The FSA fined J P Morgan Securities Ltd £33.32 million for failing to protect client money by segregating it appropriately.

Under the FSA’s client money rules, firms are required to keep client money separate from the firm’s money in segregated accounts with trust status.  This helps to protect client money in the event of the firm’s insolvency.

Between 1 November 2002 and 8 July 2009, JPMSL failed to segregate the client money held by its futures and options business (F&O) with JPMorgan Chase Bank N.A (JPMCB).  The error occurred following the merger of JPMorgan and Chase. Instead of being held overnight in a segregated money market account, JPMSL’s F&O client money was held in an unsegregated account with JPMCB. This error remained undetected for nearly seven years.

During this period, the client money balance held by the F&O business of JPMSL varied between $1.9 billion (in December 2002) and $23 billion (in October 2008). Had the firm become insolvent at any time during this period, this client money would have been at risk of loss.

Good evening.  I am glad that the Singapore Corporate Awards has gained in reputation since its inauguration in 2006.  However, I cannot say the same for the global financial industry.  Even now, the Greek sovereign debt crisis threatens to spread its contagion effects to the international financial markets.

GOVERNANCE AS A STRATEGIC ADVANTAGE

Singapore must never end up with any sovereign debt problem.  There will be no European Union to bail us out.  And long before we call in the IMF, investors would have taken fright and capital taken flight.

So, let me reiterate the importance of good governance, both political and corporate.

One essential requirement of good governance is fiscal responsibility, in particular, not spending beyond your means.  More than a balanced budget, given Singapore’s lack of resources, our small and open economy and our vulnerabilities to external events, we need to build up healthy reserves for a rainy day and to safeguard our future.  But for our reserves during the recent financial storm, we would not have weathered it without mishap.  For example, the government would not have been able to credibly guarantee bank deposits at short notice to prevent an outflow of funds to other financial centres, which offered such a guarantee.  More importantly, we had the resources to roll out quickly bold schemes like the Jobs Credit scheme and SPURS.  Together, these schemes helped companies to hold on to their workers, and to use the downturn to send their workers for training and upgrading.  So, not only did we keep unemployment low through the crisis, but our companies were also able to ramp up quickly to meet the surge in orders when the global economy recovered.

Good governance is central to Singapore’s competitiveness as a business hub.  Our hard-earned reputation for political stability, integrity, rule of law, sound accounting frameworks and a strong commitment to efficiency and effectiveness has made Singapore an attractive place for global businesses.  For these reasons, the “Doing Business Report 2010″ by the World Bank recently ranked Singapore as the country with the most conducive environment for business.

While the government has created this favorable environment, the corporate sector must build on it through good corporate governance.  Though we also have a good reputation here, we can do more.

To raise standards, MAS established the Corporate Governance Council in February 2010.  The Council will use the backdrop of the recent financial crisis to review Singapore’s Code of Corporate Governance.  What lessons have we drawn?  What needs to be updated?  What are other jurisdictions doing?  Can we adapt their solutions to suit our circumstances?  How can we provide better guidance to directors and management on improving their corporate governance practices?  How can we address gaps in the training and professional development of directors to promote higher standards of board performance?  These are some questions that the Council will address.

ROLE OF BUSINESSES

However, formal regulations and guidelines can only go so far.  Neither the Code of Corporate Governance nor MAS’ Corporate Governance Regulations can spell out all the scenarios of good corporate governance.  As you know too well, any corporation can write high-minded statements of corporate governance but the hard part is believing in and living those values.  I will touch on three key areas in which you as corporate leaders can play a leading role in strengthening the values and practice corporate governance.

SUBSTANCE OVER FORM

First, corporate governance is not simply about complying with rules or reporting requirements.  Boards of directors and senior management need to internalize the values, spirit and purpose behind the rules.

Take for example, the area of risk management.  An OECD report in June 2009 found that excessive emphasis appears to have been given to corporate risk reporting, without sufficiently considering how the information generated for risk reporting could be used for the companies’ strategies in growth and risk management.  The corporate casualties during the global financial crisis showed how this could have devastating consequences.  To prevent this, the board’s role must extend beyond corporate reporting to using the information to exercise proper oversight of risk management.  This includes setting the risk appetite of the company and monitoring that risks are managed properly on an enterprise-wide basis.

