I INTRODUCTION

In May 2018, Malaysia found itself in the unfamiliar territory of having a new government at the helm after the opposition Pakatan Harapan's historic victory in the 14th general election in May 2018, the country's first change of government after 61 years of rule by the incumbent Barisan Nasional government. On the international front, the global economy of 2018 started off on a positive note following expectations for stronger growth momentum from the previous year. However, as the year progressed, multiple factors such as the escalation of trade conflicts, renewed volatility in commodity prices and global financial markets combined to moderate growth trends. On the domestic side, Malaysia's economy likewise had a positive start to 2018 that subsequently met with external and domestic challenges. Major policy and significant political shifts, arising from global trade tensions and the change of government, became sources of uncertainty for the economy. Unanticipated supply disruptions in the mining and agricultural sectors, as well as commodity exports, stifled Malaysia's economic performance, resulting in a greater-than-expected moderation in growth. Domestic demand continued to anchor growth, supported mainly by private sector expenditure. 2

The Malaysian economy grew by 4.7 per cent in the fourth quarter of 2018 (down from 5.9 per cent in 2017), with a value of 1.23 billion ringgit at constant and 1.43 billion ringgit at current prices,3 and is projected to expand by 4.3 to 4.8 per cent in 2019, with domestic demand continuing to be the key driver, underpinned by continued expansion in private sector activity. Overall, the Malaysian economy is expected to sustain its growth momentum against a backdrop of a challenging global environment, including slower-than-expected global growth, prolonged uncertainty surrounding Brexit in the United Kingdom, and unresolved trade disputes between China and the US.4

The ringgit saw a mixed performance in 2018, despite its strong performance in the first quarter of 2018. In the first quarter, the ringgit's performance was mainly driven by non-resident portfolio inflows as the increased overnight policy rate in January signalled a sustained strong growth outlook for the economy. However, from April onwards, the expectation of a faster pace of monetary policy normalisation in the US and the strengthening of the US dollar led to non-resident portfolio outflows from regional economies, including Malaysia. As at the end of August 2018, the ringgit depreciated against US dollar as external uncertainties continue to drive non-resident portfolio outflows and a strengthening US dollar.5 The ringgit appreciated marginally against the US dollar during the fourth quarter of 2018, despite non-resident portfolio outflows from the domestic bond and equity markets.6

The total size of the Malaysian capital market amounted to 3.1 trillion ringgit in 2018 compared with 3.2 trillion ringgit in 2017 and 2.84 trillion ringgit in 2016; equity market capitalisation contracted, by 10.8 per cent, to 1.7 trillion ringgit, compared to 1.9 trillion ringgit in 2017. Overall, the bond market totalled 1.4 trillion ringgit as at 31 December 2018, which is an increase of 8.8 per cent from the 1.3 trillion ringgit recorded at the end of 2017. Malaysia continued to maintain its position as the third-largest local currency bond market as a percentage of gross domestic product in Asia, after Japan and South Korea, and continued to lead the world sukuk market in 2018, accounting for 1.9 trillion ringgit. Malaysian corporate bonds and the sukuk market reported a combined total issuance of 105.45 billion ringgit in 2018, a decrease of 15.56 per cent from the 124.88 billion ringgit in 2017.7

Malaysia's financial services industry has traditionally been a key driver of its economic development, and is the foundation of the Financial Sector Blueprint (FSB), the 10-year master plan implemented by the Bank Negara Malaysia (BNM) for managing Malaysia's transition towards becoming a high-value-added, high-income economy.8 However, exactly how the new government will continue the objectives of the FSB has yet to be confirmed, as the inaugural months of the Pakatan Harapan administration opened with an increased focus on good governance and curtailing corruption while reviewing and streamlining infrastructure investment.

The number of licensed banking institutions in Malaysia on the BNM website currently stands at 57, comprising 32 domestic banking institutions and 25 foreign-owned banking institutions.9 There are also 16 Islamic banks, 11 of which are domestically owned, and 11 investment banks, all of which are domestically owned.10

The five main local banking groups are:

  1. Malayan Banking (Maybank);
  2. Public Bank;
  3. CIMB Bank;
  4. RHB Bank; and
  5. Maybank Islamic.

All (other than Maybank Islamic) have widespread branch networks, affording them access to inexpensive funding sourced from retail deposits. All (other than Maybank Islamic) have affiliated Islamic and investment-bank subsidiaries.

Top 10 banks in Malaysia by asset size (ringgit) as at the end of 2018
Institution Asset size (million ringgit)
Malayan Banking 806,992
CIMB Bank 534,089
Public Bank 419,693
RHB Bank 243,166
Maybank Islamic 225,215
Hong Leong Bank 195,530
AmBank 137,881
United Overseas Bank (Malaysia)* 112,975
OCBC Bank (Malaysia)* 94,518
HSBC Bank Malaysia 83,922
Data sourced from 2018 annual reports or financial statements (unless otherwise stated). *As at 30 September 2018

II THE REGULATORY REGIME APPLICABLE TO BANKS

In line with the FSB, the regulatory and supervisory framework of Malaysia in respect of the banking and finance sector was recently consolidated and updated under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) (collectively, Acts), both of which came into force on 30 June 2013, simultaneously consolidating and repealing the Banking and Financial Institutions Act 1989 (BAFIA), the Islamic Banking Act 1983, the Insurance Act 1996, the Payment Systems Act 2003 and the Exchange Control Act 1953. The Acts aim to provide a regulatory framework for both the conventional financial and shariah-compliant sectors, and endow the BNM with greater powers to counter future risks to stability in the financial sector, increase consumer protection and promote competition in the financial services sector. The Acts also contain provisions that preserve every guideline, direction, circular or notice previously issued under any repealed legislation in relation to any provision of the Acts prior to their coming into force.

Malaysia has also established its own mid-shore jurisdiction on the island of Labuan, off the coast of Borneo, which was declared an international offshore financial centre in October 1990 to complement the activities of the domestic financial market in Kuala Lumpur. Labuan is regulated and administered by the Labuan Financial Services Authority (Labuan FSA) pursuant to the Labuan Financial Services Authority Act 1996 (Labuan FSA Act). In 2008, the jurisdiction was renamed the Labuan International Business and Financial Centre (Labuan IBFC), and an entity called Labuan IBFC Incorporated was established as the jurisdiction's marketing arm in 2008. The Labuan FSA and the Labuan IBFC work together to promote Labuan IBFC's reputation as the premier mid-shore international business and financial centre in the Asia region. Entities operating in the Labuan IBFC are subject to federal laws that are specific to the Labuan IBFC. Labuan banks are subject to the Labuan Financial Services and Securities Act 2010 (LFSSA) and Labuan Islamic banks are regulated under the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA).

i The BNM

The BNM is a statutory body wholly owned by the government that was established under the Central Bank of Malaysia Act 1958 and continues to operate under the Central Bank of Malaysia Act 2009 (CBA), which became effective on 25 November 2009. The BNM reports to the Minister of Finance (Minister) and keeps the Minister informed of policies governing the monetary and financial sector.

