Introduction

This list of FAQs is intended to provide guidance and clarification on various requirements in Chapter 10 of the Licensing Handbook; Outsourcing Arrangements by CMSL Holders.

1.

Is a CMSL holder required to notify the Securities Commission Malaysia (SC) or Bursa Malaysia (the Exchange) for all outsourcing arrangements?

No. Notification to the SC or the Exchange is not required for outsourced functions that are determined as non-material. A CMSL holder should refer to paragraph 10.02 of Chapter 10 of the Licensing Handbook; in determining whether the outsourced function is a material or a non-material function. This assessment process should be documented. Please refer to the diagram below on illustration of the outsourcing framework for reference.

2.

When should the CMSL holder notify the SC or the Exchange on a material outsourcing arrangement?

The CMSL holder is expected to notify the SC and the Exchange within 2 weeks of signing the service level agreement for a material outsourcing arrangement. The notification should be forwarded concurrently to both the SC and the Exchange. The SC or the Exchange expects the CMSL holder to demonstrate observance with the various requirements in Chapter 10 of the Licensing Handbook and may require additional measures or other measures depending on the impact of the outsourcing on the CMSL holder, its investors or the capital market and the circumstances of the case. The SC may communicate with the home or host regulator of a service provider on the ability and willingness to cooperate with the SC in supervising the outsourcing arrangement.

3.

Is notification to the SC or the Exchange required for all outsourcing arrangements to service provider outside Malaysia or if there is a sub-contractor?

A CMSL holder must notify the SC or the Exchange if a material function is outsourced to a service provider outside Malaysia or where such outsourced material function is being sub-contracted to a sub-contractor. The intermediary and its Board of Directors are responsible for all outsourced functions including where such outsourced function is being sub-contracted. In this regard, the intermediary should take all steps to ensure that the outsource function is carried out effectively, which include, amongst others, establishing adequate agreements, policies and procedures and monitoring frameworks.

4.

Is a CMSL holder required to notify the SC or the Exchange if the service level agreement is amended to factor in a new outsourced function?

If the changes in the said agreement resulted from an addition of a new material function, a CMSL holder has to notify the SC or the Exchange within two (2) weeks of signing the amended service level agreement.

5.

Is a CMSL holder allowed to sub-contract its supervisory functions such as internal audit, risk management or compliance functions?

No. Paragraph 10.02(4) stipulates that these functions are not allowed to be sub-contracted.

6.

Can a CMSL holder outsource the maintenance of unit holder register to a service provider outside Malaysia?

In outsourcing the maintenance of unit holder register, a CMSL holder has to comply with sections 308 and 309 of the Capital Markets and Services Act 2007 which stipulates that the unit holder register must be maintained at the registered office of the CMSL holder in Malaysia.

7.

If a CMSL holder outsources maintenance of unit holder register, could there be interaction or contact with the clients of the CMSL holder in the course of performing the function? 

The interaction must not have the elements of core functions that forms part of licensed activities.

8.

Where it involves outsourcing of a compliance function, is the designated compliance officer required to be registered with the SC?

Yes. The compliance officer must have the necessary qualifications and passed the necessary examinations or courses set out by the SC.

9.

Paragraph 10.02(07) states that ‘where the compliance function is outsourced to the group level, a CMSL holder must ensure that the group appoints at least one registered compliance officer to perform the compliance function’.  For a market intermediary that is not required to have a compliance officer registered with the SC under the Licensing Handbook, how does the market intermediary comply with the requirements of paragraph 10.02(7) with regard to the requirement for a registered compliance officer?

Paragraph 10.02(7) with regard to the appointment of a registered compliance officer is not applicable for a market intermediary licensed for regulated activities which do not require a compliance officer to be registered with the SC under the SC’s Licensing Handbook.  The regulated activities include advising on corporate finance, investment advice, financial planning and dealing in private retirement schemes.

10.

What can be considered as non-material functions which do not require notification to the SC or the Exchange?

Examples of non-material functions that do not require notification are human resource (e.g. payroll, performance of appraisal, employment of personnel) and accounting and financial matters.

11.

What are the functions/services which are not subject to Chapter 10 of the Licensing Handbook?

The following are examples of functions/ services which are not subject to Chapter 10 of the Licensing Handbook: –
Functions:

  • Advisory services e.g. legal opinions;
  • Tax advisory services; and
  • Secretarial.

Services:

  • Utilities e.g. telephone, electricity;
  • Procurement of office supplies;
  • Procurement of fixtures and fittings;
  • Maintenance of office and premises;
  • Servicing of commercially available computers and operating systems;
  • Mail and courier; and
  • Printing services.

12.

Is outsourcing of clearing and settlement as provided under paragraph 10.02(3) applicable to all CMSL holders?

No. The outsourcing of clearing and settlement function is applicable only fora holder of a CMSL for regulated activities of dealing in securities or trading in derivatives contracts.

13.

What type of variation requires notification to the SC or the Exchange, as required under paragraph 10.04(4)?

Generally, variation in commercial terms need not require notification to the SC or the Exchange. However, the intermediary should notify the SC or the Exchange if the variation could significantly affect the CMSL holder, including termination or early exit of the arrangement.

14.

Does a CMSL holder need to monitor the conduct of a sub-contractor?

Yes. A CMSL holder must ensure that the service provider has the necessary monitoring mechanism to monitor conduct of its sub-contractor.

15.

Is a CMSL holder required to conduct an assessment on internal audit that is being outsourced?

An assessment is not required where the internal audit function of a CMSL holder is outsourced. However, the audit committee or the board of directors of the CMSL holder is required to ensure the effectiveness of the internal audit function outsourced.

16.

Is the CMSL holder required to change the existing outsourcing agreement to reflect current requirements?

No. This requirement does not have a retrospective effect as long as the outsourcing arrangement was approved by the SC and the Exchange. The CMSL holder should be guided by the requirements in Chapter 10 of the Licensing Handbook for future obligations e.g. the need to notify the SC or the Exchange of any variations of the terms in the agreement.

17.

What other written laws are required to be adhered to in maintaining confidentiality of clients’ information?

All CMSL holders are reminded of their obligations with regard to the Personal Data Protection Act (PDPA) 2010, when entering into an outsourcing arrangement. A CMSL holder, that is a holder of a CMSL for regulated activities of dealing in securities, must give due attention to the requirements stipulated under Sections 43 and 45 of the Securities Industry (Central Depositories) Act 1991.

June 2014