Legal Business. FAQ Banking (Amendment) Act Memoranda on legal and business issues and concerns for multiple industry and business communities

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1 Memoranda on legal and business issues and concerns for multiple industry and business communities FAQ Banking (Amendment) Act Rajah & Tann 4 Battery Road #26-01 Bank of China Building Singapore Tel: Fax: eoasis@sg.rajahandtann.com Website:

2 FAQ Banking (Amendment) Act 2001 DATE THE AMENDMENTS COME INTO FORCE When Do The Amendments To The Banking Act Take Effect? The amendments to the Banking Act took effect on 18 ( the commencement date ). That was the date the Banking (Amendment) Act 2001 ( Amendment Act ) came into operation vide the Banking (Amendment) Act (Commencement) Notification 2001, S 349 / RESTRICTED BUSINESS / SEPARATION OF BUSINESS What Are The Types Of Business That Banks Can Engage In? Generally, bank can only engage in financial business. This would encompass banking business as defined under the Banking Act (the definition has not changed) and any other business authorised by Monetary Authority of Singapore ( MAS ) under other written law or approved by MAS under the Banking Act. In addition, banks can undertake other businesses which are incidental to the financial business that they are allowed to engage in. Deputy Prime Minister ( DPM ) and MAS Chairman Lee Hsien Loong, on the Second Reading of the Amendment Bill in Parliament on 16 May 2001, elaborated on the types of business that could be considered as incidental to financial businesses. These include the provision of clearing and settlement services, custody, trustee and nominee services, financial advisory activity as well as agency transactional services where the banks act as agents for third party products but take on no additional risk themselves. [Section 30(1) of the Banking Act]. Are Foreign Banks Subject To The Restriction On Non-Financial Business? The Singapore branches of foreign banks will also be subject to the restriction on engaging in non-financial businesses. How Long Do Banks Have To Comply With The Requirement On Engaging Only In Financial Business? Banks have a period of up to three years from the commencement date, to cease any nonfinancial business which they are no longer authorised to engage in. The period may, however, be extended by MAS on application by a bank, but subject to the imposition of conditions or MAS levying a charge. [Section 34 of the Banking Act]. Page 1

3 What Are The Consequence Of Banks Engaging In Non -Financial Business? If banks engage in businesses that they are not authorised to do, they would be liable for an offence which carries on conviction, a maximum fine of S$250,000 and thereafter, to a further maximum fine of S$25,000 for everyday that the offence continues. [Section 30(3) of the Banking Act]. Can Banks Take Stakes In Companies? Banks can acquire shares in companies, but subject to certain limits. First, for portfolio investment purposes, banks can purchase non-major stakes (generally 10% or less of the share capital) in a company. To acquire a major stake, banks will have to obtain MAS s approval. A major stake is a larger-than-10% beneficial interest in the shares of the company, control of over 10% of the voting power of the company or any interest which gives the bank significant influence over the management of the company. [Section 32(1) & (7)]. If the company that the bank seeks to invest in carries on non -financial activities, approval will probably be withheld if the company is not engaged in financial business and it does not have the benefit of an exemption. [Section 32(2)] Second, for any single company, banks can only invest up to 2% of their capital funds, unless the bank has the benefit of an exemption given by MAS either generally or in respect of any investment or class of investments. [Section 31(1)]. Both the above limitations do not apply to certain interests, namely those held as security by the bank and any shareholding or interest acquired or held by the bank in Singapore in the course of satisfaction of debts due to it which is disposed of at the earliest suitable opportunity. [Sections 31(2) & 32(4)]. Are The Restrictions On Investments Applicable To Venture Capital Investment? The restrictions on acquiring a major stake do not apply to certain private equity and venture capital investments, provided that the companies the banks seek to invest in satisfy the criteria laid down in regulation 7 of the Banking Regulations Basically, the companies must have a potential for high growth in relation to the exploitation of new technologies or new business models. Alternatively, where they do have potential for high growth, they are undergoing a reorganisation or restructuring. The exemption will not, however, apply where the company does not carry on any substantial business or is not in operation; is engaged in property related activities; or carries on the business of factoring, leasing equipment or purchases debt obligations from others. [Regulation 7 of the Banking Regulations 2001]. Page 2

4 Are Foreign Banks Subject To The Above Limitations On Taking Stakes In Companies? The Singapore branches of foreign banks will also be subject to the restriction on equity investments except that their Asian Currency Units will be exempt, in line with current MAS policy. (The Banking (Amendment) Bill: An Explanatory Brief by MAS, dated 19 April 2001, para 4). How Long Do Banks Have To Comply With The Requirement On Investments In Companies? Banks have a period of up to three years from the commencement date to dispose of any investments that they are no longer authorised to hold. The period may, however, be extended by MAS on application by a bank, but subject to the imposition of conditions or MAS levying a charge. [Section 34(1) & (2) of the Banking Act]. What Are The Consequences Of Banks Exceeding The Investments Limits Where They Are Not Authorised To Do So? If a bank exceeds the equity investments limits of 2% of its capital funds for a single company, it would be guilty of an offence which carries on conviction, a maximum fine of S$100,000 and thereafter, to a further maximum fine of S$10,000 for everyday that the offence continues. [Section 31(4) of the Banking Act]. If a bank holds a major stake in a company without approval, it faces, on conviction, a maximum fine of S$250,000 and thereafter, to a further maximum fine of S$25,000 for everyday that the offence continues. [Section 32(6) of the Banking Act]. What Is The Limit On Immovable Property That Banks Can Hold? Only 20% of banks capital funds can now be invested in immovable property, irrespective of where the property is situated. Excluded from this limit are the following: properties used as the bank s business premises or for housing or providing amenities for its officers; any interest in or right over immovable property held by way of security or by way of enforcement of the security interest in the property provided that it is disposed of at the earliest suitable opportunity; and (c) any other interest or right as prescribed by MAS. [Section 33(1) & (2) of the Banking Act]. Page 3

