YBhg Dato’ Zarinah Anwar
Chairman, Securities Commission
Malaysian Capital Market Summit
Organised by Asian Strategy & Leadership Institute (ASLI)
Thursday, 23 November 2006
GROWING A VIBRANT AND INNOVATIVE CAPITAL MARKET
Distinguished guests, ladies and gentlemen.
1. The size and sophistication of the Malaysian capital market has grown in tandem with the economy. When we talk about the capital market many think only of the stockmarket. This was an accurate description of the state of affairs in the early 1990s. But over the past 15 years, the breadth of activities in the capital market has expanded at double-digit pace in many segments. In 1990 total value of the capital market – comprising debt and equity was RM200 billion. In 2005, it had grown five-fold to RM1.1 trillion.
2. The size of the corporate bond market exceeded RM200 billion in 2005 and is as large as the government bond market. Malaysia’s Islamic Capital Market (ICM), which was hardly in existence in 1990, is now the largest and most innovative globally – offering the widest range of Shariah-compliant products. Last year, the size of the unit trust industry crossed the RM100 billion mark and is continuing to grow at double-digit pace.Enabling the private sector to serve as the engine of growth
3. But as rapid as the growth has been, I believe the Malaysian capital market is not yet operating at its full potential, and maximising on the opportunities provided by our dynamic economy. To do this requires a challenging transition with the private and public sectors growing at a considerably faster pace to build a capital market that is highly efficient and internationally competitive. This vision, is not new. It has been clearly articulated in the Capital Market Masterplan (CMP).
4. Potential growth can be further unlocked through enhancing the mobilisation of domestic savings through the capital market. The strengthening of the virtuous cycle of private sector investment and capital market intermediation is critical to ensuring the sustained and healthy performance of the Malaysian capital market.
5. Fortunately, Malaysia is well positioned to face difficult challenges and to craft the necessary innovative solutions that can create sufficient forward momentum to accelerate growth rates. The SC will support the national agenda with targeted initiatives to increase international competitiveness and intermediation efficiency and to create a conducive regulatory environment for private sector investment and corporate transformation.
6. In this context, the private sector needs to be fully enabled to serve as the country’s growth engine as outlined in the 9th Malaysian Plan. As a regulator, it is our intention in the final phase of CMP implementation, to remove the inefficiencies and rigidities that prevent the emergence of appropriate business models that will stimulate demand for capital market products and services. The SC has recently announced a set of initiatives to accelerate the growth of the unit trust industry. We are currently engaging in discussions with the stockbroking industry and Bursa Malaysia on initiatives to create a facilitative environment for the emergence of new services and products to meet customer demand and improve customer reach to stimulate growth in the stock market. In this regard we all must be mindful of the experience of other markets where unattractive cost structures and burdensome regulatory requirements may drive away investors and issuers.
7. Overall, the challenge is a formidable one – it requires our institutions and intermediaries as well as the PLCs to step up their efforts to drive growth. It requires the domestic private sector to aspire to meet international benchmarks and to willingly conform to global norms including enhancing their reputation through meeting investor requirements for ethical conduct.
THE EVOLVING ROLE OF THE REGULATOR
8. As is common in Asia, the development of the capital market in Malaysia has tended to be led by the regulator. In the aftermath of the Asian crisis when exposed fragilities of poor controls and ethical misconduct badly affected investor confidence, regulatory intervention often through prescriptive rules, was absolutely necessary to regain market confidence and to address regulatory gaps which had allowed for abuses in the system.
9. By next year, it will be a decade since the initial meltdown that led to the Asian Financial Crisis. The time for fire fighting and putting patches to the regulatory system is behind us. The challenge now is how best to facilitate growth of an increasingly sophisticated capital market to serve Malaysia’s future needs. The entry of new players and the introduction of a wide array of products to meet different financing needs and risk appetites have made our capital market increasingly complex.
10. At the same time, the SC is clearly committed, by statute and by moral obligation, to ensure that fraudulent and manipulative practices are efficiently and effectively dealt with, that investors are appropriately protected and that there are no undue risks posed to financial stability.
11. What then is the appropriate regulatory approach? While it is recognised that regulation must be relevant in rapidly changing market conditions, the SC will need to ensure that the regulatory framework achieves the delicate balance of being sufficiently flexible to accommodate a dynamic market-place which allows Malaysia to compete internationally yet provide rigorous and robust checks and balances to ensure there is no compromise in the standards of market integrity and investor protection.
12. Discharging these obligations within the current environment requires new and dynamic approaches. The SC’s regulatory approach will have three thrusts:
i. First, there will be no more regulation than necessary to keep the markets fair, efficient, secure and transparent;
ii. Second, the Malaysian capital market will operate in an increasingly deregulated and competitive environment. This will ensure that Malaysian and global customers have access to a wide choice of cost-effective and quality products and services; and
iii. Third, the quality of regulatory services will be continuously enhanced to be internationally competitive such that Malaysian capital market intermediaries and issuers can bring their products to the market in a timely manner and investors are assured of the quality of products in the market.
