New custody rules seen lifting Singapore insurer costs

Oct 24, 2018

Insurance firms in Singapore will need to review existing custodian agreements or even renegotiate them in view of incoming rule changes, regulation experts say.

New custody rules seen lifting Singapore insurer costs

Tighter rules on the custody of assets in Singapore in just over a year's time are likely to raise the compliance costs of insurers operating there, believe regulation experts.

As a result of the looming changes, existing contracts between insurers and custodians will have to be reviewed in the coming months and in some cases may even have to be renegotiated, some told AsianInvestor.

As it stands, a consultation paper published in November 2016 by the Monetary Authority of Singapore (MAS) on the appointment of custodians and fund managers by insurers is on course to come into force in 2020. The most recent feedback round was in late August.

“The purpose [of the new guidelines] is to ensure that assets of insurance funds stay safe,” said Damayanti Shahani, managing director at Principium Consulting, a consultancy based in the Lion City that is focused on compliance and regulations related to the financial services industry.

“To achieve this, the new rules bring changes in three areas: the selection of custodian and sub-custodians’ the agreements with custodians and the reporting of such arrangements to the regulator,” she said.

While it is possible that some of the proposed new measures (see box below) might already be standard practice for the larger, global insurance players, regulation specialists believe most current custodian agreements are unlikely to fulfil the requirements set out by MAS.

“The changes require more resources to be allocated to doing the necessary due diligence checks on custodians prior to appointments,” Nithi Ganesan, head of Singapore for ComplianceAsia, said.

It also means allocating resources to periodically review the internal controls of custodians, in addition to reviewing and making any changes to the custodian contracts to adhere to the new MAS guidelines.

“One aspect of increased safeguards is to amend provisions in the custodian agreements to include mandatory requirements such as the requirement to set assets belonging to the insurer kept separate from other assets and to set out the extent of the custodian’s liability in the event of loss of assets of caused by fraud, wilful default or negligence,” she told AsianInvestor.

Principium's Shahani noted that the overall goal is to ensure that the custodian's controls remain appropriate in relation to protection of the insurer's assets, adding that regulatory enhancements to enhance customer asset protection have been on the rise in Singapore.

Other changes are also on the horizon for insurers, such as the tripartite advisory on human capital practices for insurance, which was unveiled on October 8.

"This sets out good human resource practices to be adopted to focus on employee skills and training to begin work force transformation," said ComplianceAsia's Ganesan.

MAS is also in the process of making updates to its risk-based capital requirement framework for insurers, she added.

Highlights of the new rules
The regulations require insurers to hand over assets to regulated custodians only, with that requirement extending even to sub-custodians. The requirement for insurers to consider custodian practices, procedures, internal controls, financial strength, general reputation and standing prior to appointment and have good financial standing will be extended to local custodians, and not just overseas custodians. There are guidelines around ongoing monitoring of custodians as well. For example, custodians should be assessed at least annually or when the insurer becomes aware of any material change such as adverse news. There are also guidelines on how to report asset information to MAS. There are two new templates, one which requires reporting by aggregate asset class with each custodian and another that requires reporting by each individual asset held with the custodian.

Highlights of the new rules

The regulations require insurers to hand over assets to regulated custodians only, with that requirement extending even to sub-custodians.
The requirement for insurers to consider custodian practices, procedures, internal controls, financial strength, general reputation and standing prior to appointment and have good financial standing will be extended to local custodians, and not just overseas custodians.
There are guidelines around ongoing monitoring of custodians as well. For example, custodians should be assessed at least annually or when the insurer becomes aware of any material change such as adverse news.
There are also guidelines on how to report asset information to MAS. There are two new templates, one which requires reporting by aggregate asset class with each custodian and another that requires reporting by each individual asset held with the custodian.