5 Are Foreign Banks Subject To The Above Limitation On Investment In Immovable Property? The Singapore branches of foreign banks will also be subject to the restriction on property investments except that their Asian Currency Units will be exempt in line with current MAS policy. (The Banking (Amendment) Bill: An Explanatory Brief by MAS, dated 19 April 2001, para 4). Do Banks Have A Grace Period To Dispose Of Their Immovable Property? Banks have a grace period of up to three years from the commencement date to dispose of any assets in order to comply with the 20% capital funds limit, unless the period has been extended by MAS on application by a bank. The extension may be subject to the imposition of conditions or MAS levying a charge. [Section 34 of the Banking Act]. What Are The Consequences Of Banks Exceeding Limits On Property Investment? If a bank exceeds the investment limit for property, it would be liable for an offence which carries on conviction, a maximum fine of S$100,000 and thereafter to a further maximum fine of S$10,000 for everyday that the offence continues. [Section 33(4) of the Banking Act]. What Are The Limits On Loans Secured By Immovable Property? The limits on loans secured by immovable property is 35% of the total eligible assets of the bank. This limit is set out in regulation 8 of the new Banking Regulations There is a somewhat long and complicated definition of total eligible assets of the bank under regulation 2 of the Banking Regulations Total eligible assets basically mean the total of: (c) (d) amounts outstanding to the bank under credit facilities but excluding transactions with banks and overseas banks; amounts of debentures beneficially held by the bank, but excluding those issued by a bank or an overseas bank; amounts paid by the bank for securities transferred to it pursuant to a repurchase transaction on terms that require the bank to transfer in future equivalent securities to the other party, but excluding transactions with banks and overseas banks; amounts of conti ngent liabilities incurred by the bank in respect of any obligation of a property corporation or any obligation of any party, where such obligation is undertaken in connection with property-related activities; Page 4

6 (e) where the bank has entered into any agreement (including a credit derivative agreement) with any other party under which the other party would secure a benefit or avoid a loss where there is: (i) a failure by a property corporation to perform its obligations; (ii) a decline in the creditworthiness of a property corporation; or (iii) a failure by any person other than a property corporation to perform its obligations where such obligations are undertaken in connection with propertyrelated activities, the highest amount of such benefit or loss as may be secured or avoided, as the case may be, except to the extent that such amount constitutes part of any amounts under paragraph (d); and (f) amounts payable to the bank by any person, other than a bank or an overseas bank, under a bill of exchange or promissory note. Certain amounts are excluded from the above, namely, where the transactions or instruments in paragraphs to (f) do not form part of the bank s business in Singapore. While this applies to both foreign and locally incorporated banks, an additional requirement has to be satisfied by local banks before the exclusion applies, ie instrument or transaction must not form part of the property sector exposure of the bank. This means that it must not in any way be related to the property sector or property related activity. What the regulations have sought to do is to redefine property loans to include all loans and debt instruments, for the purpose of property development or investment, regardless of whether it is secured on property. Do The Changes Affect The 1996 MAS Directive On Housing Loans? The changes do not affect the 1996 MAS Directive on Housing Loans ( 1996 MAS Directive ) issued to all banks, merchant banks, finance companies and direct insurers. The 1996 MAS Directive stipulates that the quantum of financing for housing loans for the purchase of residential properties in Singapore must not exceed 80% of the purchase price or valuation of the property, whichever is lower. Recently, on 5 June 2001, MAS reminded banks and finance companies of the limits set out in the 1996 MAS Directive and that they must deduct all discounts (eg legal fees, stamp duties), rebates or vouchers (eg for unit trusts) offered by property developers from the nominal price before computing the 80% limit. Do Banks Have A Grace Period To Comply With The New Limits On Property Loans? DPM Lee Hsien Loong during the Second Reading of the Amendment Bill, noted that the main banks are currently below the 35% limit. For the smaller banks that exceed the limit, MAS may grant them a short grace period to reduce their exposure to property loans. No regulation setting out the grace period has been issued todate. Page 5