NO MORE REGULATION THAN NECESSARY
13. In the Capital Market Masterplan, the SC has clearly articulated our regulatory philosophy that there should be no more regulation than necessary. This was not possible at the start of the implementation of the Masterplan when admittedly new rules were introduced to regain market confidence in the aftermath of the crisis. Many were, in fact, specific responses to abuses – such as those relating to the use of nominee accounts and related party transactions. But where it was possible, we opted to rely on codes of best practice such as the Code of Corporate Governance instead of direct regulation.
14. And these measures have been effective. In recent years Malaysia has received positive assessments for our regulatory framework. In “Doing Business 2006” a World Bank publication, Malaysia is ranked among the top three in regulating the liability of directors and in requiring adequate disclosure for related party transactions. The World Bank Report on Observance of Standard and Codes (ROSC) for Corporate Governance gave Malaysia full marks for compliance with International Financial Reporting Standards.
15. In the current phase of the CMP, it is now timely to review our rulebook. This is critical for several reasons.
i. First the amount and quality of regulation is fast becoming an important factor in determining the competitiveness of markets. This is the direct result of greater integration of markets and free flow of capital. The most successful markets will be those that find the optimal balance in reducing regulatory burden and maximising investor protection.
ii. Second the regulatory focus will be on promoting growth and incentivising good conduct. Setting regulatory controls to deal with the lowest common denominator or to address the weakest link in the industry unnecessarily penalises the majority of the domestic market players who are disciplined and professionally-run. Therefore, our regulatory approach will seek to incentivise well-managed firms through a facilitative regime that will enhance their competitiveness, while keeping the necessary regulatory supervision over the weaker ones.
iii. Third we will increase our reliance on market disciplinary mechanisms. Regulatory discipline is only one of the components of securities market regulation – the other two being self discipline set by the control systems of the intermediaries, and market discipline as represented by an investing public that are increasingly knowledgeable and vigilant that their rights are protected. It is when all three components are functioning effectively that the optimal balance of facilitative regulation and investor protection can be achieved.
Allowing market discipline to work
16. It is a well-known fact that the amount of regulation is inversely proportional to the level of self and market discipline. In other words, the SC’s ability to lighten the rule book is predicated on the assumption that the market has developed the necessary capabilities to regulate itself either internally at the firm or industry level or externally through the efforts of minority investors and a vigilant media. As you know the SC has implemented various measures to enhance the regulatory environment.
17. We have increasingly premised our assessment of corporate proposals on the assumption that the information from issuers and advisors is accurate. This has allowed us to shorten our processing timelines substantially. In tandem with this, we have enhanced our vetting process to identify potential problems.
18. We have also enhanced the obligations of professionals with respect to ensuring good ethical conduct. Auditors of public listed companies are under a statutory duty to whistle-blow. We would also be seeking to apply higher obligations on intermediaries such as brokers, fund managers and investment advisers who operate under a duty of care. Generally, as the ability of the market-place and investors to rely on professionals and intermediaries increases, the higher will be the level of market efficiency as it will facilitate the full implementation of Disclosure-based regulation (DBR).
19. In order to do so, we will actively promote a compliance culture, professionalism and ethical conduct among our intermediaries and promote self-regulation.
20. With intermediaries taking on more responsibility for self discipline and internalising a culture of compliance for good business, the prescriptions can be removed from the rule-books leaving regulatory principles by which such participants can determine the appropriate means to achieve the desired regulatory result.
Principles-based approach to regulation
21. The SC has been gradually shifting to a principles-based approach to supervision. This approach is predicated on the assumption that intermediaries have a strong culture of self-discipline and through their internal compliance and risk management systems, will comply with best efforts to meet relevant regulatory objectives that include investor protection, market integrity and systemic stability. In doing so, firms will be allowed flexibility to design controls and compliance processes to achieve such regulatory objectives.
22. A less prescriptive approach to regulation does not mean lax enforcement. The contrary is the case. The SC will therefore supplement this new approach with a regime of strong supervision and enforcement. We will extend our direct examination of market intermediaries on both a firm and integrated group basis, focussing our supervision on risk identification, assessment and management. We will seek to work closely with market intermediaries to instil best practices and to strengthen internal controls and compliance structures. Where breaches occur however, corrective action will be taken through strict and swift enforcement.
A strategic approach to enforcement
23. In the past, we have relied heavily on our prosecutorial powers, sometimes at the expense of timeliness and efficacy. But as the saying goes, if all you have is a hammer, everything looks like a nail.
24. However, we have over the last few years, introduced provisions that provide us with a comprehensive range of enforcement tools. Hence we are now in a position to view enforcement holistically and strategically, to determine the most appropriate sanction depending on the nature of the offence. The power to impose administrative fines and disgorge ill-gotten gains has been extremely effective in addressing misconduct. Of course criminal prosecution will continue to be undertaken where it is warranted by public interest and deterrent value.