The BNM is empowered to act as the regulator of banking institutions under the Acts and the CBA. The CBA confers the necessary powers and instruments on the BNM to achieve its mandates effectively, and legitimises the duality of both the conventional and the Islamic financial systems in Malaysia, and in doing so establishes the legal foundation for the development of an Islamic financial system within the Malaysian financial system.

The BNM's primary objectives include the prudent conduct of monetary policy, financial system stability, and the development of a sound and progressive financial sector. In carrying out the aforementioned, the BNM is responsible for advising the government on macroeconomic policies and the management of public debt. It is also the sole authority for issuing currency and managing the international currency reserves of the country. Other functions of the BNM include the regulation and supervision of financial institutions as described below, and the monitoring and supervision of payment systems, money markets and foreign exchange markets.

From a supervisory perspective, the BNM is empowered by the Acts to regulate banking institutions, and does so by way of a risk-based supervisory (RBS) approach that monitors and reviews the manner in which all financial institutions identify, control and deal with their respective business risks.

ii Securities Commission

In addition to the foregoing, financial institutions and investment banks that provide capital markets services are regulated by the Securities Commission (SC), a statutory body with investigative and enforcement powers established under the Securities Commission Act 1993 (SCA).

The SC is the regulatory body mandated to regulate the Malaysian capital market, and is directly responsible for the regulation, supervision and monitoring of all persons licensed under the Capital Markets and Services Act 2007 (CMSA) with the core objective of investor protection. The SC is also primarily responsible under the CMSA for encouraging and promoting the development of the securities and derivatives markets, and for the monitoring and supervision of public-listed companies to ensure compliance with securities laws.

The CMSA constitutes a single framework regulating the offering and licensing of capital market services, market conduct, issuances of securities, and the conduct of takeovers and mergers. Debt issuances (bond and sukuk) in Malaysia require the approval of the SC, and are further governed by various guidelines and practice notes issued by the SC under the CMSA.

iii Companies Commission of Malaysia

Banks in Malaysia fall under the general supervision of the Companies Commission of Malaysia (CCM), as the FSA and the IFSA require incorporation under the Companies Act 2016 (CA) for the undertaking of banking business. However, the IFSA provides for international Islamic banks to do business through either a locally incorporated company or a branch registered with the CCM, whereas banks in Labuan are required to be incorporated or registered under the Labuan Companies Act 1990.11

iv Labuan FSA

The Labuan FSA is the sole statutory body responsible for the regulation, supervision and development of the Labuan IBFC under the Labuan FSA Act. According to the Labuan FSA website, the objectives of the Labuan FSA include promoting and developing Labuan as an international centre for business and financial services; implementing national objectives, policies and priorities for the development and administration of international business and financial services in Labuan; and acting as the central regulatory, supervisory and enforcement authority of the international business and financial services industry in Labuan.

The foregoing includes the licensing and regulation of licensed entities operating within the Labuan IBFC, and supervision over those entities to ensure their compliance with the applicable domestic and international standards and best practices.

The Labuan FSA is also responsible for the development of policies for the conduct of business and financial services in the Labuan IBFC, and administration of several crucial pieces of legislation, including the LFSSA and the LIFSSA, subject to the general directions and control of the Minister.12

v Development Financial Institutions Act 2002

The Development Financial Institutions Act 2002 (DFIA) provides for the BNM to be responsible for the regulation and supervision of specialised financial institutions known as development financial institutions (DFIs), established by the government to specifically develop and promote national strategically important socioeconomic sectors such as agriculture, small and medium-sized enterprises, infrastructure, maritime, export-oriented sectors, capital-intensive and high-technology industries.

The provisions of the DFIA empower the BNM to monitor the activities and financial performance of these institutions and their main objective, which is to provide specific financial products and services to cater to their respective focus areas; and to ensure that DFIs are resilient, efficient and able to fulfil their respective mandates in a financially sustainable manner, while contributing to the overall stability of the financial system.

In January 2016, further amendments were made to strengthen the regulatory framework of the DFIA in line with the evolving role of DFIs in supporting Malaysia's socioeconomic development. The new amendments enhance provisions in the DFIA on corporate governance, business activities and the scope of the BNM's regulatory oversight to ensure sound financial management and an improvement in the operational efficiency and resilience of DFIs. Other amendments incorporate new provisions for the regulation of shariah governance and consumer protection, with enforcement tools to ensure compliance.

In 2018, BNM collaborated with the World Bank and DFIs to develop an enhanced performance measurement framework for DFIs. BNM is also engaging with the government to review the DFI landscape to take into account developments in the financial system and changes in Malaysia's economic structure and priorities.13

At present, there are six DFIs prescribed under the DFIA: Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & Sederhana Malaysia Berhad, Export-Import Bank of Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Bank Pertanian Malaysia Berhad (Agrobank).14

Licensing

Under the Acts, all persons undertaking banking business, investment banking or insurance business are required to hold a valid licence granted by the Minister. These businesses continue to fall within the oversight of the Ministry of Finance and the BNM. The Minister is the authority for the issuance or revocation of licences to carry on banking business, insurance business and investment banking business, or the imposition of conditions on those licences, and has the power to carry out investigations in certain circumstances. Specifically, licences for commercial and investment banks are issued under the FSA, whereas licences for Islamic banks and international Islamic banks are issued under the IFSA.

The CMSA provides that any person wishing to carry out capital market activities (save for registered persons) is required to be licensed by the SC, the sole authority that issues and approves licences for capital market intermediaries engaging in the regulated activities prescribed under the CMSA. Under the CMSA single licensing regime, capital market intermediaries that are fit and proper are issued with a licence that will enable them to carry on one or more regulated activities.

The two main types of licences are new capital markets services licences, which are granted to principals, and new capital markets services representatives' licences, which are granted to representatives of a principal, enabling licensed representatives to carry out one or more regulated activities on that principal's behalf.15

In Labuan, the LFSSA empowers the Labuan FSA to grant licences for the conduct of Labuan banking business, which means the following:

  1. the business of receiving deposits on current accounts, deposit accounts, savings accounts or any other accounts as may be specified by the Labuan FSA;
  2. Labuan investment banking business;
  3. Labuan financial business;
  4. Labuan Islamic banking business; and
  5. such other business as the Labuan FSA, with the approval of the Minister, may specify, in any currency (including the ringgit where permitted by the Acts or such other relevant law in force).

The LIFSSA also empowers the Labuan FSA to grant licences for the conduct of Labuan Islamic banking business (i.e., the carrying on of Labuan banking business in compliance with shariah principles.

III PRUDENTIAL REGULATION

i Relationship with the prudential regulator

From a corporate governance perspective, the Acts codify the duties of the directors of financial institutions, and place stringent requirements for transparency on the directors of financial institutions and their holding companies. Directors are required to disclose to the board of directors the nature and extent of any direct or indirect interest in a material transaction or material arrangement with the financial institution where they hold office. Further, under the Acts, the approval of the BNM is required for the appointment, election, reappointment and reelection of the chairperson, directors and chief executive officer of a financial institution.

