Tan Sri Zarinah Anwar
Securities Commission Malaysia
SC Annual Report 2009 Press Conference
19 March 2010
Ladies and gentlemen of the media,
Let me begin by providing an overview of 2009 before discussing some of our major initiatives in 2010. Last year was a challenging year not only for the SC but also for capital market regulators around the world. The impact of the global financial crisis was still working its way through markets in early 2009. This necessitated unprecedented fiscal measures on the part of governments. There was a noticeable erosion of confidence in global markets – increasing the costs of funding and resource allocation which invariably impacted society as a whole.
In response to the volatile market conditions, the SC focused its efforts on the core areas of our mandate to ensure market stability and investor confidence in Malaysia’s capital market. We widened our risk-based coverage of potential stress points through heightened surveillance of systemic risks and expanded co-operation with regulatory agencies and market participants.
We also continued to strengthen the longer-term competitiveness of Malaysia’s capital market through initiatives to facilitate greater international participation and to enhance the ability of domestic players to capitalise on regional opportunities. Major structural reforms were implemented to liberalise the capital market while initiatives were introduced to improve access to funding and to strengthen equity market competitiveness. Overall, the size of Malaysia’s capital market grew by 23% in 2009.
Ladies and gentlemen,
Strengthening oversight and effective enforcement
The global financial crisis of 2008-9 represented a severe test of the robustness of the regulatory framework of many markets. Malaysia’s approach to prudential regulation and the emphasis on high levels of transparency and accountability as a means to achieving regulatory objectives ensured that Malaysia was among the most stable markets during the crisis period.
As global financial risks increased, we heightened our surveillance of markets and business conduct. We also stepped up surveillance of the local bond market and reviewed the business conduct of intermediaries. This led to on-site examinations of all 15 registered bond trustees as well as increased supervision on credit rating agencies. As a reflection of the quality of Malaysia’s corporate bond market, it is worth noting the corporate securities default rate was only 0.36% in 2009.
Another priority area of review was the rapidly growing investment management industry. A combination of macro and micro prudential supervisory approaches were adopted to identify and mitigate risk exposures. We had engagements with fund managers focusing on custodial arrangements, business viability and investments in non-traditional asset classes. Similarly, we remained vigilant against potential incidences of market misconduct and took the necessary actions.
We continue to maintain a strong enforcement stance; adopting approaches to seek restitution for investors who were defrauded either by investment scams or trading offences.
I wish to briefly highlight two landmark cases. The first is a settlement for RM31 million in the Swisscash investment scam – the largest in the history of Malaysia’s capital market. After much time, effort and collaboration with multiple jurisdictions, the fruits of our endeavours have been realised and efforts are now underway to compensate eligible investors who were defrauded in this illegal scheme.
The second landmark was when the High Court ruled against Kenneth Vun, the former managing director and shareholder of FTEC Resources Berhad, and ordered the restitution of RM2.4 million – the amount of company funds he misused for his personal benefit. This was the first time a company director was ordered by the High Court to restitute company funds.
We continue to take action for corporate governance transgressions with several high-profile prosecutions throughout 2009.
In 2009, new provisions were added to the Capital Markets and Services Act (CMSA) to broaden the SC’s scope of enforcement to pursue corporate governance transgressions; which previously was limited to disclosure-type offences. Section 317A now enables the SC to take action against those causing wrongful loss to a PLC. Section 320A makes it an offence to influence persons preparing or auditing financial statements of listed companies. Amendments were also made to make it an offence to falsify or destroy the accounting records of a listed corporation.
We enhanced our surveillance of their compliance with financial disclosure requirements. We also engaged with auditors, advisers and other relevant parties to foster greater accountability and awareness of corporate governance duties and obligations.
I am glad to note the increase in industry-led activities to raise awareness and to promote greater understanding of governance. The SC and Bursa Malaysia organised the first-ever CG week. During the week, the Malaysian CG Index was launched. It was the joint effort of the MSWG, the University of Nottingham Business School and the Corporate Governance and Financial Reporting Centre at the National University of Singapore. The Malaysian Institute of Accountants (MIA) also launched the Audit Assurance Board and the Ethical Standards Board.