7 What Are The Consequences Of Banks Exceeding The Limit On Property Loans? Banks which fail to limit their exposure to property loans will be liable for an offence which carries on conviction, a maximum fine of S$100,000 and thereafter, to a further maximum fine of S$10,000 for everyday that the offence continues. [Section 35(2) of the Banking Act]. Use of a bank s name, logo etc What Are The New Restrictions On The Use Of A Bank s Name, Logo O Trademark? Use of a bank s name, logo or trademark by other parties is restricted to subsidiaries, the financial holding company or related corporation (engaged in financial business) of the bank or any party carrying on financial business pursuant to an agreement or arrangement with the bank. MAS may also prescribe other persons or class of persons who may use the bank s name, logo etc. [Section 5A(1) & (2) of the Banking Act]. Is There Any Obligation On The Bank To Prevent The Use Of Its Name, Logo Or Trademark? Significantly, there is an obligation on the bank to ensure that it does not cause or knowingly permit any person (other than a related corporation or financial holding company) to use the name, logo etc without approval from MAS. [Section 5A(2) of the Banking Act]. How Long Do Parties That Are Currently Using A Bank s Name, Logo Etc Have To Comply With The Above Restriction? For persons who are engaged in non-financial activities but who were lawfully using the bank s name, logo or trade mark before the commencement date, they can continue with such use for a period of three years from the latter date. To continue such use beyond that period, the necessary approval would have to be obtained. [Section 5A(5) of the Banking Act]. What Are The Consequences Of Using A Bank s Name, Logo Etc Without Authorisation? The use of a name, logo or trademark in a manner that would associate it with a bank incorporated in Singapore or its subsidiaries without authorisation, is an offence. An individual found guilty of the offence faces a maximum fine of S$125,000 and thereafter, to a further maximum fine of S$12,500 for everyday that the offence continues. For all other business Page 6

8 entities, the maximum fine is S$250,000 and thereafter, to a further maximum fine of S$25,000 for everyday that the offence continues. [Section 5A(3) of the Banking Act]. Deposit-taking business What Are The Restrictions On Deposit-taking A new restriction has been introduced aimed at deposit-taking businesses targeted at the Singapore market but which are not licenced by MAS or specifically exempted. Specifically, the new measures provide that unless authorised by the Banking Act (as in the case of banks, merchant banks and finance companies) or MAS, no person is allowed, in the course of carrying on a deposit-taking business in Singapore or elsewhere, to accept in Singapore any deposit from any person in Singapore. The prohibition extends to soliciting for deposits through eg invitations and advertisements targeted at the public or a section of the public in Singapore, even though the deposits may be made outside Singapore. The prohibition on soliciting for deposits applies to parties situated outside Singapore as well. [Section 4A(1) & (2) of the Banking Act]. What Is A Deposit-Taking Business To constitute a deposit-taking business, the following must be satisfied: in the course of the business, money received by way of deposit is lent to others; or the deposit, or any interest earned on it, is used to finance to a material extent, any other activity of the business. However, notwithstanding the above, it is not a deposit-taking business if the person carrying on the business: does not hold himself out as accepting deposits on a day to day basis; and does not accept deposits on a day to day basis, whether or not involving the issue of debentures or securities. [Section 4A(6) & (7) of the Banking Act]. Who Can Engage In The Business Of Accepting Deposits In Singapore? Deposit-taking business can be undertaken by banks, merchant banks approved by MAS, finance companies licensed under the Finance Companies Act, co-operative societies registered under the Co-operative Societies Act, any person authorised under any other written law to accept deposits and any other person as may be authorised by MAS. [Section 4A(6)]. Page 7

9 To clarify matters, regulation 3 of the new Banking Regulation 2001 provides that the restriction on accepting deposits will also not apply to the following class of persons: any dealer or investment adviser licensed under the Securities Industry Act (Cap. 289); any futures broker, futures trading adviser or futures pool operator licensed under the Futures Trading Act (Cap. 116) (c) any lawyer, including a foreign lawyer registered under the Legal Profession Act (Cap. 161), law corporation or Joint Law Venture which is approved under that Act; (d) any insurer registered under the Insurance Act (Cap. 142). However, the exemption for the parties in paragraphs to (d) above will only apply if the acceptance of the deposit is incidental to the practice, business or purpose for which the licence was granted. What Constitutes A Deposit? Deposit means a sum of money paid on terms: under which it will be repaid, with or without interest or a premium, or with any consideration in money or money s worth, either on demand or at a time as agreed by the parties; and which is not referable to the provision of property or services or to the giving of security. But a deposit would not include the following: a sum paid by MAS or any insurer registered under the Insurance Act (Cap. 142); a sum paid by any moneylender licensed under the Moneylenders Act (Cap. 188); (c) (d) a sum paid by one company to another at a time when they are related companies, either being a parent-subsidiary or both are subsidiaries of another company, or the same individual controls more than half of the voting power or holds more than half of the issued share capital of both of them; a sum paid by a person who, at the time when it is paid, is a close relative of the person receiving it or who is a close relative of a director, controller or manager of that person; and (e) a sum paid by such person or class of persons as may be purchased. Page 8