In addition, the Acts provide that the BNM has the power to specify fit and proper requirements to be complied with by the chairperson, directors, chief executive officer and senior officers of a financial institution and, in the case of Islamic financial institutions, members of the shariah committee. The requirements may include minimum criteria relating to probity, personal integrity and reputation; competency and capability; and financial integrity. The BNM has complete discretion in determining whether the fit and proper requirements specified have been complied with.16

The aforementioned RBS approach17 is primarily implemented by the BNM through the adoption of risk profiles, best practices, sound governance and proper risk management systems within the internal oversight process of each institution with the objective of anticipating and managing future risks; and identifying and resolving weaknesses within the processes of each institution. The BNM further facilitates the RBS approach by ensuring the quality of the membership of directors and senior management of financial institutions, inculcating a culture of workforce risk management and ethics, and reliance on the opinion of independent audit and actuarial professionals appointed by financial institutions.

To further ensure the proper division and coordination of their respective legislative responsibilities in respect of investment banks in particular, the BNM and the SC jointly issued the Guidelines of Investment Banks pursuant to Section 126 of the BAFIA (now repealed) and Section 158 of the SCA. The Guidelines specifically provide that the BNM will be responsible for the prudential regulation of investment banks to ensure safety and soundness in the interests of depositors, and that the SC will be responsible for the business and market conduct of investment banks to promote market integrity and investor protection in the capital market.18

The BNM also has stringent fit and proper tests, which are set out in further guidelines contained in the Fit and Proper Criteria of June 201319 issued under the FSA, which should be read together with the Corporate Governance guidelines issued in August 2016 (CG Guidelines.20 The BNM also issued Fit and Proper Criteria in June 2017 for the DFIs, as prescribed under the DFIA.

The CG Guidelines are applicable to, inter alia, banks, investment banks, Islamic banks and financial holding companies (i.e., companies approved by the BNM to hold more than 50 per cent of the shares of a licensed financial institution), and set out the minimum standards of corporate governance that the BNM expects local financial institutions to adopt, which are consistent with the long-term viability of the aforesaid institutions.

Based on the fundamental concepts of responsibility, accountability and transparency, the CG Guidelines contain provisions that set out management and audit oversight, accountability and transparency together with key responsibilities of the board of directors and senior management of financial institutions. Overall, the CG Guidelines seek to encourage a corporate culture that reinforces ethical, prudent and professional behaviour, beginning with the example to be set by the board and senior management of the core values of a financial institution. Similar guidelines have been issued that are applicable to DFIs.21

ii Management of banks

Further to the foregoing, the CG Guidelines require boards of directors of banking institutions to establish specialised board committees to oversee critical or major functional areas, to address matters requiring detailed review or in-depth consideration, and to be responsible for the decisions of those committees. These specialised committees help to discharge the functions of the board and comprise the following, as set out in the CG Guidelines:

  1. a nominations committee responsible for the following matters concerning the board of directors, senior management and company secretaries:
    • board appointments and removals;
    • the overall composition of each group;
    • measures for evaluation of the performance and development of directors, senior managers and company secretaries; and
    • fit and proper assessments and evaluations;
  2. a remuneration committee responsible for reviewing the remuneration of directors, and actively overseeing the design and operation of remuneration systems of financial institutions;
  3. a risk management committee responsible for formulating risk management strategies that include identification of the nature of and exposure to risks involved in banking, and methods used to identify, monitor, manage and control each risk, and the nature and frequency of evaluation procedures of risk management systems;
  4. an audit committee to provide independent oversight of the internal and external audit functions and internal controls, and ensuring checks and balances within the financial institution; and
  5. in the case of Islamic financial institutions, a shariah committee to provide oversight on shariah compliance.

In addition, the aim of the CG Guidelines is to ensure that risk-taking activities and business prudence are appropriately balanced so as to maximise shareholders' returns and protect the interests of all stakeholders, and they contain principles dealing with board matters, management oversight, accountability and audit and transparency.

The CG Guidelines should be read together with the Acts, the CA and other relevant regulations, guidelines and circulars relating to corporate governance that the BNM may issue from time to time.22

iii Regulatory capital and liquidity

The Acts provide that the BNM has the power to prescribe standards on prudential matters (including liquidity and capital adequacy) to be complied with by financial institutions to promote the sound financial position of an institution, and the integrity, professionalism and expertise in the conduct of the business, affairs and activities of an institution. Pursuant to such powers, the BNM issued the liquidity coverage ratio (LCR) framework in August 2016 as per Basel III requirements (see below), which provides that banking institutions must maintain sufficient stock of high-quality liquid assets (HQLA) to withstand an acute liquidity stress scenario for a 30-day horizon at both the entity and consolidated levels. The LCR framework, which took effect on 25 August 2016, supersedes the LCR guidelines issued on 31 March 2015 and the Liquidity Framework and Liquidity Framework issued in July 1998, and provides that banking institutions shall hold, at all times, an adequate stock of HQLA such that it maintains a minimum LCR of 70 per cent, achieved by January 2016, rising to 100 per cent by January 2019 and thereafter. In addition, banking institutions are required to comply with the framework at (1) their respective entity and global operational level on a stand-alone basis; and (2) a consolidated level, which includes both (1) aforementioned and the consolidation of all subsidiaries, save for insurance and takaful subsidiaries.23 As at January 2019, all banking institutions reported LCR levels of above the 100 per cent minimum ratio.24

In addition to the Acts, the CBA provides that for the purpose of conducting monetary operations, the BNM may require financial institutions to deposit a reserve with it, and prescribe the principles and method for the determination of that reserve. Pursuant thereto, in January 2016, the BNM issued the Statutory Reserve Requirement Guidelines,25 which came into effect in February 2016 for the purpose of liquidity management, whereby financial institutions (conventional and Islamic) are required to maintain a statutory reserve requirement (SRR) balance in their statutory reserve accounts equivalent to a certain proportion of their eligible liabilities, this proportion being the SRR rate (currently 3.5 per cent.26 In this case, eligible liabilities comprise ringgit-denominated deposits and non-deposit liabilities, net of interbank assets and placements with the BNM, subject to the adjustments, exclusions and deductions prescribed under the SRR rules. In the past, and in addition to the SRR, Malaysian financial institutions were required to set aside a percentage of their profits as buffers under the repealed Banking and Financial Institutions Act 1989. The BNM announced in May 2017 that these buffers were no longer needed with the phasing-in of the Basel capital conservation buffer. Instead, financial institutions must maintain a set minimum amount of capital funds at all times.27 It is now possible for the existing reserve funds to be distributed as dividends, which was not possible previously.28

The Acts also provide that a financial institution may only be licensed if its capital funds are equal to or exceed the minimum amount prescribed by the Minister. Pursuant thereto, the BNM issued the Guidelines on Capital Funds and the Guidelines on Capital Funds for Islamic Banks in 2013 (updated in 2017) to ensure that financial institutions maintain a minimum amount of capital to operate and perform their functions.

The Guidelines on Capital Funds provide that the minimum capital funds that must be maintained by commercial banks and investment banks are as follows: for a domestic bank (by itself or in aggregation with its related corporation that is a licensed investment bank), 2 billion ringgit; for a locally incorporated foreign bank, 300 million ringgit; and for a stand-alone investment bank, 500 million ringgit.29 Under the Guidelines on Capital Funds for Islamic Banks, banking entities are required to maintain 300 million ringgit as a minimum capital fund.30

In December 2010, the Basel Committee on Banking Supervision (Basel Committee) finalised a package of measures to strengthen global capital and liquidity rules with the goal of strengthening the resilience of the global banking system. The rules are detailed in the documents Basel III: A global regulatory framework for more resilient banks and banking systems (revised) and Basel III: International framework for liquidity risk measurement, standards and monitoring (collectively, Basel III).

