for a period not exceeding 3 years from appointing or reappointing the director or executive officer, as a director or executive officer, or both.
Under the proposed amendments to the enforcement framework, the LDC and Listings Appeals Committee (LAC) will continue to exercise their existing powers at their disposal. Accordingly, the LDC and LAC will continue to have oversight of cases where the circumstances warrant a fine.
Exchange’s approval for appointment of director, Chief Executive Officer and Chief Financial Officer and enhancement of administrative powers
Currently, SGX RegCo has powers to require an issuer to obtain the approval of the Exchange for any appointment of a director, chief executive officer and chief financial officer (or its equivalent rank) (Approval). SGX RegCo is proposing to broaden such powers to include requiring an issuer to obtain Approval in circumstances where:
the issuer is the subject of an investigation into the affairs of the issuer by a special auditor, or a regulatory or enforcement agency; and
a director, chief executive officer and chief financial officer (or its equivalent rank) is to be reappointed.
SGX RegCo is also proposing a new administrative power to be able to require an issuer to suspend individual directors or executive officers for a period not exceeding three years under circumstances such as where the director or executive officer is being investigated or is the subject of proceedings for the breach of any relevant laws, regulations and rules relating to fraud, dishonesty, the securities or futures industry, corruption or breaches of fiduciary duties, whether in Singapore or elsewhere.
Currently, the circumstances under which the Exchange may exercise its powers under Rule 1405(1)(e) of the Mainboard Rules (i.e. powers to object to the appointment of directors or executive officers in any issuer for up to 3 years) include where the director or executive officer has wilfully contravened any relevant laws, rules and regulations. Similarly, the circumstances under which the Exchange may exercise its powers under Rule 305(1)(d) of the Catalist Rules (i.e. powers to object to the appointment of directors or executive officers in any issuer for up to 3 years) include where the director or executive officer has wilfully contravened any relevant laws, rules and regulations. SGX RegCo is proposing to remove the wilfulness requirement in relation to these Rules.
What SGX RegCo’s proposed enforcement powers means
The proposed enforcement powers for SGX RegCo will enhance SGX RegCo’s disciplinary powers and deter potential misconduct. Given that statutory regulators have more coercive powers than SGX, SGX RegCo is placing more emphasis on speed and clarity of enforcement outcomes, in order to maximise compliance levels. Again, these new measures will also help to keep ‘bad apples’ out of senior management positions.
SEHK enhancements to enforcement framework
SEHK proposed enhancement of disciplinary powers
SEHK has proposed to extend its disciplinary powers and enhance the sanctions available to it. The proposals would provide SEHK with a broader range of graduated sanctions to enable it to respond to breaches and misconduct of differing severity. SEHK is also proposing introducing secondary liability for persons who knowing participate in a breach of the listing rules. See our bulletin here for further details on the SEHK consultation.
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