Singapore wants to be the most important private banking and wealth management centre in the world. To this end, the Monetary Authority of Singapore has undertaken a battery of inspections at selected private banks to assess their selling and advisory practices in 2018-19.

Some private banks over-charge clients because managers do not think about pricing to an acceptable degree. Unauthorised deviations from agreed pricing arrangements that the regulator's post-trade  surveillance spotted were not reported regularly to management committees.

Front-office staff were to blame as well. A few private banks told the MAS that they overcharged some clients because their relationship managers (RMs) and assistant relationship managers (ARMs) with client-facing jobs (one struggles to imagine such people without client-facing jobs) had miscommunicated fees and charges to the clients and the MAS accepted this. As RMs and ARMs form the first line of defence, it is imperative for them to disclose things to clients clearly.

The importance of good change management cannot be understated, especially when banks make many changes to their systems and software.

Accountability and responsibility regarding pricing, the overseeing of products' life cycles and the ownership of products were not clear or well-articulated.

When system-enforced pre-trade controls to spot deviations from agreed pricing arrangements are not feasible, private banks typically undertake post-trade surveillance checks instead. These checks are performed by business control functions or independent units such as Compliance or Operations. MAS says that many post-trade checks are highly  manual and labour-intensive and asks private banks to explore the use of IT and data analysis, although it does not promise that this will be cheaper.

The regulator was also aggrieved to discover that front offices were not clear about the key performance indicators (KPIs) against which their performance was measured. This was particularly true of non-financial or behavioural targets, the weightage between financial and non-financial targets and their effect on performance evaluation and remuneration. It does not seem to like the existence of appraisal systems that benchmarked RMs against their peers.

The MAS also found that front offices did not recollect messages from senior managers at all well. They could remember 'organisational values,' whatever those are, but were unable to say how these 'values'  translated into people's expectations about their behaviour.

Front offices also did not appreciate or understand the intent and purpose of certain controls, perceiving them as overly burdensome, too 'administrative' or 'prescriptive.'

Some private banks focused mainly on the use of demerit points and penalties to discourage misconduct, with less emphasis on influencing behaviour through other means such as the recognition and celebration of exemplary conduct and role modelling. The regulator is uneasy about this and wants the boards of private banks to foster a culture of good governance and set the right "tone at the top."

What did the MAS find?

From the conversations that the MAS had with senior managers, salesmen, advisory staff and people who worked at control functions, it made some discoveries and split them into four categories: governance; investment suitability; pricing controls and disclosures; and culture/conduct.

Governance

Managers at a few private banks did not notice omissions in the reporting of pricing-related key risk indicators, and had not asked for root-cause analyses or trend analyses when they became aware of instances of over-charging during their post-trade surveillance reviews.

Most private banks have dedicated sales surveillance  or business control functions that check all sales  and  advisory activities. These are sometimes separate units (part of first line of defence), but also sometimes independent units in the risk or operations functions (second line). Most private banks also have compliance functions that periodically review the coverage and quality of checks conducted by the business control functions which have set processes for reporting any signs of non-compliance that they encounter. As we have seen, the MAS thinks that many of these processes are too ineffective and/or too manual.

Most private banks require RMs to accept clients’ trade instructions only on official recorded telephone lines or other approved and recorded channels of communication. They must keep records for five years. The MAS finds fault with banks that do not do this.

Investment suitability

It almost goes without saying that Singaporean private banks and their RMs have a duty to act in the best interests  of their clients when providing financial advice and recommending financial products. Every one of the requires every client to complete a risk-assessment questionnaire at the time when he 'steps onboard.' This allows the bank to assess his risk profile and financial needs and covers his investment objectives, his investment horizon, his loss and volatility tolerance, his financial needs or constraints from liquidity requirements, his investment experience and product knowledge, and his risk tolerance when it comes to debt. The MAS would like all banks to force their HNW clients to acknowledge the terms of their finalised risk profiles before trading commences, although few do this.

Private banks usually require clients’ profiles to be updated at least biennially and whenever there are changes to the clients’ circumstances. The MAS found cases in which RMs unduly influenced clients' responses to their risk assessment questionnaires by steering them towards higher risk profiles, the better to sell them risky products.

Most private banks require RMs to spot clients who might be 'vulnerable,' i.e. witless and easy to defraud. They do this at the time of onboarding but also periodically thereafter and the MAS approves of the few that hold off the taking of orders before each upcoming assessment is complete. It calls this "a good control."

Most private banks perform electronic pre-trade checks to spot mismatches between the products being transacted and the clients’ risk profiles. Some - but not all -  are also on the lookout for large transactions (perhaps US$10 million or a certain percentage of the clients' liquid net worth), transactions that result in product concentration in the clients’ portfolios, the use of debt by clients, trades involving unapproved products (i.e. not formally assessed, risk-rated and otherwise approved by the private bank for recommendation to clients) and trades that are inconsistent with house views (e.g. a 'buy' transaction initiated by a client on a product with a 'sell' rating bestowed by the bank’s research team) for further follow-up. Most private banks prohibit their RMs from recommending unapproved products.

Post-trade controls are typically performed by business control units, which also track the progress of RMs’ remedial actions. Compliance functions also assess the quality and effectiveness of these checks.

Pricing controls and disclosures

RMs must provide clients with adequate disclosures about prices when taking orders. These include disclosures of (i) all sales charges and other quantifiable benefits, (ii) the capacity (principal or agent) in which the private bank in question is acting, (iii) any actual/perceived conflicts of interest in dealing with product issues or affiliates, (iv) key risks associated with this-or-that transaction, such as those associated with debt and margin financing, and (v) termination clauses. They should tell clients about any deviations from agreed pricing arrangements - and there are some circumstances in which divergence is legitimate, although the MAS does not describe them - but some do not and, indeed, do not keep records of their mistakes.

The MAS mentions that some private banks "have implemented approval authorities and system workflows to approve and centrally maintain documentation of such arrangements," although it stops short of saying whether it approves of this.

One-off arrangements include a client’s limit order (by which the client wants the bank to execute a trade when a specific desired price level is met) and an order where the RM has promised him a specified or better price. A few banks require their RMs to seek approval for, and centrally record, such one-off arrangements through a system workflow. Most, however, leave them to manage such one-off arrangements on their own and rely only on voice logs for records. Again, the MAS merely states this as an observation without expressing a preference.

Order-taking standards set out the information about transactions that RMs must give to their clients, such as the name of a product and its features, the currency, the price, the quantity and the order type (i.e. a market or limit order).

All private banks provide clients with standard fee schedules (which set out the range of fees that the banks charge for all categories of investment products and services) at the time of account opening or prior to the times when the clients issue their first orders. The MAS has found that some fee schedules lack details and are not sufficiently comprehensive because they omit certain products, especially structured products.

Most private banks require RMs to inform clients (and obtain their agreement) before executing trades if prices exceed the fee schedules. Most also monitor deviations from fee schedules, although in most cases they do not cover all products. The regulatory inspections revealed that private banks ought to improve the processes by which they control the bilateral pricing arrangements that they have agreed with clients.

Culture and conduct

The main point that we have not yet covered on this topic is the MAS's insistence that private banks ought to be mindful of sub-cultures. Several private banks have swelled their front offices through new hires and acquisitions of other firms. They should be alert to the 'risk' of sub-cultures forming under such circumstances - a phenomenon that the MAS clearly does not like because it undermines the efforts of compliance departments to build cohesive cultures and align them with the banks' objectives.