Strengthening the Fund Management Industry - Strengthening the Sustainability and Competitiveness of the Capital Market

Strengthening the Fund Management Industry

The fund management sector is a pivotal contributor to the Malaysian economy, serving as a cornerstone for the efficient allocation of capital to productive resources and fostering wealth accumulation for investors. The evolution of investment preferences and the dynamic nature of industry players has been a primary driver behind substantial growth in AUM, contributing to a diversified landscape in terms of product offerings and intermediation capabilities.

Consequently, the AUM of the fund management industry has exhibited noteworthy expansion, achieving a CAGR of 7.6% to reach RM975.5 billion in 2023, up from RM377.5 billion in 2010. This remarkable growth underscores the escalating prominence and significance of the fund management industry within the capital market and the broader economy.

While the industry has seen strong growth over the past few decades, a proactive and adaptive regulatory approach is necessary to address the challenges and opportunities brought about by technological advancements, changing investor preferences, and the globalisation of financial markets.

In view of the changing economic landscape and the evolution across the value chain from products and strategies offered, to marketing and distribution channels as well as fund operations, the SC aims to take steps to ensure the industry remains relevant and competitive vis-a-vis global development.

To this end, the SC sought to shape the future of fund management by taking an inclusive, industrywide approach through engagements and an industry wide CEO survey. Responses were received from 68 fund management CEOs across different license types and covered a wide range of areas across the fund management value chain from strategic priorities to client preferences and digitalisation.

Through insights derived from the survey, a holistic set of policy recommendations covering the competitiveness of fund management companies, promoting efficiency of the value chain and widening access and investment options have been developed. Prioritisation of initiatives and implementation over the next three years will be undertaken through joint working groups with industry captains/leaders.

Ultimately, these recommendations aim to actively chart and push the next phase of growth for the Malaysian fund management industry by ensuring that the industry adapts to the evolving landscape and that market participants operate within a framework that promotes innovation without sacrificing investor protection.

Expanding the Wholesale Fund Framework
In line with measures to liberalise the fund management industry, efforts were undertaken to provide investors with access to a more varied range of alternative assets and strategies. This initiative reflects the SC’s commitment to enhance the depth and breadth of the capital market while promoting an inclusive investment environment for various risk appetites and needs.

In this regard, the Wholesale Fund Framework has been expanded to enable domestic managers to invest in in alternative investment products via special purpose vehicles, in addition to the available conventional assets such as securities, derivatives, money market instruments and deposits.

To improve transparency, fund managers will be required to provide an offering document setting out information that would facilitate comparability between funds and enable investors to make more informed decisions. Additional measures have been put in place to ensure fund managers are prepared to manage the risks associated with alternative assets.

Overall, these measures will provide wider investment opportunities and diversification potential for investors as well as broaden fund managers’ capabilities to maximise returns and promote more innovation which in turn will improve competitiveness of the Malaysian fund management industry.
Providing Flexibilities for Secondary Listing of ETFs
The proliferation and popularity of ETFs over the past decade have significantly reshaped the investment landscape globally. Within this sphere, secondary listing which is the process of listing on multiple exchanges has become a strategic move for ETF issuers aiming to expand their reach and attract a broader investor base. Recognising the limitations within the existing regulatory framework and the growth potential of this segment, the SC sought to enable greater flexibility and provided greater clarity on secondary listings of ETFs on Bursa Malaysia.

To this end, the SC has allowed foreign ETF operators to apply for secondary listing of up to five non-plain vanilla ETFs, such as leveraged ETF, inverse ETF and synthetic ETF, which is subject to certain controls on the foreign operator. These controls include the need for the ETF operator to maintain certain information such as indicative NAV, fees, information on key personnel and a summary of operator’s financial position on its website as well as to notify the SC of events that may affect the index which the ETF is tracking.

Ultimately, this initiative will empower investors with more diverse strategies to accumulate wealth that can be accessed conveniently and cost-effectively on the exchange. In addition, the introduction of a more diverse range of ETFs is likely to increase overall participation in the domestic ETF market thus boosting overall market vibrancy as well.
Championing Behavioural Interventions in the Private Pension Industry
In the face of rapid demographic changes coupled with the economic challenges in the post-pandemic world, the discussion on the future of Malaysians vis-a-vis their retirement savings has become an increasingly pressing subject. The private sector’s role in supplementing retirement incomes becomes even more pronounced when we consider PRS within the construct of Malaysia’s multi-tier pension framework.

While there has been commendable growth of 19.22% in the industry with total AUM reaching RM6.45 billion and 579,000 members at the end of 2023, the SC recognises that moving the needle on retirement security with respect to private sector solutions requires partnership and collaboration between retirement stakeholders on multiple fronts.

In this regard, the SC championed the adoption of behavioural interventions by PRS Providers and PPA in 2023. These are solutions that incorporate behavioural science to create effective solutions that encourage the desired behaviour. Some behavioural interventions explored by PRS Providers and PPA included targeted messages to members and direct debits through PPA’s Online Account system, which would facilitate easier, more convenient and automated contributions by members into the respective PRS account.

These efforts began from a workshop that the SC hosted in March 2023, where Providers were invited to engage in a discussion on how behavioural interventions could be utilised to increase participation and contributions into PRS. Providers worked with the SC to develop targeted behavioural messages and approaches to test them among their respective members. This pilot-test approach was undertaken to empirically determine the most effective behavioural messages which Providers could utilise in the longer-term to continue targeted interventions among their respective members. The dialogue on retirement adequacy and behavioural solutions to address this continued on with the SC’s retirement forum in November 2023 entitled ‘Improving Long Term Retirement Planning and Savings Behaviour’. This was an important avenue to bring social protection and private pension experts to share solutions on improvements across the private pension system that should be implemented to better cater for the changing retirement needs of Malaysians.
Expanding Advisory Channels While Ensuring a Continued Role for Dealer Representatives
As Malaysian investors’ needs increase in sophistication, market intermediaries will be relied upon to provide multiple value-added services, from execution to advisory services, for better access and convenience. The SC recognised the potential ability of dealer representatives to offer such multiple value-added services and, in this regard, sought to provide greater opportunities for dealer representatives to increase their scope of activities to cover advisory-related services. This would lead to additional sources of revenue for dealer representatives while expanding the channel for investors to obtain advice and other services.

The expansion included removing the requirement for dealer representatives to be employed on a fulltime basis and permitting them to be licensed and or registered for investment advisory, financial planning and distribution of unit trust and PRS to their clients. These flexibilities are offered to dealer representatives who have been licensed for more than five years and meet the competency requirement for the relevant regulated activity. To ensure effective supervision and oversight to mitigate against any potential misconduct, the additional regulated activities must be undertaken within the same broking firm or within its group of companies.

Overall, these measures would continue to ensure that dealer representatives adapt to the changing investment landscape within the capital market while availing diversified services for investors in other capital market products and services.
Introducing the Foreign Exempt Scheme Framework
As the demographics of Malaysian investors mature, it is essential that investors are empowered with more investment fund options to meet their diverse risk appetites and needs. This includes exposure to varied strategies and geographies. While onshore funds do cater to investor needs, the SC recognises the potential foreign funds may offer in widening options available to investors.

In this regard, a new framework for Foreign Exempt Schemes was introduced to widen access to foreign funds and provide more options for sophisticated investors. This would allow foreign fund operators that are a related corporation to an SC-licensed fund manager to offer their foreign funds to institutional investors and high-net-worth entities (HNWEs). Ultimately, the framework will make available more choices and add greater diversity to onshore fund options in the domestic capital market.

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.