10 [Section 4B(3), (5) of the Banking Act]. With respect to (e) above, regulation 5 under the Banking Regulations 2001 has excluded from the definition of deposit certain further sums. Generally, the exclusion relates to sums paid in consideration for the issue of: specified bonds; (c) (d) specified negotiable certificate of deposits ( NCD ); Singapore Government Securities; or bonds issued by a statutory board. Are Capital Market Fund-Raising By Corporations Affected By The New Rules On Deposit- Taking Services? DPM Lee Hsien Loong during the Second Reading of the Amendment Bill gave the reassurance that the new provisions are not meant to restrict capital market fund-raising by corporations which do not carry on a deposit-taking business. Such companies issue bonds and notes from time to time, and these will generally not be considered deposit-taking business. To this end, regulation 5 under the Banking Regulations 2001 has exempted monies paid for the issue of specified bonds and negotiable certificate of deposits from the definition of deposit. Further, the definition of deposit-taking business may not apply to such corporations. What Activities Amount To Advertising For Deposits? Any activity that involves disseminating or conveying information, or inviting or soliciting by any means or in any form would be caught as advertisement and fall foul of the restriction if they contain information which is intended or presumed to be intended to lead, directly or indirectly, to the making of a deposit. The means employed could include the following: publication in a newspaper, magazine, journal or other periodical; display of posters or notices; (c) (d) (e) circulars, handbills, brochures, pamphlets, books or other documents; letters addressed to individuals or bodies; photographs or cinematograph films; or (f) sound broadcasting, television, the Internet or other media. Page 9

11 [Section 4B(1) of the Banking Act]. Would An Advertisement In A Foreign Newspaper, Journal, Television Broadcast Etc Be Caught As Well? Advertisements carried in foreign newspapers, journals and other periodicals that are circulated principally outside Singapore would not be caught. Neither would advertisements in any other broadcasting or communications available principally outside Singapore. [Section 4B(2) of the Banking Act]. Can A Member Of The Public In Singapore Seek, Via The Internet Or Otherwise, Deposit- Taking Services Or Any Other Services, From Financial Institutions Not Licensed By MAS? There is nothing prohibiting a resident in Singapore, on his own seeking via the Internet or otherwise, financial services of financial institutions not licensed in Singapore. This was clarified by DPM Lee Hsien Loong during the Second Reading of the Amendment Bill. However, DPM Lee also pointed out that such persons place the deposits at their own risks. What Are The Risks That Persons Face If They Place Deposits With Institutions Not Licenced By MAS? If deposits are placed with institutions not licenced by MAS, the depositor takes the risk of not getting all or any of his money back as a result of the failure of the financial institution. Worse still, the institution with which the money is placed may be a sham financial institution set up to embezzle the public. What Are The Implications Of Engaging In Deposit-Taking Business When Not Authorised Or Exempted? Basically, it is an offence to engage in illegal deposit-taking activities. On conviction, individuals face a maximum fine of S$125,000, the possibility of imprisonment for a maximum term of 3 years or both. There is also a further maximum fine of S$12,500 for everyday that the offence continues thereafter. For all other cases, the maximum penalty is S$250,000 and thereafter a further maximum fine of S$25,000 for everyday that the offence continues. [Section 4A(4) of the Banking Act]. It should be noted that the illegality of the deposit-taking does not affect the civil liability in respect of the deposit or the money deposited. [Section 4A(9) of the Banking Act]. Page 10

12 OWNERSHIP REQUIREMENTS When Must Approval Be Sought By A Party Obtaining A Stake In A Local Bank Or Financial Institution? Under the new sections 15A and 15B of the Banking Act, approval of the Minister in charge of MAS, who is currently the Chairman of MAS as well as the Deputy Prime Minister, must be sought before a person: becomes a substantial shareholder of a Singapore incorporated bank incorporated in Singapore or a financial holding company (collectively referred to as a designated financial institution ) [section 15A(1)]; enters into an agreement or arrangement to act together with another person to acquire, hold, dispose of or exercise rights in relation to 5% or more of the voting shares in a designated financial institution [section 15A(3)]; (c) (d) becomes a 12% controller [section 15B(1)(c)]; becomes a 20% controller [section 15B(1)]; or (e) becomes an indirect controller [section 15B(1)(c)]. Who Is A Substantial Shareholder? Where a person has an interest in one or more voting shares in a company incorporated in Singapore and the nominal amount of that share, or the aggregate of the nominal amounts of those shares, is 5% or more of the aggregate or the nominal amount of all the voting shares in the company, such a person is referred to as a substantial shareholder. [A substantial shareholder under section 15(2) of the Banking Act has the same meaning as in section 81 of the Companies Act]. Who Is a 12% Controller A 12% controller means a person who, alone or together with his associates holds or can control the voting power of 12% or more (but less than 20%) of the shares in a designated financial institution. [Section 15B(3) of the Banking Act]. Page 11

