Supervision - Regulatory Performance and Outcomes | Securities Commission Malaysia

Supervision

In addition to its authorisation regime for licensed and registered capital market entities, the SC also operationalises a comprehensive supervisory programme across its spectrum of regulated entities to foster ongoing compliance and enable a holistic assessment of emerging risks and vulnerabilities.

Supervision of Capital Market Intermediaries

The SC continues to adopt a risk-focused supervisory approach over its capital market intermediaries. Its efforts have been directed towards ensuring proper conduct and financial soundness of its intermediaries. To achieve this, the SC employs an array of tools ranging from ongoing desktop reviews that leverage analytics from regulatory submissions and information gathered from ongoing monitoring by its supervisors, structured supervisory assessments on selected intermediaries that are determined based on assessed risks factors, thematic reviews on emerging risks, as well as for-cause assessments which are investigative in nature and originate from complaints received, referrals and supervisory concerns with regards to misconduct (Table 18).

TABLE 18

Supervisory assessments on intermediaries

Assessment type	Number of completed assessments
Assessment type	2023	2022
Structured supervisory assessments*	28	41
For-cause assessments	113	70
Thematic industry reviews	2**	1***

Note:
* The number of intermediaries identified for these assessments are determined through the evaluation of predefined risk factors.

** The two reviews involved assessments on the adoption of the Guidance Note on Managing Environmental, Social and Governance Risks by Fund Management Companies and the state of preparedness of capital market intermediaries in complying with the Guidelines on Market Conduct and Business Practices for Investment Analysts. The two reviews covered 93 and 54 capital market intermediaries respectively.

*** This review involved an assessment on the standards and controls implemented by stockbroking companies in maintaining appropriate remuneration structures. The review covered all stockbroking companies.

Arising from its supervisory assessments, the SC issued a total of 41 communications to respective intermediaries on its regulatory concerns and expectations. These comprised both, Infringement Notices for breaches of securities law and/or SC Guidelines and supervisory letters for enhancement concerning controls and processes (Table 19).

TABLE 19

Supervisory outcomes

Supervisory outcomes	2023	2022
Referral for administrative enforcement action	4	1
Issuance of guidance notes	0	2
Industry communication/engagements	8	6
Issuance of Infringement Notices*	37	30
Issuance of supervisory letters	4	14

Note:
* Statistics also reflected under the SC’s Infringement Notices (Table 26).

The SC recognises the importance of an intermediary’s culture such as the shared values, beliefs, behaviours and practices that shape its conduct. Intermediaries with good culture demonstrate strong governance, promote fair treatment of customers and protect market integrity. This in turn would translate to intermediaries being less prone to misconduct. Towards this end, in 2023, the SC undertook a survey through issuance of a questionnaire to 286 capital market intermediaries towards better understanding as to culture and practices of these intermediaries. The SC intends to share its findings which include good governance structure and practices towards cultivating and promoting good culture.

In October 2023, the SC held a series of Anti-Money Laundering, Countering Financing of Terrorism/ Proliferation (AMLCFT/PF) Workshops with Compliance Officers of stockbroking, derivatives broking and unit trust/fund management companies to emphasise the crucial role of Compliance Officers in ensuring these intermediaries not only comprehend but also effectively mitigate the risks associated with money laundering, terrorism financing, and proliferation financing. Case studies derived from the SC’s enforcement efforts and red flags were also shared.

The workshop also featured engaging discussions on case study exercises, covering topics such as risk-based approach i.e. business-based and relationship-based risk assessment, identification of beneficial owner(s), and detection of red flags/unusual transactions. These exercises encouraged participants to share their practical experiences and perspectives, fostering a rich exchange of ideas and solutions.

Thematic Review on the State of Compliance of Capital Market Intermediaries with the Guidelines on Market Conduct and Business Practices for Investment Analysts and their Analysts

Supervision of Exchanges and Financial Market Infrastructures
Under securities law, the SC is responsible for approving and supervising operators of securities and derivatives exchanges as well as financial market infrastructures such as clearing houses and central depositories (approved institutions). As the sole integrated exchange group in Malaysia, Bursa Malaysia is subject to statutory requirements such as operating a fair and orderly market, acting in the public interest with particular regard for the protection of investors, ensuring prudent risk management as well as ensuring sufficient financial, human and other resources.

In 2023, the SC conducted regular supervisory engagements with Bursa Malaysia on issues including governance, risk management, internal audit and controls, commercial strategy, and the effectiveness of its frontline regulatory framework. Such engagements are complemented by ongoing reviews of regulatory submissions and onsite regulatory assessments (RA) on approved institutions.

In January 2023, the SC concluded its RA on the Bursa Suq Al-Sila (BSAS) platform operated by Bursa Malaysia Islamic Services Sdn Bhd (BMIS), a wholly-owned subsidiary of Bursa Malaysia. The assessment focused on processes and procedures in relation to the onboarding of participants, as well as the adequacy and effectiveness of controls in monitoring participants’ ongoing adherence with the platform’s rules and other applicable Shariah requirements.

While there were no immediate concerns regarding the integrity of the overall structure and system of BSAS, several recommendations were made to Bursa Malaysia, including enhancing BMIS’ human resource management and succession planning, as well as strengthening and streamlining the processes for onboarding and supervising its participants.

