Malaysia’s new financial services regulatory framework
July 2013 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
The Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) will be two of the most significant pieces of legislation to impact the Malaysian financial services industry when they come into force. Both legislations received Royal Assent and were gazetted in March 2013. Anticipated to come into force by the end of June 2013, the FSA consolidates and repeals the Banking and Financial Institutions Act 1989, the Payment Systems Act 2003, the Insurance Act 1996 and the Exchange Control Act 1953 while the IFSA consolidates and repeals the Islamic Banking Act 1983 and the Takaful Act 1984.
Both Acts were introduced to provide for the regulation and supervision of financial institutions, payment systems and other relevant entities, as well as oversight of the money market and the foreign exchange market. Their principal regulatory objective is to promote financial stability by fostering the safety and soundness of financial institutions, the integrity of the money market and foreign exchange market, business conduct of financial institutions, and consumer protection.
This article seeks to provide a summary of key provisions of the FSA and the IFSA.
The Financial Services Act 2013
Financial Holding Company. The FSA empowers the financial regulator, namely the Central Bank of Malaysia, also commonly known as Bank Negara Malaysia (BNM), to exercise oversight over financial groups by introducing the concept of a Financial Holding Company (FHC).
An FHC is defined as a company which holds an aggregate of more than 50 percent interest in shares in a licensed entity, or holds an aggregate of less than 50 percent of shares but has control in a licensed entity. Further, the FHC must be an entity that is approved by BNM to be an FHC.
FHCs based outside Malaysia may not be directly caught by the FSA as the Act does not provide BNM with extra-territorial jurisdictional powers to enforce the FSA outside Malaysian jurisdiction. However, BNM may require its local licensed entity to propose another company within its corporate group to be approved as an FHC in Malaysia. BNM has the authority to approve more than one company within a group as an FHC.
An FHC can only carry on the business of holding investments (directly or indirectly) in corporations which are primarily engaged in financial services, unless otherwise approved by BNM. Hence, an FHC may be required to divest its interests in non-financial businesses.
Consumer protection and proper business conduct. The FSA grants BNM the authority to undertake various actions to ensure that financial services providers are fair, responsible and professional when dealing with financial customers. Financial services providers are governed by the standard of prohibited business conduct tabled under Schedule 7 of the Act. Any contravention of these standards will attract a hefty fine of no more than RM10m or imprisonment, or both. Institutions are expressly prohibited from exerting undue pressure and influence on consumers to make debt repayments and to collude with other persons to fix or control the features or terms of any financial product or service.
Further, where complaints are concerned, financial customers can now direct them to a financial ombudsman who will then handle such complaints fairly and effectively.
Powers of BNM. Under this new regime, BNM is endowed with wide powers to intervene and ensure sound risk management and good governance policies. BNM’s powers are broad, including the ability to restrict the institution from carrying on with a business arm and dispose of investments and assets if it deems necessary.
Through BNM’s ability to vet directors and senior officers, it may intervene in an institution’s operations. This intervention even extends to the shareholders of institutions as BNM now has the power to order share transfers or share issues to take place. Amongst its vast powers, BNM has the power to remove directors, CEOs and senior officers, reduce the share capital of institutions, appoint a receiver and manager, and assume control of an institution in certain circumstances.
Where criminal offences are concerned, the FSA provides that imprisonment is only available for individuals and for strict liability offences. Previously, imprisonment was imposed for offences committed by individuals at senior management levels and above. Now, this restriction is no longer applicable as it extended to anyone who forms part of the decision making process. An offence committed by an institution is considered to be committed by its directors, officers and anyone concerned with the planning, coordinating, directing or decision making of the institution.
The Islamic Financial Services Act 2013
Apart from the principal objective of the IFSA discussed above, the IFSA also aims to promote compliance with Shariah principles. To achieve this, it entrenches BNM’s role as Shariah regulator, imposes stringent requirements on Shariah governance mechanisms and caters to the specificities of Islamic financial products and operations which are based upon various types of Shariah contracts.
Shariah governance and compliance. The IFSA intends to strengthen the foundations for end-to-end Shariah governance and compliance, support the effective application of Islamic contracts in the offering of Islamic financial products and services, from entering into a contract to the resolution of a failed Islamic financial institution, and align legal and regulatory principles with Shariah precepts and promote greater legal and operational certainty.
The main distinction between the FSA and the IFSA lies in the IFSA’s extensive requirements on Shariah governance and ensuring Shariah compliance. The IFSA statutorily enforces management of Shariah non-compliance risk and requires Islamic financial institutions to ensure that their aims, operations, business, affairs and activities are in compliance with Shariah principles at all times. Specifically, the IFSA: (i) entrenches the role of BNM as Shariah regulator; (ii) embeds Shariah principles and BNM Shariah Advisory Council (SAC) rulings; (iii) strengthens Shariah governance and compliance requirements; (iv) makes it an offence for IFIs to carry on Shariah non-compliant activities and imposes heavy penalties in relation to Shariah compliance matters; and (v) gives BNM wide powers to assess, intervene, direct and penalise IFIs in relation to offences and breach of IFSA provisions.
The FSA and the IFSA may be aptly described as an evolution rather than a revolutionof the financial regulatory system in Malaysia as it marks a gradual shift away from the laissez-faire and self-regulatory approach of the previous regime towards one of increased regulation and corporate accountability.
Amy Tan Ai Fen is a senior associate and Stella Lee Siew Tsin is an associate at Zaid Ibrahim & Co. Ms Tan can be contacted on +60 (3) 2087 9999 or by email: firstname.lastname@example.org.
© Financier Worldwide
Amy Tan Ai Fen and Stella Lee Siew Tsin
Zaid Ibrahim & Co.