13 Who Is a 20% Controller Similarly, a 20% controller means a person who, alone or together with his associates, holds or can control the voting power of 20% or more of the shares in a designated financial institution. [Section 15B(3) of the Banking Act]. Who Is An Indirect Controller? An indirect controller is one who, acting alone or together with any other person, can direct the action to be taken by directors, or who is in a position to determine the policy, of a designated financial institution, whether with or without holding shares or controlling the voting power in the designated financial institution. Excluded from the above definition is an officer of the designated financial institution whose appointment has been approved by MAS and professional advisers to the designated financial institution. [Section 15B(5) of the Banking Act]. What Is A Voting Share For The Purpose Of Determining A Substantial Shareholder? A voting share, in relation to a Singapore listed company, means an issued share in the company, not being, inter alia, a share to which, in no circumstances, is there attached a right to vote (that is, non-voting shares) or to which there is attached a right to vote only in limited circumstances, such as during a period in which a dividend in respect of the share is in arrears or upon a proposal that affects rights attached to the share (for example, preference shares). [The definition of a voting share in section 15(2) of the Banking Act has the same meaning as in section 4(1) of the Companies Act]. When Is A Person Considered To Be Holding Shares? A person is considered to be holding shares if he is: (i) either deemed to have an interest in that share under section 7(6) to (10) of the Companies Act, or (ii) if he otherwise has an equitable or legal interest in that share. [Section 15B(4) of the Banking Act]. When Is A Person Deemed To Have An Interest In Shares? Interest in shares is very widely defined in section 7 of the Singapore Companies Act. In particular, it should be noted that a person is deemed to have an interest in a share: Page 12

14 if he has entered into a contract to purchase a share; if he has a right, otherwise than by reason of having an interest under a trust, to have a share transferred to himself or to his order, whether the right is exercisable presently or in the future and whether on the fulfillment of a condition or not; (c) (d) if he has a right to acquire a share, or an interest in a share, under an option, whether the right is exercisable presently or in the future and whether on the fulfillment of a condition or not; or if he is entitled (other than as a proxy or corporate representative) to exercise or control the exercise of a right related to a share (not being a share of which he is the registered holder). [Section 7(6) of the Companies Act]. What Interests Are Disregarded For The Purpose Of Determining Whether A Person Is Deemed To Have An Interest In Shares? For the purpose of determining whether a person is deemed to have an interest in shares, the following will be disregarded: interest in the share which is held by way of a bare trust; interest in a share where the person holding the share lends money in the ordinary course of his business and the interest in the share is held as security in connection with the lending of money, where the transaction was entered into in the ordinary course of business; (c) (d) interest in a share held by a person by reason of him holding a prescribed office; and an interest of a company in its own shares being purchased or otherwise acquired in accordance with the Companies Act. [Section 7(9) of the Companies Act]. Who Is An Associate? A person, A, would be an associate of another, B, if he is related by close family ties or if B can direct the action to be taken by A, or the directors of A, where A is a corporation. More specifically, A would be an associate of B in the following instances: if A is part of the immediate family of B, including the relationship of step-parent and stepchild; Page 13

15 B can direct the action to be taken by the directors of A, a corporation; (c) B can direct the action to be taken by A; (d) A is a related corporation of B; (e) B, alone or together with other associates of B, is in a position to control not less than 20% of the voting power of the A, a corporation; or (f) A is a person with whom B has an agreement or arrangement to act together with respect to the acquisition, holding or disposal of shares or other interests in, or with respect to the exercise of their voting power in relation to, the designated financial institution. [New Section 15B(4)(c) of the Banking Act]. What Are The Criteria That The Minister Will Apply When His Approval Is Sought By A Party Wishing To Be A Substantial Shareholder Or To Cross The Various Threshold? The Minister, before giving his approval under section 15A or 15B, must be satisfied that: the applicant is a fit and proper person; having regard to the applicant s likely influence, the designated financial institution will or will continue to conduct its business prudently and comply with the provisions of the Banking Act; and (c) it is in the national interest to give the approval. [Section 15C(1) of the Banking Act]. What Is The Position Of Persons Who Have Entered Into The Relevant Agreement, Are Currently Substantial Shareholders, 12% Controllers, 20% Controllers Or Indirect Controllers? How Long Do They Have To Obtain Approval? Persons who are currently substantial shareholders, 12% controllers, 20% controllers, indirect controllers or who have entered into an agreement or arrangement to act together with another person(s) in relation to 5% or more of the voting shares in a designated financial institution, have six months from the commencement date to obtain the approval of the Minister under section 15A or 15B to retain their current shareholdings or keep their ag reements. The exception to this is where approval had already been obtained under the repealed section 15, 16 or 17 of the Banking Act. Such approval will be deemed to be approval granted under the Amendment Act, subject to such conditions, if any, that had previously been imposed. Additional conditions may also be imposed. Page 14