The BNM issued a circular implementing Basel III in 2010 that set out its approach to incorporating elements of each reform into Malaysia's domestic regulatory and supervisory framework, with the regulator's expectations of banking institutions in managing the transition to the new regime. The circular provides that the BNM supports the implementation of these reforms, and will strengthen the existing capital and liquidity standards for banking institutions in Malaysia to be in line with Basel III, and that the BNM aims to implement Basel III reforms in Malaysia in accordance with globally agreed levels and is working on an implementation timeline for the gradual phasing-in of the reforms between 2013 and 2019.31

In addition to the foregoing, and to facilitate the monitoring of Basel III reform implementation, identification of transitioning issues and assessment of potential impact on the financial system, the following requirements were imposed on financial institutions by the BNM:

  1. minimum regulatory capital requirements imposed under the Capital Adequacy Framework (Capital Components) and the Capital Adequacy Framework for Islamic Banks (Capital Components) issued by the BNM, which basically fulfil Basel III capital adequacy requirements. The guidelines require banking institutions to maintain a minimum risk-weighted total capital ratio of 8 per cent at all times at entity, global and consolidated levels; and
  2. reporting requirements on financial institutions with regard to their Basel III leverage and liquidity prior to formal implementation of the new standards.32

In November 2012, the BNM issued its regulatory capital adequacy framework (Capital Adequacy Framework (Capital Components) (2012 Framework)), implementing the Basel III reforms. The capital requirements promulgated by the BNM provided that banking institutions were required to maintain the following minimum capital ratios for the calendar years stated: a Common Equity Tier 1 (CET1) capital ratio of 3.5 per cent in 2013, 4 per cent in 2014 and 4.5 per cent in 2015; a Tier 1 capital ratio of 4.5 per cent in 2013, 5.5 per cent in 2014 and 6 per cent in 2015; and a total capital ratio of 8 per cent from 1 January 2013 onwards. The 2012 Framework provided that these capital requirements would be supplemented by a leverage ratio, an LCR and a net stable funding ratio (NSFR). Further, banking institutions were required to maintain additional capital buffers above the minimum CET1, Tier 1 and total capital ratios set out above in the form of a capital conservation buffer and a countercyclical capital buffer based on a percentage of total risk-weighted assets.

The BNM then issued its guidelines on the Capital Adequacy Framework (Capital Components) in October 2015 (2015 Framework) for banking and financial institutions, which superseded the 2012 Framework. The provisions of the 2015 Framework do not differ greatly from the 2012 Framework, but seek to enhance it so that Malaysian regulations can better conform with Basel III. The 2015 Framework provides detailed formulae for calculating the capital conservation buffers and countercyclical buffers, determined from an operational perspective, and provides that banking institutions and their holding companies are required to comply with the provisions of the 2015 Framework both at the entity and consolidated levels.33

The BNM subsequently issued its guidelines on the Capital Adequacy Framework (Capital Components) in August 2017 (2017 Framework) for banking and financial institutions. The aim of the 2017 Framework is to incorporate loss absorption mechanisms via write-off for Additional Tier 1 and Tier 2 Islamic capital instruments that are structured using equity-based shariah contracts such as wakalah, musyarakah or mudarabah.34 The BNM issued fresh guidelines on the Capital Adequacy Framework (Capital Components) in February 2018 (2018 Framework) for banking institutions, to be read together with the Capital Adequacy Framework (Basel II – Risk-Weighted Assets) Guidelines. The 2018 Framework supersedes the 2017 Framework.35

The implementation of Basel III standards remained a key focus of banks' regulatory and supervisory activities in 2018. The leverage ratio requirement took effect on 1 January 2018 with a minimum ratio of 3 per cent, and the BNM announced in October 2018 the extension of the net stable funding ratio (NSFR) observation period to 31 December 2019. The NSFR requires banks to maintain sufficient stable funding in relation to their asset profile and off-balance sheet obligations over a one-year horizon. While most banking institutions are expected to be well-positioned to meet the NSFR minimum requirement of 100 per cent, the BNM is conducting further work on the liquidity risk management practices of banking institutions as additional input to the finalisation of the NSFR requirements. Although progress in the implementation of NSFR globally remains uneven, the Bank remains committed to its implementation in Malaysia and aims to finalise the NSFR requirements in the first half of 2019.

In the first half of 2019, BNM will issue proposals on enhanced regulatory requirements and policy measures for domestic systemically important banking institutions (D-SIBs) to reduce the probability and impact of their distress or disorderly failure on the financial system and the economy. This will include requiring D-SIBs to hold additional capital buffers in the form of Common Equity Tier 1. In light of the increasing size, complexity and regional footprint of some domestic banking groups, it is crucial to hold these banking groups to higher prudential standards to ensure their continued resilience and reduce the moral hazard associated with expectations of publicly funded bail-outs. The Bank also completed a review of technology risk management standards to ensure that new and emerging dimensions of risk are managed appropriately, in particular from increased exposures to cyber threats and compromised access to confidential data.36

iv Recovery and resolution

The CA was introduced in early 2017, repealing and superseding the Companies Act 1965 for the most part. As with corporations, financial institutions are subject to general legislation for corporate insolvency, now contained within Part IV of the CA. The modes of winding-up proceedings under the CA include compulsory and voluntary winding up and the appointment of receivers and managers over a corporation. The Act also contains provisions relating to corporate voluntary arrangements and judicial management in Part VIII (corporate rescue mechanisms), which came into force on 1 March 2018, together with the Companies (Corporate Rescue Mechanism) Rules 2018. However, specialised frameworks for addressing the failure of financial institutions to pay their debts as they fall due exist separately under the Acts and the Malaysia Deposit Insurance Corporation Act 2011 (MDICA).

Consumers who make deposits into financial institutions in Malaysia are protected by an insurance scheme known as the Perbadanan Insurans Deposit Malaysia (PIDM) (or the Malaysia Deposit Insurance Corporation (Corporation)) pursuant to the provisions of the MDICA. As a measure that promotes financial stability within the financial system, the PIDM ensures that depositors are insured against the loss of their deposits (subject to a threshold of 250,000 ringgit per depositor per financial institution) in the event of loss caused by the failure of a financial institution holding their deposits.

The provisions of the MDICA empower the Corporation to assume control of a non-viable financial institution, and to acquire and take control of non-performing loans that are outstanding between financial institutions, borrowers and security providers through the appointment of a conservator.

