3. It is in reflection of such that collective levels of trust amongst various societal actors have been widely regarded by economists, political scientists and researchers to possess widespread capabilities in determining broad trends. These include fundamental associations to market forces, economic performance and societal wellbeing.1
4. Today, the far-reaching influence of trust has stemmed into urgent discourses surrounding the state of global affairs. In June, I had the privilege of co-chairing the high level Salzburg Global Finance Forum of high level policy makers. In my speech at the opening of the forum, I highlighted several pertinent global trends that threaten the harmony of our prevailing socioeconomic order. These include the widening fissures of income inequality, increasing risks of climate change, surging debt levels amongst major economies and anxieties surrounding job security.
5. These are but a few features of our global landscape that has cultivated strong challenges against status quo, promulgating feelings of unease, and in some cases, leading aggressive motions for change. In developed economies, nationalist movements expressing anti-globalization sentiments have demanded policy readjustments toward protectionism – steps perceived in their minds as cures for various structural inequities. It is important to note that these occurrences are symptomatic of a global environment lacking trust.
6. As stakeholders convene with intent to embark upon the challenging journey of restoring trust, we must remain cognizant that we dwell in a unique era that brings about distinct opportunities and uncertainties. Unprecedented technological evolution, rapid informational dissemination, intensifying competition and growing consumer demands have all catalyzed the substantial degree to which the world is inextricably linked– connecting nations, markets, businesses and people in a vast and complex tapestry.
Trust as a Backbone of Our Financial Markets
7. This depth of interconnectivity is particularly evident in the financial markets, where risk transmission and tolerance is realized across a broad spectrum of market segments. The recognition of these transmissions of risk is a simple yet profound understanding that the actions of a few could impact the conditions of many.
8. Several experiences within markets have showcased and reminded us of this– demonstrating instances of market failures that diminished trust and propagated market manipulative behaviors beyond the confines of national borders and economic boundaries. The LIBOR2 scandal represents one such example where dealers were discovered colluding to manipulate interbank reference rates. This led to a loss of trust in a key benchmark, resulting in massive fines for financial institutions and moves towards developing a more robust, transaction-based reference rate.
9. Where market failures are concerned, there is perhaps none more historically recent and stark than the global financial crisis – an event which observed the collapse of large financial institutions and resulted in severe disruption in developed markets, an impact which echoed throughout all four corners of the globe.
10. As a consequence, systemic risk recognition begun to surface in mainstream conversations surrounding stability, expressing concerns that financial institutions and corporations had manifested into ‘too large’ entities whose downfall would cascade in widespread adversity. Businesses crashed, communities lost the capacity to form stable livelihoods and families witnessed the dissipation of their wealth. Ordinary citizens sustained the brunt of the ensuing recession only deepened by the prevalence of diminishing liquidity and a credit crunch. As a result, many stakeholders developed disenchantment towards financial markets, provoking a call for change.
Investor Confidence: Underpinning the Discipline of Market Forces
Ladies and Gentlemen,
11. Amongst the various lessons that the global financial crisis conveyed, it has also raised insights into the paradigms of trust and, its delicate stability that characterizes relations between markets and regulators.
12. Looking at some of the statistics, the world’s largest banks have paid USD321 billion in fines as at end-2016 for regulatory breaches3. To put things into context, that is slightly more than the GDP of Malaysia and the same as that of Hong Kong. Take Wells Fargo as an example. Firstly, Wells Fargo estimated that 2.1 million accounts had been opened by its staff without customer consent. Then, it was revealed that 570,000 of its auto loan customers were charged for insurance that they did not need. Some auto loan customers actually defaulted because of the insurance burden and had their vehicles repossessed. A few days after news broke, the bank conceded that another 1.4 million unauthorised accounts had been discovered.