16 [Section 15C(5) of the Banking Act]. What Are The Consequences If The Minister Disapproves The Application? Depending on the nature of the application, if the application is disapproved the applicant must within a time prescribed by the Minister, take steps to: cease to be a substantial shareholder; (c) cease to be a party to the agreement or arrangement to control the shareholding or voting power of 5% or more of the voting shares in a designated financial institution; cease to be a 12% controller; (d) cease to be a 20% controller; or (e) cease to be an indirect controller. [Section 15C(4) of the Banking Act]. What If A Person Does Not Take The Necessary Steps As Required Once The Application Is Disapproved? A person who does not take the necessary steps as required could be liable for an offence. In the case of individuals, the offence carries on conviction a maximum fine of S$125,000 and a further fine of S$12,500 for everyday that the offence continues. In all other cases, the maximum penalty is S$250,000, and a further fine of S$25,000 for continuing offences. [Section 17(1) of the Banking Act]. In addition, the offender may be directed by the Minister to transfer or dispose of all or any of the shares that he or his associates hold in the designated financial institution ( the specified shares ) within a certain time and possibly subject to conditions. Restrictions on the transfer or disposal of the specified shares may also be imposed by the Minister. Finally, there is a catch all provision allowing the Minister to make such other directions as is considered appropriate. [Section 16(1) of the Banking Act]. What Are The Consequences If A Person Becomes A Substantial Shareholder Or Controller Without Obtaining Approval? A person who becomes a substantial shareholder, controller, or enters into the relevant agreement or arrangement without obtaining the necessary approval could be liable for an offence. In the case of individuals, the offence carries on conviction a maximum fine of S$125,000 and a further fine of S$12,500 for everyday that the offence continues. In all other Page 15

17 cases, the maximum penalty is S$250,000, and a further fine of S$25,000 for continuing offences. [Section 17(1) of the Banking Act]. In addition, the offender may be directed by the Minister to transfer or dispose of all or any of the shares that he or his associates hold in the designated financial institution ( the specified shares ) within a certain time and possibly subject to conditions. Restrictions on the transfer or disposal of the specified shares may also be imposed by the Minister. Finally, there is a catch all provision allowing the Minister to make such other directions as is considered appropriate. [Section 16(1) of the Banking Act]. If A Person Was Not Aware Of His Status As Substantial Shareholder Or That He Crossed The Threshold To Become A Controller, Will He Still Be Liable For An Offence? A person who was not aware of his status as substantial shareholder or that he crossed the various thresholds, with the result that he was deemed a controller, has a defence. He will not be found guilty if within 14 days of becoming aware of his contravention of the relevant section, he notifies the Minister of his contravention and takes such action with respect to his shareholding as required by the Minister. [Section 17(3) of the Banking Act]. Does A Person Have A Defence If He Was Aware Of The Contravention? A person who was aware that his shareholdings crossed the various levels so that he was deemed a controller, has a possible defence if he can establish the following: in respect of his shareholdings, the increase was a result of him, or his associates, being deemed to have an interest in share; (c) in respect of the voting power, the change was due to the increase in the voting power if his associate(s), where the associate was a close family member; the person concerned has no agreement in whatever form with the associate with respect to the shares or voting power in relation to the designated financial institution; and (d) he has within 14 days of the contravention, notified the Minister and taken such action with respect to his shareholding as required by the Minister. [Section 17(4) of the Banking Act]. Disclosure Page 16

18 What Must A Designated Financial Institution Disclose To MAS? A designated financial institution can be required to obtain and disclose the following information to MAS: whether a shareholder holds any share in the designated financial institution as beneficial owner or as trustee; and if he holds the share as trustee, to indicate as far as he can, the person for whom he holds the share (either by name or by other particulars sufficient to enable that person to be identified) and the nature of his interest. [Section 18(1) of the Banking Act]. What Are The Consequences If The Bank Does Not Comply With MAS s Request For Information? A bank that does not comply with MAS s request for information on its shareholder may be liable for an offence which carries on conviction, a maximum fine of S$250,000 and thereafter, to a further maximum fine of S$25,000 for everyday that the offence continues. [Section 18(4) of the Banking Act]. Are There Any Disclosure Requirements On A Shareholding Of A Designated Financial Institution? A shareholder can be required by MAS to disclose: the ownership of the beneficial interest in the share, ie, does it lie with the shareholder or another party. If the shareholder is holding the share as trus tee, particulars of the beneficial owner must be given; and whether any share or any voting right attached to the share, is the subject of an agreement or arrangement that allows parties to act in concert to control the shareholding or voting power of 5% or more of the shares in the designated financial institution. [Section 18(2) of the Banking Act]. What Are The Consequences If A Person Does Not Comply With MAS Notice To Disclose? Failure to comply with a notice by MAS to disclose, or knowingly or recklessly giving false information, is an offence. On conviction, the person, if an individual, faces a maximum fine of S$125,000 or imprisonment for a maximum term of 3 years or both. For everyday that the offence continues after conviction, there is a maximum daily fine of S$12,5000. Page 17