The MDICA further provides that upon the appointment of a conservator, a moratorium shall take effect during which, inter alia, no action, suit or proceeding may be commenced or continued against the Corporation, the conservator or the financial institution, any petition for the winding up of the financial institution shall be dismissed, no receiver, receiver manager or liquidator may be appointed over the financial institution, and no steps may be taken to enforce any security over the assets of the financial institution.37

The MDICA also provides that the BNM may provide written notice to the Corporation if the BNM is of the opinion that a financial institution has ceased to be viable or is likely to cease to be viable, whereupon the Corporation is empowered to, inter alia:

  1. require the financial institution to take any step or action or refrain from any act or thing, in relation to itself, its businesses or its officers, to cease soliciting, taking or repaying deposits, or carry on its business or such part of its business as the Corporation may direct, or to restructure the whole or part of its business as may be specified by the Corporation;
  2. acquire or subscribe to the shares of the financial institution;
  3. assume control over the member institution, carry on the whole or part of its businesses, and manage the whole or part of its assets, liabilities and affairs, including disposal of its assets or businesses or any part thereof, or appoint any person to do so on behalf of the Corporation;
  4. apply for the appointment of a receiver, a manager or a receiver manager, to manage the whole or part of the assets, liabilities, businesses and affairs of the financial institution;
  5. subject to the approval of the Minister, present a petition for the winding up of the financial institution;
  6. with the approval of the Minister, designate one of its subsidiaries as a bridge institution; or
  7. transfer such assets and liabilities of the non-viable financial institution to the bridge institution on terms as the Corporation shall determine.38

The Acts themselves provide measures for addressing the insolvency of financial institutions that distinguish between conventional and Islamic banks whereby the BNM itself acts as a resolution authority, and with the prior approval of the Minister by an order in writing, is empowered to assume control of the whole or part of the business, affairs or property of a financial institution, manage the same, or appoint any person to do so on behalf of the BNM in the event that the BNM is of the opinion that certain circumstances exist in relation to the financial institution concerned, including the following:

  1. the assets of the institution are not sufficient to give adequate protection to its depositors, policy owners, participants, users or creditors, as the case may be;
  2. the capital of the institution has reached a detrimental level or is eroding in a manner that may detrimentally affect its depositors, policy owners, participants, users, creditors or the public generally; and
  3. the financial institution has become or is likely to become insolvent, or is likely to become unable to meet all or any of its obligations.39

The Acts provide the BNM with further powers in the event of insolvency whereby it may:

  1. make an application to appoint a receiver and manager over the whole or part of the business, affairs or property of the financial institution;40
  2. with the prior approval of the Minister, by an order in writing, vest in a bridge institution or any other person the whole or part of the business, assets or liabilities of the financial institution;41
  3. with the prior approval of the Minister, provide financial assistance to another institution or any other person to purchase any shares, or the whole or any part of the business, assets or liabilities, of the financial institution;42 and
  4. recommend to the Minister, and the Minister may, upon such recommendation, authorise the BNM to file an application for the winding up of a financial institution.43

The Acts generally provide that the provisions of the CA shall apply to the winding up of an institution, unless specifically provided otherwise. However, no application for the winding up of a financial institution may be presented by any person without the prior written approval of the BNM.44

In conclusion, the Acts provide that in the winding up of investment banks and Islamic banks, the assets of a banking institution shall be available to meet all liabilities of that licensed investment bank in respect of all deposits in Malaysia as a priority over all other unsecured liabilities of those banking institutions in Malaysia, other than preferential debts set out in the CA and debts due and claims owing to the government under the Government Proceedings Act 1956.45

IV CONDUCT OF BUSINESS

Under the Malaysia Deposit Insurance Corporation Act 2011, conduct of, inter alia, the following activities would require licensing under the provisions thereof:

  1. banking business, which means the business of accepting deposits on current accounts, deposit accounts, savings accounts or other similar accounts; paying or collecting cheques drawn by or paid in by customers; and provision of finance;
  2. investment banking business, which means the business of accepting deposits on deposit accounts, and the provision of finance; and any regulated activity carried on pursuant to a capital markets services licence under the CMSA; and
  3. such other activities as the BNM, with the approval of the Minister, may prescribe.

Under the IFSA, conduct of, inter alia, the following activities would require licensing under the provisions thereof:

  1. Islamic banking business, which means the business of accepting Islamic deposits on current accounts, deposit accounts, savings accounts or other similar accounts, with or without the business of paying or collecting cheques drawn by or paid in by customers, accepting money under an investment account, or the provision of finance;
  2. international Islamic banking business, which means Islamic banking business in currencies other than the ringgit or such other business in point (c) below; and
  3. such other activities as the BNM, with the approval of the Minister, may prescribe.

International Islamic banks carry on Islamic banking business in currencies other than the Malaysian ringgit. The Guidelines on International Islamic Banks issued by the BNM in 2008 provide that Islamic banking business in international currencies includes the following: commercial banking business, investment banking business, and other banking businesses in Malaysia, as may be specified by the BNM.46

The LFSSA and the LIFSSA provide that the Labuan FSA may grant a Labuan banking licence, a Labuan investment banking licence, a Labuan Islamic banking licence, a Labuan Islamic investment banking licence or such business licence as the Labuan FSA, with the approval of the Minister, may specify. Labuan banks holding any of the aforementioned licences would only be allowed to undertake business activities in currencies other than the Malaysian ringgit in, from or through the Labuan IBFC, subject always to the relevant exchange control restrictions imposed under the Acts.

The Rules on Prohibited Business Conduct were issued by the BNM in 2016 pursuant to the provisions of the Acts, which prohibit financial services providers from engaging in conduct deemed inherently unfair to financial consumers. These rules reinforce existing standards of business conduct and consumer protection issued by the BNM by way of the following:

  1. ensuring consumers are not provided with misleading or deceptive information in connection with a financial service or product;
  2. preventing unreasonable business practices that intimidate or exploit financial consumers;
  3. preventing business practices that restrict the freedom of financial consumers to choose between financial services or products available to them; and
  4. preventing collusive business practices that may result in unfavourable outcomes to financial consumers.

In addition to the foregoing, the Financial Services (Financial Ombudsman Scheme) Regulations 2015 and Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015 (Regulations) were issued in September 2015. The Regulations established the Financial Ombudsman Scheme (FOS) as contemplated under the FSB to ensure the effective and fair handling of complaints and the resolution of disputes against member banking institutions for direct financial loss, within prescribed monetary limits, which include 250,000 ringgit in respect of disputes relating to financial service, and 25,000 ringgit for disputes on unauthorised transactions involving payment instruments, payment channels or cheques.

The FOS commenced operations in 2016.47 Its operations are funded by its banking institutions' members and governed by a board of directors made up of independent individuals who are not in active employment, nor have a significant interest in any banking institution. To avoid duplicity and inconsistency, the Acts further provide that a dispute referred to the FOS may not be further referred to the Tribunal for Consumer Claims under the Consumer Protection Act 1999. However, the service does not constitute a replacement for the Malaysian courts.48

As the responsible authority under the Malaysian Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, the BNM is tasked with disseminating financial intelligence received from reporting entities to the law enforcement agencies tasked to investigate money laundering and terrorism financing activities. The Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Banking and Deposit-Taking Institutions (Sector 1) Guidelines also state the obligations of reporting institutions and common red flags with respect to the banking sector.

The BNM has continuously sought to strengthen money laundering and terrorism financing controls and practices among banking institutions. This is reflected in the increased resources allocated to, and investments in, screening and transaction monitoring systems, and improved practices in the conduct of customer due diligence. Further enhancements in governance and control measures were put in place to improve processes for identifying transactions designed to evade tax and for assessing risks associated with politically exposed persons.