13. With such large-scale and far reaching transgressions, it is no surprise that these infractions have instigated periods of hesitation and uncertainty towards financial markets. As Governor Mark Carney, puts it “Trust arrives by foot and leaves by Ferrari”. I would go further to say that “Trust happily leaves in another man’s Ferrari” because people do not need to have a bad experience themselves to lose trust. All they need is to hear of another person’s bad experience and distrust will arise.
14. This simple but powerful illustration underscores the very nature of consumer and investor confidence which ultimately forms the bedrock of financial markets. In particular, it highlights the importance of how aligned interests lead to trust, and misaligned interests lead to suspicion.
15. In the capital market, the opportunity for investors to realise returns remains a key element of market performance. Investors who perceived themselves to be disadvantaged may very well reduce their exposure, or in light of increased risk – demand higher returns. Reduced investor participation in markets will affect and lead to lower liquidity and higher costs of capital.
16. Where trust exists in the capital market, capital is allocated from those with excess funds to those who need it in a manner that lowers the cost of capital and provides liquidity. Where trust exists, time and resources are not unnecessarily wasted in verifying information and counterparties. This ultimately leads to the efficient mobilization and allocation of capital, thereby supporting the capital markets active role in sustaining development within the real economy.
17. In the context of Malaysia’s RM3.1 trillion capital market, we have witnessed healthy levels of fundraising over the past five years, with an average of RM116 billion raised annually. This has enabled the capital market to play an active role in supporting business activity, infrastructure development and the real economy.
18. Similarly, savings mobilization has grown significantly with Malaysia’s strong fund management industry having established itself over the years. Assets under management (AUM) are now RM750 billion in the first half of 2017. It is one of the fastest growing segments of the capital market; growing 15.8% per annum over the last 10 years from a size of RM161 billion. Similarly, the unit trust industry has also experienced a significant increase in net asset value (NAV) from RM122 billion in 2006 to RM409 billion as at end June 2017. These private fund managers, together with public institutional investors, make up in excess of RM1.3 trillion.
19. This scale of fund mobilization and savings by Malaysian investors shows that there is trust and confidence in the capital market. Therefore, the Securities Commission recognizes that building trust and confidence must, and will always remain as a core constant of our efforts. This demands robust market infrastructure and a regulatory architecture that enables transactions to occur fairly, orderly and in a transparent manner, and where investors are protected.
Imperatives in Regulatory Discipline: the 3 ‘Ts’
Ladies and Gentlemen,
20. In the present regulatory environment, a continued motion for robust capital market infrastructure and sustained trust calls for the recognition of several imperatives. While these encompass a broad range of considerations, I will try to summarize them into 3 ‘Ts’ – Technology, Teaming and Transparency.
21. The first ‘T’ – Technology, has emerged with great pertinence across capital markets, introducing new challenges in the way trust is to be sustained. One such challenge is accountability. For example, who is going to be held responsible for an algorithm or artificial intelligence? In 2012, a glitch in the trading algorithm of Knight Capital disrupted the trading prices of 140 stocks listed on the New York Stock Exchange. With the advent of robo advisers today, investors are getting advice from a computer program who cannot feel the consequences of its wrong actions. As Artificial Intelligence progresses, we will find self-learning machines augmenting their actions as they go along. In order to ensure that trust is maintained, providers of digital services must be held accountable for the actions of their creations and platforms.
22. Privacy of user information is the other area of big concern. While various laws are in place to require data protection and privacy, incidents of massive hacks that compromised customer and other data is unfortunately becoming – commonplace. In the capital market, investors need to have the confidence that their data is secure. Not only is data security a significant concern, cyberfraud and cybersecurity risks have become a priority for all participants in the digital capital market. The increasing reliance of the capital market on technology also means that better cybersecurity is a prerequisite for trust.
23. Another technological evolution that undoubtedly warrants mention relates to the increasing accessibility and influence of social media. This has transformed the rate and breadth at which information disseminates, granting the public an ability to rapidly expose the conduct of businesses. Additionally, as more information circulates within society, society in turn demands to know more before they are willing to trust.