RIGHT SKILLS AND MINDSET

Second, good governance requires people with the appropriate skills and mindset.  While having a comprehensive risk management framework is necessary, human expertise and judgment are equally important.  One key learning point from the financial crisis was that financial institutions which experienced more significant problems during the crisis tended to apply a “mechanical” approach to risk management, without exercising expert judgment to challenge the outputs of quantitative risk models.

It is incumbent on boards to identify the skill sets required of directors and to keep those skill sets updated.  Directors need to take personal responsibility to ensure that they devote sufficient time to attend relevant training and to apply their judgment well.

SETTING THE RIGHT TONE

Lastly, boards of directors set the overall tone for the culture within their companies.  Boards need to take a broader and a longer-term view when setting directions for their companies, balancing the drive to generate earnings with appropriate guidance on the level of their companies’ risk appetite.  Remuneration structures must strike the right balance between incentivizing profit-maximization and discouraging excessive risk taking.  Independent directors serve as a check and balance to management, ensuring that the interests of the company and its shareholders are protected.  In financial institutions like banks and insurance companies, customers’ interests especially must be protected.

CONCLUSION

In conclusion, improving corporate governance is a collective responsibility.  For Singapore to continue thriving as an international financial and business centre, it is incumbent on all corporate leaders to take ownership of this responsibility, and to lead by example at your companies.  A study done by the Singapore Management University showed that investors are willing to pay a premium for companies with high standards of corporate governance.  Therefore, it follows that the more accountable and transparent a company, the more likely institutional investors would invest in the company.

It is in this context that I commend the Singapore Exchange and Business Times for organizing the Singapore Corporate Awards.  Spotlighting good practitioners of corporate governance not only shows others that it can be done but also raises the bar for others to emulate.  I congratulate the winners of the Singapore Corporate Awards tonight for your exemplary contributions to good corporate governance.  May your success inspire others to do likewise.

FSA regulated firms should carry out risk assessments of the money laundering and financial crime risks that they are exposed to. However, between September 2006 and November 2008, Alpari failed to carry out thorough assessments and, as a result, put the firm at risk of being used to further financial crime.

Alpari failed to carry out satisfactory customer due diligence procedures at the account opening stage and failed to monitor accounts adequately. These failings were particularly serious as Alpari’s customer base included those from higher risk jurisdictions, such as Nigeria, and its customer relationships did not operate on a face to face basis.

Alpari also failed to have in place adequate systems for screening customers against UK and global sanctions lists and for determining whether customers were politically exposed persons (PEPs).

Despite increasing its customer base from 400 to 11,500 live accounts between mid 2007 and mid 2008, Alpari did not expand its compliance and anti-money laundering function in line with the rest of the business and placed too much responsibility on Chattopadhyay.

Margaret Cole, director of enforcement at the FSA, said:

“The FSA expects firms to assess the financial crime risks to which they are exposed properly. The FSA also expects expanding businesses to commit sufficient resource to their compliance and anti-money laundering functions. Alpari failed to operate and maintain adequate money laundering systems and controls, leaving it open to the risk of financial crime.”

The proposals under the consultation paper represent an evolution of the existing regulatory regime for the fund management industry.  Fund Management Companies ["FMCs"] whose activities are limited in scale and impact may continue to operate under a notification regime and be subjected to certain conditions.   This is similar to the existing framework for exempt fund managers.  FMCs who serve retail investors and/or manage or advise on a larger portfolio of assets will have to be licensed.  MAS also intends to require all FMCs to meet business conduct as well as capital requirements.

Under the proposed business conduct requirements, FMCs will need to maintain customers’ monies and assets with independent custodians, ensuring segregation of duties between the functions of fund management and fund administration.  FMCs will also need to have compliance arrangements which are commensurate with the size and scale of the FMCs’ business. These requirements aim to enhance safeguards against theft or misappropriation of customers’ monies.

The CFTC complaint alleges that, since at least August 28, 2009, defendant Song engaged in a series of unlawful commodity futures transactions involving Natural Gas and Hearing Oil futures contracts on the New York Mercantile Exchange. Through this allegedly unlawful scheme, Song repeatedly made non-competitive, fictitious trades between his personal account and the hedge fund account of his employer, Singapore-based Woori Absolute Partners, where he is a director. Since August 28, 2009, according to the complaint, Song’s personal account has profited by more than $348,000 through this illegal scheme of non-competitive, fictitious trades, while Woori’s account has lost a corresponding amount.