In 2018, the legal and regulatory framework continued to be strengthened to counter money laundering and terrorism financing risks, which constitutes one of the main objectives for the BNM in 2019. The Companies Act was revised to improve transparency in the ownership of legal persons registered in Malaysia. Owing to the recent proliferation of digital currencies, the BNM has also taken the steps to extend the AML/CFT obligations to digital currency exchangers by issuing the Anti-Money Laundering and Counter Financing of Terrorism Policy for Digital Currencies (Sector 6) to ensure that effective measures are in place against money laundering and terrorism financing risks associated with the use of digital currencies and to increase the transparency of digital currency activities in Malaysia.49

In 2018, Malaysia's effort to preserve the integrity of the financial system and combat money laundering and terrorism financing risks have resulted in the Financial Action Task Force (FATF) Plenary upgrading Malaysia's technical compliance ratings of its AML/CFT framework. This places Malaysia among jurisdictions that are highly rated for their technical compliance with FATF Recommendations. The National Coordination Committee to Counter Money Laundering (NCC) has also endorsed the results of the National Risk Assessment (NRA), which will provide important inputs for the NCC to review the National AML/CFT Strategic Plan in 2019 to further enhance the identification of, and safeguards against, money laundering and terrorist financing threats and vulnerabilities at the national level.

The SC has also been active in undertaking regulatory reform, and introduced the Lodge and Launch (LOLA) Framework for wholesale offerings of unlisted capital market products in June 2015, which constituted a major revision of its capital markets product authorisation rules. The LOLA provides an avenue for unlisted capital market products offered to sophisticated investors (comprising accredited investors, high-net-worth entities and high-net-worth individuals) to be made available to such investors once specific information has been lodged with the SC via an online submission system, which significantly reduces the time to market.

The Netting of Financial Agreements Act 2015 (NFAA), which came into force in March 2015, contains provisions for the enforceability of close-out netting for financial transactions in Malaysia. Close-out netting is an important risk-management mechanism used by financial institutions and other financial market participants in financial derivative transactions and repurchase transactions. The enforceability of close-out netting provides credit risk reduction and mitigation benefits by allowing counterparties to net off credit risk exposures instead of having gross exposures, thus improving operational efficiency and reducing systemic risk of the financial system.

It is also anticipated that the NFAA will enhance the efficiency of the financial markets in Malaysia, as banking institutions would be able to deal more competitively with foreign counterparties globally, develop new hedging instruments and innovative financial products, and facilitate the further development of a vibrant and competitive financial market.50

In 2016, the BNM introduced the Financial Technology Regulatory Sandbox Framework (Framework) to enable the deployment and testing of innovations and advances in financial technology (fintech) in live environments within specified parameters and time frames. The Framework sets out a conducive regulatory environment that harnesses the potential of fintech to modernise, deepen and inject competition in the domestic financial and funding markets. Through the Framework, the BNM aims to facilitate the growth and development of Malaysia's financial sector by encouraging innovation in financial services and the introduction of new business models, solutions and enhancements in customer value and experience; and improvements in the efficiency and risk management of financial institutions.51 The Financial Technology Enabler Group was established by the BNM in June 2016. It is responsible for formulating and enhancing regulatory policies to facilitate the adoption of technological innovations in the Malaysian financial services industry.

In 2017, the BNM spearheaded a tripartite effort between the Malaysian Anti-Corruption Commission and the Inland Revenue Board of Malaysia for strategic cooperation in combating financial crimes, tax evasion and corruption. This joint strategic cooperation aims to combine the powers and resources of each agency to restrain financial crimes, especially those involving corruption and tax evasion. It is hoped that this joint effort will strengthen the country's financial system, increase national revenue, and build a nation free from corruption and abuse of power.

V FUNDING

The primary sources of funding for banks in Malaysia are deposits (fixed, demand, savings, investment deposits, etc.), which include negotiable instruments of deposits and repurchase agreements. The money and foreign exchange markets are also integral to the funding of the banking system. These are governed by the Code of Conduct for Malaysia Wholesale Financial Markets, which came into effect on 2 May 2017. This Code and the Guidelines on Repurchase Agreement Transactions, issued by the BNM in 2015, set out the principles and standards to be observed by market participants in wholesale financial markets. The Code of Conduct for Malaysia Wholesale Financial Markets sets out the eligibility requirements for dealers and brokers, market conduct and internal control requirements to safeguard the professionalism and integrity of the wholesale financial markets and the role of industry associations in preserving market integrity, while the Guidelines on Repurchase Agreement Transactions set out the scope of the repurchase agreement that can be conducted by licensed banks and licensed investment banks to promote sound risk management practices.52

Throughout 2015, the Islamic banking sector completed an industry-wide exercise to migrate customers' Islamic deposit accounts into Islamic deposits or investment accounts according to the requirements of the IFSA. During the exercise, which was carried out over the subsequent two years, customers, depending on their risk appetite, could choose to convert their deposits into investment accounts that offered different rates of return but were not principal-guaranteed. By the end of 2018, investment intermediation activities had continued to grow, whereby total investment accounts managed by Islamic banks amounted to 82.6 billion ringgit, compared to 2017, when investment accounts amounted to 79 billion ringgit.53

VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Reporting requirements

The Acts provide that financial institutions carrying on banking business under the FSA and Islamic banking business under the IFSA must be public companies incorporated under the CA. Consequently, the reporting obligations for substantial shareholders under the CA apply to substantial shareholders of Malaysian financial institutions. A substantial shareholder is a person who has an interest of at least 5 per cent of the interests in the voting shares of a company. Notice in writing of the acquisition of a substantial shareholding must be given to the company and the SC within three days for a company whose shares are quoted on a stock exchange, and five days for any other case, from the date a person becomes a substantial shareholder. A substantial shareholder is also required to file a notice of change in their interests or notice of cessation of a substantial shareholding within three days for a company whose shares are quoted on a stock exchange, and five days for any other case, from the date of a change or date of cessation, as the case may be. The changes made in the CA regarding substantial shareholders provide for good governance practices by enhancing and refining the relevant provisions pertaining to transactions involving directors and substantial shareholders by way of rules relating to substantial property transactions and persons connected with directors or substantial shareholders; and disclosure principles to avoid conflicts of interest.54

ii Share transactions

The Acts provide that all approvals are required on two levels: first, prior to the commencement of negotiations, and subsequently, prior to the execution of the relevant transaction agreements. Approval is required for direct and indirect acquisitions of shares in a financial institution.

iii Acquisition

The Acts require the approval of the BNM or the Minister for the acquisition of interest in shares that exceed prescribed percentages, or result in a change in control, of a financial institution. An interest in shares is defined under Schedule 3 of the Acts, and includes both legal and beneficial interest in shares. Such an interest arises when a person enters into a contract to acquire shares or has a right to have a share transferred to them. A person is deemed to have an interest in shares if he or she holds shares jointly with another person. This does not apply in certain instances, such as when the interest is held by a person as security or as bare trustee.