19 For every other case, the offence carries on conviction, a maximum fine of S$250,000 and thereafter, to a further maximum fine of S$25,000 for everyday that the offence continues. [Section 18(4) of the Banking Act]. DIVIDENDS Must Banks Still Write Off Goodwill Against Their Reserves Before Paying Dividends? With the repeal of section 24 of the Banking Act, banks are no longer required to write off goodwill against their reserves before paying dividends. CAPITAL REQUIREM ENTS How Much Paid-Up Capital Must Subsidiaries Of Singapore-Incorporated Banks Maintain? Subsidiaries of Singapore-incorporated banks need only maintain paid-up capital of S$100 million under a new section 9A of the Banking Act, a substantial reduction from the previous S$1.5 billion. To qualify for this reduction, the subsidiaries must be more than 50% owned by another Singapore-incorporated bank, where the latter meets the more stringent capital requirements under section 9 of the Banking Act. When Do The Changes To The Paid-Up Capital Requirements Of Subsidiaries Of Singapore- Incorporated Banks Take Effect? Since no specific period has been stipulated, presumably the changes take effect as soon as the Amendment Act came into operation. However, a grace period of 3 months to satisfy the capital requirements, has been granted to a qualifying subsidiary which already holds a licence under section 7, 11 or 79 of the Banking Act. The qualifying subsidiary has up to 17 October 2001 to ensure that its paid up capital is S$100 million. This grace period is set out in the Banking (Qualifying Subsidiary)(Transitional Provision) Order 2001, S 348 / How Much Capital Must Foreign Banks Maintain? A bank with its head office outside Singapore ( foreign bank ) must still maintain a paid-up capital of S$200 million. While the amount has not changed, what constitutes paid-up capital has. The equivalent of paid-up capital as applicable to the bank under the laws of its home jurisdiction can be taken into ac count. Further, the foreign bank s reserves may also be included for the purpose of satisfying the S$200 million capital requirement. [Section 9(9) of the Banking Act]. Page 18

20 When Do The Changes To Foreign Bank Capital Requirements Take Effect? The changes take effect from the commencement date of the Amendment Act. What Are The Implications Of A Bank Failing To Maintain The Minimum Capital Requirements? Banks, whether local or foreign, that fail to comply with the minimum capital requirements prescribed, are required to inform MAS immediately. MAS may restrict or suspend the operation of such banks or give appropriate directions to the bank. [Sections 9(7) & 9(8) of the Banking Act]. Do The Capital Requirements Apply Uniformly To All Banks? The capital requirements under sections 9 and 9A of the Banking Act are the minimum requirements applicable to all banks. However, MAS can now increase that amount for any particular bank or class of banks (but not reduce it), having regard to the risks arising from the activities of the bank or class of banks. The new risk-based approach to capital requirements is reflected in the subheading to section 10, which has been renamed as Risk-based Capital Requirements. [Section 10(1) of the Banking Act]. What Is The Capital Adequacy Ratio That Local Banks Must Maintain? While the minimum capital adequacy ratio remains at 12% for Singapore-incorporated banks, MAS now has greater flexibility to vary that ratio for any particular bank having regard to the risks arising from the activities of the bank. [Section 10(2A) of the Banking Act]. What Are The Changes That Have Been Made To The Minimum Liquid Assets Requirements? MAS now has the flexibility to impose different minimum liquid assets requirements for different banks or class of banks, having regard to the risks arising from the activities of the bank or class of banks. Further, the list of items constituting liquid assets has been updated to remove the following items: balances with banks in Singapore, net money at call in Singapore and Treasury Bills issued by the Government. [Sections 38(1) and 38(9) of the Banking Act]. Page 19

21 BANKING SECRECY How Do The Changes Affect The Current Forms Of Consents In Banks Standard Documentation? Duty of confidentiality has been imposed on the bank, in addition to the officers, under the amended section 47 of the Banking Act. Thus the consent letters must be worded to cover the liability of the banks as well as its officers. [Section 47(1) of the Banking Act]. What Information Is Subject To Banking Secrecy? The obligation to maintain banking secrecy applies to customer information. Customer information, in relation to a bank, means: any information relating to an account of a customer of the bank, whether the account is in respect of a loan, investment or any other type of transaction; or deposit information. Deposit information in turn has been defined to mean any information relating to: any deposit of a customer of the bank; funds of a customer under management by the bank; or (c) any safe deposit box maintained by, or any safe custody arrangements made by, a customer with the bank. The information in both instances must be referable to a named person or group of named persons. [Section 40A of the Banking Act]. Who Is A Customer Of The Bank For The Purpose Of Banking Secrecy? There is no comprehensive definition of a customer under the Banking Act. But a customer of the bank would include the MAS or any monetary authority or central bank of any other country or territory. It does not however, include another bank or other financial institution. [Section 40A of the Banking Act]. Page 20

22 Where Are The Exceptions To The Banking Secrecy Provision Contained? The exceptions to the banking secrecy provision are now cont ained in a new Sixth Schedule to the Banking Act. The Sixth Schedule is divided into two parts, Part I and II. Most of the existing exceptions are contained in Part I while Part II contains most of the new exceptions. [Section 47(2) of the Banking Act]. What Is The Difference Between Part I And Part II Of The Sixth Schedule? The most important difference between the two Parts is that further disclosure by the person to whom the information is disclosed, is not prohibited under Part 1, whereas persons who receive customer information under Part II of the Sixth Schedule are prohibited from disclosing that information to any other person, except as authorised under the Schedule or by an Order of Court. Thus when relying on the exceptions in Part II of the Sixth Schedule, it must be made clear to the persons to whom the information is disclosed, that further disclosure is prohibited except as authorised. Otherwise, the recipient could be liable for an offence under section 47 of the Banking Act. [Section 47(5) of the Banking Act]. What Are Some Of The New Exception To The Banking Secrecy Provision? The new exceptions to section 47 include the following: A bank may disclose customer information to designated branches and related entities, including those outside of Singapore (this applies to foreign banks) for where it is in connection with the conduct of internal audit of the bank or the performance of risk management. Customer information may be disclosed in connection with the outsourcing of the bank s operational functions. Such activities can include the printing and mailing of customer s monthly statements. (c) Disclosure may be made if this occurs in the course of bank mergers or negotiations for bank mergers, or in the course of the restructure, transfer or sale of credit facilities by banks (eg asset securitisation). The information may be disclosed to any party participating or otherwise involved in the proposed transaction. (d) Banks may disclose a customer s name, identity, address and contact number to any financial institution in Singapore for the purpose of cross-marketing of financial products Page 21