The DFSA proposes to make significant enhancements to the DIFC’s Collective Investment Funds regime to better align it with international trends and practices, thereby making it more attractive to both fund managers and participants in the funds industry. The Funds Regime is mainly contained in the Collective Investment Law 2006 and the Collective Investment Rules module of the DFSA Rulebook. Other modules of the DFSA Rulebook are also relevant, for example, the IFR module, which contains the Rules relating to Islamic Funds and the FER module, which contains Rules relating to fees applicable to Funds.

In June 2009, the DFSA established the Funds Regime by a Market Practitioner Panel, which comprised members with industry-wide expertise relating to the managed funds industry. The remit of the Panel was to review the DFSA’s Funds Regime and present to the DFSA recommendations that would better promote the growth of the Funds industry in the DIFC, while remaining fully compliant with the relevant principles of the International Organization of Securities Commissions (IOSCO).

The Panel presented its Report to the DFSA on 30 September 2009. It contains wide-ranging recommendations arranged under 10 issues. While the Panel found our Funds Regime fit for purpose, these recommendations suggest significant enhancements to that regime, to make it more usable by fund managers and industry practitioners.

The DFSA published the Panel Report on 19 October 2009, seeking public comments on the Panel recommendations. The period for public comment closed on 4 December and we received 4 sets of comments. While most of those comments were strongly supportive of the Panel recommendations, there were some differing views as to the nature of improvements that could be made to the Funds Regime. We have taken into account those comments in formulating the proposals in this consultation paper.

The remedial action includes the resignation of the Damas Board, the appointment of a new Board to govern Damas, and measures to enhance the governance, systems and controls of Damas so as to protect the company, its assets and shareholders’ interests.  Damas has also agreed to the appointment of new auditors for the fiscal year commencing 1 April 2010.

The sanctions include financial penalties against Damas, Tawhid, Tawfique and Tamjid Abdullah, and voluntary bans, for periods up to 10 years, on the Abdullah Brothers from acting as Directors of Damas or any company in the Dubai International Financial Centre.

Today’s announcement follows an investigation by the DFSA into “unauthorised transactions” that were announced to the market by Damas on 15 October 2009.

In April 2008, the Commission issued an order under Section 4d of the Commodity Exchange Act permitting NYMEX and clearing member futures commission merchants to hold customer positions and associated funds held in connection with NYMEX’s clearing of specific futures contracts traded on or subject to the rules of the DME with other funds held in the segregated account. CME Clearing and NYMEX wish to amend the order to include four new financially-settled option and swap futures contracts that will be listed for trading on or subject to the rules of DME and cleared by NYMEX through CME Clearing.

The work of the committee, set out in today’s discussion paper, would update the “wider implications process,” which is often triggered once a problem has already had an impact on both the industry and consumers.

The Discussion Paper considers the current position for redress and complaints handling in the financial services industry and any potential changes. It is a joint publication by the Financial Services Authority, the Office of Fair Trading, and the Financial Ombudsman Service.

Sheila Nicoll, FSA director of conduct policy said:

“Complaints handling is a priority area within the FSA’s intensive supervision agenda. The co-ordination committee is a clear indication of the intention, and will, of the authorities to work even more closely together to improve the experience of consumers, and to avoid problems happening in the first place.”

Excerpt:

“Domestic and global GDP levels have stabilized and are showing signs of recovery. However, the exact path of the UK’s recovery is still uncertain and will be influenced by the way in which vulnerabilities present in the government, household, corporate and financial sectors unfold, as well as the path of the global economy. Our central scenario, based on a consensus of the main private sector forecasting institutions, is for UK economic growth to accelerate steadily throughout 2010. Household spending and business investment will stabilize, but weaknesses will persist. This scenario places the UK economy on a ‘V’-shaped growth path, but depends on external demand as the principal driver of recovery. In this base case scenario it should be possible to combine sustained, steady economic recovery with fiscal consolidation and gradual deleveraging by households and parts of the non-financial corporate sector. But continuing high leverage will, for a number of years, leave many households and companies more vulnerable to any economic shocks that lead to higher interest rates or falling income. This will mean continued high risks for financial firms”.