Consequently, the Acts require a person to obtain the prior approval of the BNM for:

  1. entering into an agreement to acquire an interest in shares that would result in him or her holding an aggregate interest of 5 per cent or more of shares in a licensed person;
  2. entering into an agreement to acquire an interest in shares that would result in the acquirer holding an aggregate interest in shares of a financial institution of, or exceeding, any multiple of 5 per cent or the percentage holding triggering a mandatory offer under the Malaysian Code on Take-Overs and Mergers 2016; and
  3. entering into any agreement that will result in him or her holding an aggregate of more than 50 per cent of the interest in shares of a financial institution.

A person's interests are aggregated with shares held by his or her spouse, children, family corporation and persons acting in concert with him or her for the purposes of determining interests held, or to be held, by a person in a financial institution.

iv Control

The Acts require a person to obtain the prior approval of the Minister if he or she takes control of a financial institution. In this case, control means the acquirer has an interest of more than 50 per cent of the shares in a financial institution; or, unless proven otherwise, has the power to, inter alia, appoint the majority of the directors of a financial institution, or to make and implement business and administration decisions of a financial institution, or is a person in accordance with whose directions, instructions or wishes the directors or senior officers of a financial institution are accustomed or under an obligation to so act.

v Disposal

The Acts also require a person who has an aggregate interest in shares of a financial institution of more than 50 per cent, or 50 per cent or less but with control over the financial institution, to obtain the approval of the Minister before entering into an agreement that would result in that person holding less than a 50 per cent interest in shares in, or ceasing to have control over, the licensed person.

vi Sharing threshold for individuals

The Acts stipulate that an individual may own a maximum interest of 10 per cent of the shares in a financial institution. However, solely in the case of the IFSA, this threshold may be waived by the BNM if it is satisfied that an individual will not exercise control over the financial institution and has given a written undertaking not to exercise control over the financial institution. No such provision for waiver is provided for under the FSA.

vii Reconstruction, amalgamation and transfers

The Acts require the prior approval of the Minister, upon recommendation by the BNM, for any agreement or arrangement for the reconstruction or amalgamation of a financial institution. The Acts also require the prior written approval of the BNM for any agreement or arrangement to transfer the whole or part of the business of a financial institution. Consequently, the prior approval of the Minister or the BNM (as the case may be) would have to be applied for and obtained if the acquisition of a financial institution is to take place through the acquisition of business and assets.

viii Foreign ownership of financial institutions

The current position was established by a statement made by the then Prime Minister on 27 April 2009 and as announced by the BNM in April 2009 with regard to the liberalisation of the financial sector as contemplated under the FSB, whereby flexibility is allowed for the following thresholds for foreign equity ownership in banking and financial institutions in Malaysia: up to 70 per cent in investment banks, insurance companies and Islamic banks, subject to domestic Islamic banks maintaining a paid-up capital of at least US$1 billion; and up to 30 per cent in conventional commercial banks.

Priority will be accorded to investors who have the capacity to contribute in areas of Malaysia's financial sector where growth is required and in new areas of growth, or in areas that will reinforce Malaysia's position as an international Islamic financial hub.

VII THE YEAR IN REVIEW

As has already been mentioned, 2018 was a year in which economic growth began to moderate while remaining resilient, despite the country experiencing a change of government for the first time in the country's history. The economy was also confronted with several external and domestic challenges. Overall, the strong fundamentals and highly diversified structure of the Malaysian economy have accorded Malaysia the ability to weather challenges posed by global volatility. With the benefit of flexible and pre-emptive domestic policies ensuring the minimisation of risks while its external position remained healthy, with a current account surplus, adequate international reserves and manageable external debt exposure, the Malaysian economy remains resilient, and is widely expected to sustain its growth momentum in 2019.55

VIIi OUTLOOK AND CONCLUSIONS

In mid-2017, Malaysia pioneered the issuance of green sukuk. On 27 July 2017, the SC announced the debut of the world's first green sukuk under the Sustainable and Responsible Investment (SRI) Sukuk Framework launched in 2014.56 This issuance was the result of high-level collaboration between the SC, the BNM and the World Bank Group to 'to develop an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to accommodate global infrastructure needs and green financing'.57 In 2018, the SC continued to lead initiatives to establish Malaysia as a regional leader for sustainable and responsible investment (SRI) in 2018 by establishing a 6 million ringgit green SRI sukuk grant scheme in 2018 to incentivise issuances of green SRI sukuk by defraying up to 90 per cent of external review costs in relation to obtaining green certification.58

In the ASEAN region, Malaysia is also one of the ASEAN countries that observes the ASEAN Green Bond Standards, introduced by the ASEAN Capital Markets Forum in 2017 and ASEAN Social Bond Standards and ASEAN Sustainability Bond Standards, both introduced by the ASEAN Capital Markets Forum in October 2018. The region now has a complete suite of standards to accelerate the development of sustainable finance in the region.59 In addition, going forward the government has emphasised in the Mid-Term Review of the Eleventh Malaysia Plan 2016–2020: New Priorities and Emphases its determination to support development of green projects, green technologies and green industries through financing mechanisms such as green sukuk financing to fund development of green projects. The Green Technology Financing Scheme 2.060 will be continued to provide financing for development of green technologies and green industries.61

In line with its commitment to further strengthen corporate governance, the BNM issued enhanced standards in August 2016 to raise the corporate governance bar to strengthen the conditions for strong and effective boards, with greater emphasis on a sound risk culture and remuneration system in promoting prudent risk-taking. The key changes introduced in the standards include addressing issues arising from more complex organisational structures and business models of financial institutions that have expanded in size and across borders, namely:

  1. strengthened requirements on board composition, including that the majority of the directors should be independent;
  2. enhanced expectations for boards and their committees, including a requirement to approve and maintain credible recovery and resolution plans under conditions of stress;
  3. an expectation for boards to set a tenure limit for independent directors that should not generally exceed nine years;
  4. requirements for financial institutions to adopt a code of ethics that promotes ethical, prudent and professional behaviour supported by a transparent whistle-blowing policy;
  5. expanded requirements on remuneration arrangements that promote a sound risk culture and are aligned with prudent risk-taking; and
  6. strengthened expectations for effective group-wide governance arrangements.62

The Securities Commission also issued the Malaysian Code on Corporate Governance (Code) in 2017, which places more emphasis on internalisation of corporate governance culture, not just among listed companies, but also encourages non-listed entities – including state-owned enterprises, small and medium-sized enterprises and licensed intermediaries – to embrace the Code.63

In December 2016, the BNM introduced a Supplementary Notice64 to its existing Foreign Exchange Administration Rules (issued on 30 June 2013) to enhance the foreign exchange market through the following measures:

  1. allowing residents to freely and actively hedge their foreign currency exposure with a licensed onshore bank up to a limit of 6 million ringgit per client per bank, subject to a declaration of non-participation in speculative activities;
  2. allowing residents with domestic ringgit borrowing to invest in foreign currency assets both onshore and abroad up to a limit of 50 million ringgit;
  3. allowing resident and non-resident fund managers to manage their foreign exchange exposure up to 25 per cent of their invested assets, subject to registration with the BNM;
  4. allowing offshore non-resident financial institutions to participate in the Appointed Overseas Office Framework (AOO Framework);65
  5. expanding the AOO Framework to include non-resident financial institutions; and
  6. requiring exporters to convert 75 per cent of their proceeds into ringgit.