We continue to make good progress in our efforts to broaden the coverage of our investor education initiatives. Financial literacy programmes conducted by the SIDC reached out to over 28,000 participants covering a wide spectrum of the community including school children, university students, rural communities and blue collar workers. The media also greatly assisted us to expand the reach of our programmes and industry is becoming an increasingly active partner in education and awareness programmes.
Enhancing equity market competitiveness and efficiency
The benefits of a diversified capital market have also become increasingly evident. As market conditions changed in one segment, issuers could tap alternative sources of funding. The tight conditions in the bond market and rising risk aversion led companies to shift from the bond market to seek equity funding so as to reduce leverage and to strengthen their balance sheet resilience. Approvals for fund-raising through IPOs and other equity exercises rose to RM28.4 billion in 2009; a five-fold increase over the previous year. Approvals for debt securities fund-raising exercises fell 59% to RM57.5 billion.
A major revamp of Bursa Malaysia’s board structure was completed, and in tandem with this, an extensive range of efficiencies were introduced to lower costs and improve access to equity fund-raising. This, coupled with the liberalisation measures, has attracted more issuer interest with three China-based companies preferring Malaysia as a listing destination over other regional exchanges. Maxis Berhad’s return to the equity market also marked Malaysia’s biggest initial public offering (IPO) of RM11.2 billion.
Rapid growth in investment management and ICM
Due to the sharp recovery in equity markets and sustained inflows into the Malaysian fund management industry, assets under management (AUM) grew by 40.9% to RM315 billion in 2009. Unit trust industry net asset value (NAV) rose by 47% to RM191.7 billion with net inflows sustained at a healthy RM24.8 billion. Industry penetration rates (as measured by the unit trust NAV divided by equity market capitalisation) remained high at 19%, reflecting the increasing maturity of Malaysia’s unit trust industry. We continued to implement initiatives to broaden participation, widen product range and strengthen investor safeguards to promote sustainable growth in the industry.
The size of Malaysia’s ICM grew by 40% to RM894.5 billion in 2009. Issuer interest to raise sukuk was sustained at reasonable levels. While approvals were lower by 21% at RM34 billion, net issuance tripled to RM44 billion. This was commendable given that sentiment in the global sukuk market was dampened by the developments in Dubai and reflects the strength of credit quality and liquidity demand in Malaysia’s sukuk market. During 2009, the default rate for Malaysian sukuk was very low at 0.46%.
Malaysia continued to strengthen its position as the largest and most comprehensive Islamic capital market. With the facilitative measures in place for sukuk listings, there were maiden sukuk listings and by the end of 2009, Bursa Malaysia had become the leading exchange with 12 sukuk listings with a value of RM60.1 billion.
Malaysia’s reputation as a centre of innovation was reinforced with the launch of the world’s first Shariah-based commodity trading platform, Bursa Suq Al-Sila’ on 17 August. The electronic multi-currency trading platform enables Shariah-based financing and liquidity management based on the principles of murabahah, tawarruq and musawwamah.
Seven new Islamic fund management licences were issued and a mutual recognition agreement (MRA) was inked with the Securities and Futures Commission (SFC) of Hong Kong for cross-border distribution of Islamic fund products. The attractiveness of Malaysia as an Islamic fund management hub was reaffirmed by continuing strong international interest to establish operations in the country. To date, 12 Islamic fund management licences have been issued.
The Ministry of Finance extended the tax deductions on sukuk issuance expenses and Islamic stockbroking to sustain Malaysia’s attractiveness as an international centre. In addition, Malaysia’s Shariah experts continued to strengthen their profile and increased their collaboration with international scholars. These measures complemented intensive marketing to strengthen Malaysia’s global ICM brand.