25. We will incentivise good conduct. Intermediaries and issuers with a good compliance, supervision and submissions track record will benefit as their reliability and quality allows us to reduce regulatory hurdles – through providing them green lanes or fast track approvals. This will reduce their costs of doing business and enhance their competitiveness.
Introduction of single legislation for the capital market
26. Next year will see the introduction of the Capital Market Services Act (CMSA) which will reflect many of the regulatory philosophies I have outlined. This will be a significant milestone in the Malaysian capital market; it will see the consolidation of securities, futures and fundraising laws into a single legislation and facilitate the development of a vibrant and efficient capital market whilst ensuring investor protection.
27. The CMSA will adopt a functional approach to achieve regulatory parity for all participants carrying out capital market activities. One of its key deliverables in terms of reducing the burden and complexity of regulation will be the introduction of a single licensing regime for securities dealing and futures trading. The CMSA will also strengthen approach to regulation through the introduction of a framework for recognition and oversight of SROs.
28. Indeed the changes that the Act will bring about are significant and will pave the way for a more efficient and competitive capital market. It is also expected to significantly reduce cost of compliance while promoting flexibility and business efficacy.
OPERATING IN AN INCREASINGLY DE-REGULATED AND COMPETITIVE ENVIRONMENT
29. The global capital market-place is becoming increasingly borderless. Investors – including Malaysians – are increasingly able to scan the world’s markets from their desk-top at home and to search for products and services that best meet their needs.
30. The global and regional capital markets are undergoing massive change to respond to the emerging competitive forces. Exchanges across continents are considering hostile take-overs, investment products have become increasingly complex and intermediaries are re-configuring and re-positioning their businesses and generally expanding their presence and scale in Asia.
31. More urgently than before, there is a need for regulation to focus on how best to serve the needs of customers.
32. Rules that prevent healthy competition will deter domestic intermediaries from introducing products and service innovations that will stimulate demand and activities in the Malaysian capital market. Domestic intermediaries must be fully enabled to develop the capability to offer local and foreign products; otherwise they would be handicapped in competition with international players.
33. The SC will continue to de-regulate by removing rules that inhibit competitive practices. We will consider the necessary rule changes that can assist Malaysian intermediaries to bring their innovations more quickly to the market, to grow at a faster pace and to increase productivity through facilitating greater use of technology and scale economies.
Quality of regulatory service to be internationally competitive
34. There is a long list of challenges not only for industry participants but also for the SC. The SC will require no less from itself than it requires from market participants. We demand integrity, professionalism, transparency, disclosure and accountability from our regulatees and PLCs and it is therefore incumbent that we meet the same standards.
35. Towards this end, the SC has implemented business process improvements on a continuous basis and undertaken the necessary organisational restructuring to raise the performance of the organisation and its ability to meet the needs of the market.
36. Through internal streamlining and rationalisation, we have slashed our time to market for approval of corporate submissions and licensing renewals. In the interest of transparency and accountability, we now publish quarterly scorecards of our performance in meeting service charters and timeline obligations. Reasons for rejection of corporate proposals are published on our website.
37. We continue to enhance our policy formulation processes, regularly conducting post-implementation reviews, and intensifying consultations with industry, not only through closed-door industry dialogues and stakeholder engagements, but public release of exposure drafts and consultation papers, such as those issued for the CMSA, which were all placed on our website.
38. Finally, it all boils down to people. The SC as an institution must be adequately skilled, equipped and resourced to respond to changes in the market. We invest a great deal in our people in terms of training for technical and leadership skills. We have placed emphasis on cross-fertilising expertise and experience with industry. In this regard, we created a special SC-industry project team comprising full-time secondments from Bursa Malaysia and the Malaysian Investment Banking Association (MIBA) to explore areas and initiatives to enhance the vibrancy of the Malaysian capital market.
39. To summarise, the SC believes that in an increasingly crowded landscape, the capital market is best served by minimising regulatory friction on capital market intermediaries to innovate and to respond to changing investor preferences and needs in a timely manner.
40. Regulatory friction is reduced in an environment where there is “no more regulation than necessary” and the SC stands committed to streamlining and rationalising regulation starting with the pending introduction of the Capital Market Services Act.
41. The SC will increasingly rely on market professionals, intermediaries and self-regulatory organisations as the sentries of the marketplace to ensure high levels of investor protection and market integrity. We will exercise strong oversight through principles-based regulation to provide greater flexibilities to those able to demonstrate strong controls and good conduct to undertake activities with minimal regulatory burden.
42. Errant professionals and intermediaries will be taken to task and there will be swift and effective enforcement where there is irresponsible and unethical conduct such as fraud and manipulation and we will ensure that there are no risks to investor protection, a fair and orderly market and financial soundness.
43. Market efficiency and competitiveness will be enhanced through necessary rule changes to assist Malaysian intermediaries to bring new ways of serving investors and issuers better.
44. Our new regulatory paradigm will mean a deepening of our partnership with industry. We look forward to an exciting and vibrant future for the Malaysian capital market.