In 2017, the BNM issued Supplementary Notice No. 2, which sets out additional hedging flexibilities to further facilitate foreign exchange risk management. For example, the hedging framework is expanded to include other major currency pairs. Again in 2017, it issued Supplementary Notice No. 3, which lays down additional hedging flexibility.66 In 2018, the BNM issued Supplementary Notice No. 4, which introduces greater flexibility in the management of export proceeds, flexible hedging of foreign currency obligations and wider access for non-residents to the onshore market financial market.67

On 18 February 2018, the BNM issued the Anti-Money Laundering and Counter Financing of Terrorism Policy for Digital Currencies (Sector 6) (Policy Document) to ensure that effective measures are in place against money laundering and terrorism financing risks associated with the use of digital currencies and to increase the transparency of digital currency activities in Malaysia.68 Recently the Capital Markets and Services (Prescription of Securities)(Digital Currency and Digital Token) Order 201969 came into force on 15 January 2019, and it allows the SC to regulate digital assets as prescribed securities. The offering of prescribed securities, as well as its associated activities, will require authorisation from the SC and need to comply with the relevant securities laws and regulations.70 The SC will put in place guidelines to regulate the offering and trading of digital assets. To implement the regulatory framework on digital assets, the SC and the BNM will enter into coordination arrangements to ensure compliance with laws and regulations under the purview of both regulations. This regulatory framework is expected to be launched by the end of the first quarter in 2019.71

Further to the foregoing, the BNM established the Financial Markets Committee (FMC) in May 2016,72 which was entrusted with formulating strategies to further develop the domestic financial market and provide an effective engagement platform to discuss potential issues and risks related to the development of the financial market. Since its inception, proactive measures have been introduced to develop the onshore foreign exchange market, mitigate speculative activities and correct imbalances that existed within the onshore foreign exchange market. The FMC issued 'Updates on Malaysian Financial Market' on 21 December 2017 outlining the results of the FMC's various initiatives.

In conclusion, Malaysia has a strong financial system that is the result of many decades of good work and systematic development. The strength of the BNM's institutional arrangements has been tested, and has always been proven in times of change and uncertainty. Although fundamental shifts in political and social dynamics have made the regulatory and policymaking environment increasingly challenging, we firmly believe that Malaysia will maintain its role at the forefront of banking and financial regulation, and continue its outstanding work towards a better future for all Malaysians.


Footnotes

1 Rodney Gerard D'Cruz is a partner at Adnan Sundra & Low.

2 BNM's Annual Report 2018 (Executive Summary) (http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_ar&ac=42&en).

4 The Ministry of Finance's Economic Report 2018/19 – Chapter 3 Macroeconomic Outlook: http://www1.treasury.gov.my/eo_2019.html.

5 The Ministry of Finance's Economic Report 2018/19 – Chapter 4 Monetary and Financial Developments: http://www1.treasury.gov.my/eo_2019.html.

10 Ibid.

11 FSA; IFSA, Section 12.

12 Labuan IBFC website: www.labuanibtc.com.

13 BNM Financial Stability and Payment Systems Report 2018: http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_fspr&ac=27&en.

14 Ibid.

15 SC website: www.sc.com.my/the-licensing--process. See also Section 58, CMSA.

16 Section 55, FSA; Section 69, IFSA.

17 See Section II.i.

18 SC website: www.sc.com.my.

19 Guidelines on Fit and Proper Criteria dated 28 June 2013: http://www.bnm.gov.my/guidelines/01_banking/04_prudential_stds/Ft_Proper_Criteria_280613.pdf .

21 Ibid.

22 Guidelines on Corporate Governance 2016: http://www.bnm.gov.my/index.php?ch=57&pg=140&ac=512&bb=file.

23 BNM Liquidity Coverage Ratio Framework, 25 August 2016: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=285&bb=file.

24 BNM Financial Stability and Payment Systems Report 2018: http://www.bnm.gov.my/files/publication/fsps/en/2018/fs2018_book.pdf.

25 Statutory Reserve Requirement Guidelines dated 26 January 2016: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=30&bb=file.

26 CBA Section 26; BNM Statutory Reserve Guidelines 2016: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=30&bb=file.

27 Removal of reserve fund requirement in the policy document on Capital Funds: www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=534&lang=en.

29 BNM's Capital Funds Guidelines 2017: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=590&bb=file.

30 BNM's Capital Funds for Islamic Banks Guidelines 2017: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=591&bb=file

31 Implementation of Basel III (2010): http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=26&bb=file.

32 Basel III Observation Period Reporting (Capital Adequacy Ratios, Liquidity Coverage Ratio, and Leverage Ratio) 2017: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=656&bb=file.

34 Reissuance of the Capital Adequacy Framework (Capital Components) 2017(http://www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=567&lang=en.

35 Capital Adequacy Framework (Capital Components) 2018: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=447&bb=file.

36 BNM Financial Stability and Payment Systems Report 2017: www.bnm.gov.my/files/publication/fsps/ en/2017/fs2017_book.pdf.

37 Sections 161 and 179, MDICA.

38 Sections 98 and 99, MDICA.

39 Sections 165 and 167, FSA; Sections 177 and 179, IFSA.

40 Section 172, FSA.

41 Section 176, FSA.

42 Section 188, FSA.

43 Section 193, FSA.

44 Sections 204, 205, 207, IFSA.

45 Section 205, FSA; Section 216, IFSA.

46 Guidelines on International Islamic Banks 2008: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=54&bb=file.

47 BNM Financial Stability and Payment Systems Report 2016: www.bnm.gov.my/files/publication/fsps/en/2016/fs2016_book.pdf.

48 Financial Services (Financial Ombudsman Scheme) Regulations 2015 and Islamic Financial Services (Financial Ombudsman Scheme) Regulations 2015: http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=443&bb=file): http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=444&bb=file.

49 BNM Financial Stability and Payment Systems Report 2017: www.bnm.gov.my/files/publication/fsps/en/2017/fs2017_book.pdf.

51 Financial Technology Regulatory Sandbox Framework: www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4273&lang=en.

53 BNM Financial Stability and Payment Systems Report 2018 (http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_fspr&ac=27&en).

55 BNM's Annual Report 2018 (Executive Summary) (http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_ar&ac=42&en).

61 Mid-Term Review of the Eleventh Malaysia Plan 2016-2020: New Priorities and Emphases (18 October 2018): http://epu.gov.my/en/rmk/mid-term-review-eleventh-malaysia-plan-2016-2020.

64 Supplementary Notice on Foreign Exchange Administration Rules – Measures to Promote The Development of Malaysian Financial Market: www.bnm.gov.my/documents/2016/Supplementary_Notice_on_Foreign_Exchange_Administration_Rules.pdf.

65 BNM press release dated 6 December 2016: www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4318.

66 Supplementary Notice (No. 2) on Foreign Exchange Administration Rules and Amendment to the Definitions of the Notices on Foreign Exchange Administration Rules – Measures to Promote Development of Malaysian Financial Market: www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=533&lang=en.

68 Bank Negara Malaysia issues policy document for digital currencies (see also footnote 45): www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4628&lang=en.

72 Establishment of the Financial Markets Committee (see also footnote 6): www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=4178&lang=en.