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The COVID-19 pandemic in the last 2 years has been challenging for businesses. As we look to transition to the new normal, many financial institutions are already focusing on capturing new opportunities arising from the post-COVID era. As in previous editions, we look to examine the key themes for regulatory and operational excellence and also what’s to come in 2022 and beyond.
Unsurprisingly perhaps, from our review of private banks in Singapore in 2021, we see several gaps across a few thematic risk areas that call for immediate attention. These thematic areas include the perennial topic of anti-money laundering (AML) / countering the financing of terrorism (CFT), individual accountability and conduct, operational risk management as well as regulatory reporting by the private banks.
This publication identifies these gaps, while outlining new risk areas for private banks, set against the backdrop of key developments in the risk and control environment in 2022. We also shine the spotlight on opportunity of growth for the private banks specifically in the Environmental, Social and Governance (ESG) space.
From our review of Singapore private banks in 2021, we have summarised the observations on control matters noted across themes below:
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Anti-money laundering (AML) / Countering the financing of terrorism (CFT)
Despite years of emphasis, we continue to observe a significant number of gaps in the AML/ CFT space.
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Individual accountability and conduct
A hot topic for the year, focusing on senior management’s roles and responsibilities on oversight of the banks and related matters.
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Sales and advisory
Sales and advisory processes and controls remain an area to be improved since the publication of the MAS Information Paper “Private Banking Sales and Advisory Practices in 2020".
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Regulatory reporting
New topic for the year where banks implemented revised reporting (MAS 610/1003) per new requirement by the Monetary Authority of Singapore (MAS).
In addition to the top four themes above, we continue to see lapses in operational controls in terms of timely reporting of operational risk incidents and material outsourcing events which can be further improved.
The thematic focus areas for private banks have largely remained similar in 2020 and 2021 except for Individual Accountability and Conduct (IAC), which was a new area of focus in 2021.
Exhibit 1: Thematic risk areas1
1PwC research
- Backlogs in Customer Due Diligence (CDD) periodic review, clearance of transaction monitoring alerts and name screening alerts which may impact timely AML risk assessment of customers.
- Inadequate Source of Wealth (SoW) plausibility assessment and SoW corroboration performed for higher risk accounts.
- Lack of documented basis for parameters and thresholds used for transactions monitoring.
- Lack of documentary evidence and basis for artificial intelligence (AI) adopted in name screening and transaction monitoring systems.
- Senior managers not appointed for Core Management Functions (CMF) with no proper documentation and assessment of whether the role is required.
- Ambiguity in roles and responsibilities undertaken by senior management.
- Lack of proper framework, policies and procedures for conduct risk assessment (such as Key Risk Indicators) for front office employees.
- Inconsistent application of how front office is evaluated based on conduct risk assessment outcomes.
- Lack of or performance and consequence management framework.
- Weak processes established for managing trade mismatches.
- Operating ineffectiveness in sales surveillance performed.
- Lack of proper follow-up performed for issues identified from sales surveillance, including identification of root causes to prevent recurrences of issues identified.
- Lack of senior management awareness of exceptions and issues identified, including next steps required to resolve issues identified.
- Lack of proper framework to identify and manage overcharging of commissions and fees on investment products.
- Lack of formalised governance around regulatory reporting process (e.g. responsible parties for providence/maintenance of data not properly established).
- Inconsistent reporting within appendix/annexes within regulatory returns submitted.
- Incorrect definition and classification of key attributes (e.g. For MAS Notice 610/1003: residency, counterparty types, industry) used within reporting returns.
- Breaches in prudential limits with inadequate root cause and remediation actions undertaken.
- Non-timely reporting of operational risk incidents.
- Non-timely reviews of material outsourcing events.
- Oversight of accuracy of fees input into the system.
Regulatory focus area 2022
AMLD 01/2022: Circular on non-face-to-face customer due diligence measures
Information paper on environmental risk management
Information paper on strengthening AML/ CFT name screening practices
Business Continuity Management guideline
Implementation of fairness principles in financial institutions' use of artificial intelligence/ machine learning
Spotlight on Environmental, Social and Governance
The COVID-19 pandemic, unprecedented heatwaves in parts of the world and extreme rainfalls and widespread flooding in others – these are just some events that have intensified concerns surrounding ESG issues in recent years, which saw significant momentum in actions taken globally in the strive for a more sustainable future.
Within the investing landscape, institutional and retail investors too, are pivoting towards ESG. According to a recent PwC research, fund distributors including private banks in Europe are anticipating heightened demand for ESG-related investment products and as much as 68% are considering halting their distribution of non-ESG products altogether. This study also found that more than 50% of investors (including high net worth individuals) are considering halting their Environmental, Social and Governance in non-ESG funds and 67% of these investors are willing to pay an ESG premium.
Meanwhile, the rise of ESG-related products has brought attention to the risk of “greenwashing” associated with greater transparency, as sustainability claims become subject to higher levels of scrutiny and challenge by regulators and investors. At the same time, ESG-related regulatory initiatives show no sign of easing. From ESG reporting and disclosure regimes to regulations on climate and other ESG risks, private banks face increasing compliance expectations to consider ESG across their business and operations.
The MAS Guidelines on Environmental Risk Management, for instance, require private banks to assess and manage environmental risks in their business and investing activities and to integrate this as part of enterprise risk management frameworks, including the governance and strategy around the risks and opportunities. This is a new, complex domain which presents various implementation challenges for banks: lack of internal capabilities to develop the necessary risk management methodologies and tools, data quality and availability, and more broadly the difficulty to overcome organisational silos to collaborate and embed ESG across divisions and ensure that ESG-related issues are truly integrated within organisation’s strategic and financial planning agenda.
As private banks continue to face pressure from all directions to act on ESG, there is an opportunity for private banks to respond strategically by rethinking their business and operating models – from investment approach and product offerings to other ESG priorities such as corporate purpose, societal impact and climate footprint. By taking a holistic approach to their ESG transformation, private banks can leverage these developments to drive the creation of business value and sustained outcomes, and to establish a more purposeful culture within the organisation.
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