SC’s international regulatory initiatives
Together with our ASEAN counterparts, the SC worked on an “Implementation Plan to promote development of an integrated capital market” through the ASEAN Capital Markets Forum (ACMF). The regional integration initiative was endorsed by the ASEAN Finance Ministers. As a start, Malaysia, Singapore and Thailand implemented the ASEAN and Plus Standards Scheme for cross-border offering of securities on 12 June.
The SC actively participates in ongoing work to evolve global securities regulation to keep pace with innovation and to manage changes in risks and public expectations. As Vice-Chair of the International Organization of Securities Regulators Emerging Market Committee (IOSCO EMC), the SC co-chaired a Task Force to review the experiences of EMC members in responding to the financial crisis, identifying key regulatory and supervisory challenges and providing key recommendations. The findings were provided to the G-20 leaders in advance of their meeting in April 2009 and ultimately led to a report being published in September 2009 by IOSCO. The SC was also appointed a member of the IOSCO Strategic Direction Task Force to discuss the development of IOSCO’s role, mission and its key goals and priorities and to establish IOSCO’s Strategic Direction for 2010-2015.
The SC also organised the World Capital Markets Symposium (WCMS) on 10-11 August to bring together thought leaders, policy-makers, regulators, economists and finance practitioners to discuss the global financial crisis and the way forward. The WCMS was a major success – attracting more than 500 high-level participants from 30 countries and generating positive global media coverage on Malaysia.
Ladies and gentlemen,
SC priorities for 2010
We currently operate in an environment of uncertainty arising from the ongoing structural shifts in the global economic and market landscape. Given the strong nexus between the access to finance and the growing role of the capital market in providing long-term financing, uncertainty poses a challenge in that any erosion of trust and confidence in the capital market would increase the cost of allocating resources and managing financial risks in the economy. Ultimately, and unfortunately, it is the man-in-the-street that bears the consequences of poor governance and misconduct.
Poor governance has played a significant role in most financial crises. Steps to reduce systemic risk, protect investors and uphold fairness and efficiency in the capital market will come to naught if they are not coupled with the practice of strong governance. Our governance frameworks are already place. We have come to a stage where stakeholders now need to walk the talk. They must internalise these governance principles and reflect them in the way they conduct business.
Therefore, the SC’s agenda for 2010 is premised on the belief that the quality and future success of our capital market rests greatly on how well its stakeholders govern themselves. We believe that long-term growth prospects can only be sustained through strengthening governance arrangements such that the benefits of market and economic activities are fairly shared by society. Only then can we be truly assured of sustaining confidence and trust in our capital market in the years to come.
2010 initiatives to strengthen corporate governance
Since the Asian crisis of 1997-8, Malaysia has succeeded in improving its governance framework. From a broader perspective, we see the incorporation of best practices into our corporate governance framework as representing substantive progress and marking an important turning point with positive changes in stakeholder attitudes and public expectations. There is certainly now greater recognition of board accountabilities and obligations in relation to corporate governance duties than a decade ago.
Although the frameworks in place comply with international standards, many observers continue to raise concerns about their implementation. The way governance is practiced by some companies and players in our market suggests there is much to be done before negative perceptions can be overcome.
The key to improving corporate governance practice lies in shaping Boards to be more effective in providing leadership on corporate governance. It is the message from the top that sets the tone for the earnestness with which the organization practices corporate governance.
Findings from SC review of board structures of Malaysian PLCs
The SC recently completed an extensive review of all PLCs to identify how Boards can strengthen the effectiveness of their corporate governance practices. I would like to share with you some of our findings on weaknesses in board structure that need to be addressed:
Independent directors. Our findings show that a significant number of PLCs have independent directors who are related to each other. This raises concerns about the ability of independent directors to discharge their responsibilities effectively.
Long tenure of independent directors. Additionally, while a large majority of PLCs comply with the requirement to have one-third independent directors, about 40% of these companies have independent directors with tenures exceeding nine years. Some 20 PLCs have independent directors with tenures exceeding 30 years. Boards cannot disregard the risks that independence may be undermined by long tenure.