23 and services in Singapore. Apart from the above, no other customer information may be disclosed. [Part II of the Sixth Schedule]. For a comparison of the exceptions under the old section 47 and the new Sixth Schedule, please see Appendix 1. How Are Merchant Banks Affected By The Changes To Banking Secrecy? The secrecy obligation in the new section 47 also applies to merchant banks and their officers, subject to modifications as prescribed by regulation 10 and the Second and Third Schedules of the Banking Regulations [Section 47(10) of the Banking Act]. Subject to one exception, there are no material changes between the law on banking secrecy applicable to merchant banks and that which applies to banks regulated by the Banking Act. In this respect, the Second Schedule of the Banking Regulations 2001 corresponds to the amended section 47 of the Banking Act while the Third Schedule of the Banking Regulations 2001 corresponds to the Sixth Schedule of the Banking Act. The only difference relates to the exception under the Banking Act which allows a bank in Singapore to notify other banks of the cancellation or suspension of a charge or credit card. There is no similar exception for merchant banks. What Are The Implications Of A Breach Of The Banking Secrecy Provision? The breach of the secrecy provisions is an offence. For individuals, the penalty on conviction has been increased from a previous maximum fine of S$50,000 to S$125,000. In addition, there is also the possibility of imprisonment, which remains unchanged for a maximum term of three years. For the first time, the banks themselves face the possibility of paying a fine, the maximum being S$250,000. Previously, since section 47 did not impose any obligation on the bank itself, there was no offence that the bank, as opposed to its officers, could commit. [Section 47(6) of the Banking Act]. PENALTIES What Are The New Penalties For A Breach Of The Provision Of The Banking Act? Unless a specific penalty provision has been provided, the general penalty for a breach of the Banking Act is a maximum fine of S$100,000 and in the case of a continuing offence, a further fine of S$10,000 for every day that the offence continues after conviction. [Section 71 of the Banking Act]. Page 22

24 Specific penalties have been provided for inter alia the following offences: submitting false information in connection with an application for a banking licence [section 7]; becoming a substantial shareholder, or controller without obtaining prior approval [section 17]; (c) banks engaging in non-financial business which has not been authorised [section 30]; (d) banks investing in companies beyond the authorised limits [sections 31 and 32]; (e) banks investing in immovable property beyond the authorised limits [section 33]; (f) engaging in deposit taking business in Singapore without authority or benefit of an exemption [section 4A]; and (g) breach of the banking secrecy provision [section 47]. What Are The New Penalties For A Breach Of The Regulations Made Under The Banking Act? Where the regulations made pursuant to the Banking Act create an offence, the general penalty applicable in the case of individuals is a maximum fine of S$12,500 or imprisonment for a maximum term of 12 months or both. In the case of continuing offences, there is a liability to pay a maximum fine of S$1,250 for every day that the offence continues. In all other cases, the maximum fine payable is S$25,000 and in the case of continuing offences, to a further maximum fine of S$2,500 for every day that the offence continues. [Section 78(4) of the Banking Act]. Page 23

25 APPENDIX I: BANKING SECRECY EXEMPTIONS No. Exemption Old Section 47 New Sixth Schedule 1. Written consent of the customer or his personal representative Section 47(4) Part 1, Para 1 No material changes. 2. In connection with an application for grant of probate / letters of administration of deceased customer s estate Section 47(4)(h) Part 1, Para 2 No material changes except for the clarification under Para 2 that the bank must in good faith believe that the person it is disclosing the information to, is entitled to the grant of probate or letters of administration. 3. In the event of the customer s insolvency Section 47(4) Part 1, Para 3 A limitation has been introduced in that the disclosure must be necessary and must be in connection with the insolvency, ie, the bankruptcy or winding up of the customer. Thus, the bank does not have a carte blanche to disclose information just because the customer is insolvent. 4. For purpose of civil proceedings Section 47(4)(c) Part 1, Para 4 The amendments make it clear that the disclosure must be solely in connection with the conduct of civil proceedings. Further, the categories of civil proceedings have been expanded to include disclosure in connection with proceedings between the bank and one or more parties where some right or interest in or over property has been conferred or alleged to have been conferred on the bank by the customer or his surety. 5. Under compulsion of law Section 47(4)(d) Part I, Para 5 The old section 47(4)(d) allowed the bank s officials to give such information as they were required to under compulsion of law to the police or an officer duly authorised to investigate or prosecute a criminal offence. Page 24