In June 2023, the SC also conducted a high-level dialogue with the Bursa Malaysia board of directors. The engagement served as a platform for the leadership of both organisations to exchange insights on strategic issues and regulatory concerns.
Supervision of Recognised Market Operators
The regulatory framework for RMOs was designed to be commensurate with the value proposition of this market segment, counterbalanced against risk factors such as size, structure, range of products and services, as well as participant demographics.

The SC’s supervisory approach aims to ensure that RMOs continue to operate in a fair and orderly manner in adherence with these regulatory expectations. Supervisory tools deployed include regular engagements with RMOs, reviews of regulatory submissions and assessment of complaints. Focus areas in 2023 include governance, risk management, client/issuer onboarding and due diligence, as well as cyber security and systems integrity.

In May 2023, the SC conducted a thematic review on RMOs’ compliance with the SC’s Guidelines on Prevention of Money Laundering and Terrorism Financing for Reporting Institutions in the Capital Market and the SC’s Guidelines on Implementation of Targeted Financial Sanctions relating to Proliferation Financing for Capital Market Intermediaries (AML Guidelines). The thematic review focused on the emerging risks of legal persons and legal arrangements as well as antibribery and corruption. The findings from this review provided the basis for several recommendations relayed by the SC to the RMOs during the annual supervisory engagements.

This exercise also formed part of the SC’s continuous communication with the RMOs to enhance their understanding of the SC’s supervisory expectations, which will facilitate their efforts to ensure ongoing compliance. Moving forward, the SC will continue to monitor the RMOs to ensure that any gap identified is addressed in a timely manner for effective mitigation and management of AMLCFT/PF risks.

Given the growth in the digital assets segment, the SC also intensified its oversight on operators of digital asset exchanges (RMO-DAX) to ensure that key elements of their business operations, including governance, policies and procedures, systems and actual practices, are aligned with applicable regulatory and supervisory requirements.

In 2023, the SC conducted an RA on an RMO-DAX, focusing on the adequacy and effectiveness of its ongoing due diligence framework vis-à-vis the SC’s AML Guidelines. Arising from the assessment, the SC had identified several areas for enhancement including the need for greater consistency in the implementation of policies and procedures, formal documentation and record-keeping as well as more effective governance and oversight by the board of directors.
Supervision of Self-Regulatory Organization
The SC supervises the Federation of Investment Managers Malaysia (FIMM) in ensuring proper discharge of its regulatory mandate as a self-regulatory organization (SRO) for public interest and investor protection.

A proactive supervisory approach had been operationalised to facilitate effective supervision on FIMM through reporting obligations and engagements with FIMM’s board of directors and senior management. The SC also participated in major programmes by FIMM which include the annual general meeting, industry regulatory briefing and FIMM’s annual convention to observe supervisory issues and trends concerning marketing, distribution and sales practices involving unit trusts and PRS.

In 2023, it was observed that FIMM had implemented most of the recommendations from the SC’s previous RA to further strengthen the effectiveness and efficiency of the registration, supervision and enforcement functions. Additionally, various efforts for industry development, education and financial literacy were also rolled out as part of FIMM’s developmental mandate.
Supervision of the Private Pension Administrator
As a central administrator, the Private Pension Administrator (PPA) provides data repository services for members and providers as well as investor education on PRS. The SC’s oversight on PPA aimed to ensure that it continued to adopt sound governance practices and discharge its functions effectively within a satisfactory operational framework.

In 2023, PPA continued to provide enrolment and topup services via the PRS Online platform which remained a key utility for its members and the investing public. Given its role in investor education, PPA also introduced various marketing initiatives and promotional campaigns aimed to spur further growth of the PRS industry.

Mitigating Systemic Risks And Promoting Financial Stability

Enhanced Risk Governance Framework

In 2021, the SC-wide risk governance framework was enhanced as part of an overall initiative to have an effective integrated and predictive risk surveillance to maintain regulatory agility.

The structured risk governance framework integrated the wider spectrum of risks such as technology, cyber and conduct risk at the SC’s Systemic Risk Oversight Committee (SROC) and Accounting, Market and Corporate Surveillance Committee (ACMS).

Intensified surveillance

The SC continued to intensify its surveillance of systemic risk to maintain market resilience and stability. Regular SROC engagements were held to deliberate concerns emanating from various segments across the capital market. Domestic equity and bond market, foreign fund flows and trade participation continued to be monitored closely for potential stress points.

In addition, measures and economic stimulus packages introduced by the government to weather the impact of COVID-19, market trading conduct and the financial position of listed companies were among the focus areas for discussion.

Thematic assessments

The SC also conducted thematic assessments covering investors’ fund flows, the position of firms, and policy decisions to ascertain the possible impact on the capital market. In 2021, the SC reviewed and enhanced its crisis indicators on potential emerging risks in the
capital market.

The enhanced crisis indicators provided a reference point for escalation to SROC when the identified indicators and triggers materialised and ensured prompt response to manage and prevent any issues of concern that might lead to a systemic crisis.

Joint regulatory discussions

In 2021, the SC conducted frequent joint regulatory discussions with other authorities such as Bank Negara Malaysia (BNM) and Labuan Financial Services Authority (Labuan FSA) to identify systemic risk concern areas within the financial and capital markets in Malaysia.

Monitoring of various components of the capital market

The SC continued its efforts to undertake a methodological and integrated approach to ensure any potential systemic risk was being monitored, mitigated, or managed. Figure 1 highlights the findings from the following risk assessments on the various components of the capital market.