Relationship between chairman and CEO. While around three quarters of PLCs separate the role of the chairman and CEO, in many instances the chairman and the CEO are related. This nullifies the benefits of having dual roles on the board.
Sizeable number of executive directors. The independence of the board may also be compromised by large numbers of executive directors. In our review, we observed that one quarter of PLCs have more than three executive directors on the board and, in some instances, more than half the board comprises executive directors. Additionally, there are instances where the executive directors are themselves related. We are also increasingly coming across situations where an individual serves in an executive director capacity in more than one company.
Large board sizes. Although generally board sizes are appropriate, we observed some companies with very large sized boards – with 17 directors in one instance. This may make the board unwieldy and reduce its effectiveness.
The findings of the review underscore the point that many PLCs have chosen merely to comply with the form rather than the substance of the Malaysian Code of Corporate Governance. The current composition of PLC Boards naturally gives rise to situations where boards are generally passive and unquestioning and this opens up the opportunity for domination by owners and top management without adequate checks and balances. In some recent shareholder disputes, independent directors have not risen to the occasion to act as stewards of the interests of the ordinary investor, as they should.
The quality and capability of directors vary greatly from board to board. There is a lackadaisical attitude and a lack of knowledge and commitment towards corporate governance and the importance of ethics amongst some directors. Where quality is poor, problems will occur.
Engagements to strengthen quality of PLC boards
One of our priorities in 2010 is therefore to focus on improving the quality of boards as a means of strengthening the practice of corporate governance. The SC will undertake focused engagements with boards of selected PLCs to discuss our corporate governance concerns. We will also enlist Bursa Malaysia and interested organisations to participate in a more extensive engagement exercise to get feedback and discern the views of PLC boards and to identify the changes that are necessary to increase the effectiveness of boards in leading their companies.
We encourage PLCs to review their board structures and to identify improvements in the quality, dynamism and effectiveness of their boards as well as the level of governance practices by senior management. The nomination and renumeration committees must take a leading role in overseeing board quality.
In this regard, it is heartening to note that the Green Book on Enhancing Board Effectiveness have imposed higher standards of corporate governance by making compliance with international best practices mandatory for Government-Linked Companies (GLCs).
Our vision for corporate governance is to see PLCs boards move beyond meeting compliance requirements towards enlarging their role where boards can wisely guide the growth and value of their businesses. Malaysian companies, under the active stewardship of quality boards, will surely emerge among the most attractive and dynamic companies in the region and this will strengthen the competitiveness of our market and economy.
We also want to see our Malaysian PLC boards emerge as role models in an increasingly transparent society where the decisions and conduct of large companies are scrutinised by all stakeholders. The benefits of good reputation from meeting the high expectations of the public are immeasurable and these benefits will not only lead to sustained and healthy returns to owners and shareholders, but also to society.
This vision can only be achieved through infusing boards with the recruitment of more high-calibre and experienced individuals who can demonstrate passion and commitment as a member of the board. Finding talent is always a challenging exercise that requires creating attractive conditions, including providing commensurate renumeration. Choice can also be expanded through increasing the diversity of the board as this contributes different perspectives to board deliberations and results in more robust board processes and decisions. In this respect, the under-representation of women on PLC boards is incongruous with the extensive role that women already have in Malaysian society. This is a gap that needs to be addressed.
Operationalisation of AOB
A strong corporate governance framework also requires providing the necessary assurance on the rigour of the audit process and the quality and reliability of audited financial statements. Towards this objective, we have invested considerable effort to establish the Audit Oversight Board (AOB) to provide independent audit oversight over public-interest entities and to ensure our regulatory framework for auditors is on par with international standards.
As you are aware, the Bill to establish the AOB was passed by Parliament last December. I am pleased to announce that, subject to the law being gazetted, the Audit Oversight Board (AOB) will commence operations on April 1. An Implementation Steering Committee has already been established to formulate the registration criteria for auditors of public-interest entities. This will be followed by the development of a supervisory oversight program for inspection, inquiry, enforcement and standards setting.
Another critical aspect of governance arrangements is for intermediaries and advisers to uphold the primacy of customer interests. Professionals owe a fiduciary duty of care to their clients and should provide appropriate disclosure and advice in a manner that inspires trust.
SC consultation paper on sophisticated investors and sales practices
The SC has received many complaints from investors on selling practices – including difficulties in assessing the performance and risks of products, the suitability of products and the transparency of costs. Therefore, we are undertaking a review of sales practices to address mis-selling of financial products. As part of this effort, we will also review the definition of sophisticated investors. In this regard, I’m pleased to announce that the SC will release today a consultation paper to seek feedback on the proposals which includes:
Improving the assessment of client suitability;
Improving disclosure through requiring product highlight sheets;
Tightening requirements for advertising, marketing and promotional material:
Improving disclosure of monetary and non-monetary benefits;
Mitigating potential conflicts of interest from the use of gifts in promoting investment products;
Extending the cooling-off period for all unlisted capital market products;
Requiring continuous disclosure on investments; and
Introducing a code of conduct for all licensed intermediaries.
Establishment of Alternative Dispute Resolution (ADR) body
As part of the investor protection framework, it is essential that retail investors have appropriate access to a mechanism that will enable them to have their grievances addressed in an efficient manner. In this regard, the SC has been working with industry to establish an ADR body by July this year. This body will act as a mediation and dispute resolution forum for small monetary claims filed by individual investors in relation to their dealings in securities and capital market products.
SC consultation papers to review take-overs to protect investors
The reputation and quality of a market rests on regulatory assurance that all players and investors are subject to the same rules and have fair access to opportunities. It is important to ensure that take-over transactions and other transactions, which in substance result in the same effect as take-overs, are regulated in the same manner and that investors are afforded the same level of protection. In this regard, the SC has been working with Bursa Malaysia to address these concerns.
It is also important that in take-over situations, minority investors should be provided with clear, meaningful and useful advice to enable them to make informed decisions. For this purpose, the SC is proposing improvements to the quality of independent advice in take-over situations.
Consultation papers on both these matters will be released today.
Strengthening industry and media collaboration on investor education
We will also sustain our momentum in investor education initiatives. In particular, our objective is to strengthen collaboration with industry, media as well as with other regulatory agencies to further expand the effective reach of our investor education initiatives. Apart from improving the knowledge of investors on the various capital market products, it is also important to develop greater investor understanding and acceptance of their own accountability and responsibility for their investment decisions. It is also important that industry steps up their role in ensuring that the DNA of their business processes and strategies incorporates the necessary chromosome of investor education – whether in terms of product disclosures or the conduct of their salesmen.
The seriousness and speed with which the SC is launching initiatives to address the governance agenda reflects the weight we are placing on these issues. There is no need for any further reminder that it is always necessary to ensure that our markets are underpinned by robust governance arrangements for integrity, transparency and accountability. Our markets are now sufficiently matured. The time has come for intermediaries and professionals to take on greater responsibility and to work closely with us in expanding their role to ensure more effective governance in the Malaysian capital market.
Finally, I would like to say that the 10-year Capital Market Masterplan (CMP) which was launched in 2001 has played a significant role in helping us build a diverse and resilient capital market. New market segments were carefully nurtured during this period. Malaysia can now take pride in having a broad capital market that includes a stockmarket that provides access to equity capital for almost a thousand listed companies, a bond market that is the 3rd largest in Asia benchmarked against GDP, among the largest domestic unit trust industry in ASEAN and a comprehensive and innovative Islamic capital market which is globally regarded as a leading Islamic market centre.
The SC is already working on developing CMP 2. It is our objective that CMP 2 will provide a clear commitment to a sustainable growth agenda and vision underpinned by confidence in Malaysia’s future. We expect to launch the new Masterplan before the end of this year.