24. In today’s world where products and services can be replicated and pricing matched, trust emerges as a significant competitive advantage. Therefore, creating value with the purpose of earning customer trust is fast becoming an important consideration for businesses to remain relevant and competitive.
25. The second imperative, Teaming – cannot be underscored with sufficient importance. Here in Malaysia, the SC has continued to pursue proportionate regulation by emphasising the shared responsibility and collaboration among our stakeholders to build and sustain trust. An example of this shared responsibility is our approach to corporate governance. Through the Comprehend, Apply and Report (CARE) approach advocated in the Malaysian Code of Corporate Governance (MCCG), we have empowered the boards of companies while holding them accountable. Under the MCCG for instance, the Audit Committee is tasked with ensuring that the financial reporting process is appropriately carried out, including the appointment of the auditor and the audit process itself. The Audit Committee is also expected to provide auditors with views and information about transactions and issues that have impact on the financials or audit of the company.
26. At the same time, we are also very prepared to step in where regulatory discipline is necessary. When there was a need to shore up confidence in financial reporting after a spate of incidents globally and some unfortunate cases locally, we established the Audit Oversight Board (AOB) to provide more confidence in the overall quality of audits and financial reporting in Malaysia. After six years of being in operation, I am happy to say that the AOB has fulfilled its objective of enhancing public trust in the audit process.
27. Lastly, I would like to highlight significance in cultivating a culture of Transparency. Solon, an Athenian statesman who was known as one of the seven wise men of Greece, once said, “Put more trust in nobility of character rather than on oath”. Clearly, nobility of character was something that was demonstrated and could be seen. An oath was merely asking someone to take your word for it. You cannot ask people to trust you if they do not know what is happening. In capital markets, transparency is necessary for effective corporate governance as it facilitates better disclosures and reduces information asymmetry between stakeholders and management of a company. This is not only essential for the monitoring of companies but also central in allowing investors and shareholders to proficiently exercise ownership rights.
28. As a regulator, we try to provide as much guidance as we can to cultivate transparency while levelling the playing field. For instance, the MCCG and Bursa Malaysia’s Listing Rules asks the same disclosures of all listed companies without compromising commercially sensitive information disproportionately. The rules on take-overs provide guidance to ensure that recommendations are clearly explained and advisers do not give nebulous explanations to their recommendations. Offering documents are required to explain how the investment product works. These are some of the measures we have taken to ensure that the playing field continues to remain level.
29. However, while regulators can impose certain requirements for transparency, other aspects of transparency cannot be dictated. This transparency must come from wanting to treat investors fairly; to earn their trust. I do want to point out that transparency is not just about making disclosures. There are things that cannot be cured by disclosure alone and trust in such cases means not letting investors take risks that they are simply not prepared for. Disclosures should be made to help investors reach informed decisions, rather than as a legal defence for the issuer and its advisers. Therefore, accountability must follow if there is a breach of that trust.
Dimensions of Trust in Market Regulations and Policies
Ladies and Gentlemen
30. Breaches of trust also showcase the interplay between regulators and markets. On one hand regulators place a degree of trust upon market discipline to function in an equitable and ethical manner while on the other, major transgressions in conduct has prompted specific and sometimes, stringent policy responses.
31. I am mindful of the cyclical nature of ‘trust and distrust’ within markets – principally its influence upon policy and regulations. In relatively stable economic conditions, regulators may employ a ‘light touch’ approach to policy, allowing market forces to flow unencumbered. However, drastic market failures leading to economic hardships have catalysed a multitude of policy adaptations. These have manifested themselves as a consequence of subdued trust in the market, necessitating the actions of regulators to impose measures in restoring safety, fairness, efficiency and transparency.
32. Herein lies a principal challenge in policymaking – to have a properly calibrated approach to regulation. In our pursuit to calibrate and orientate policy making, we must remain cognizant that risk can only be accurately understood if the integrity, transparency and quality of disclosures continue to reflect accurate information and invoke trust. As national policy makers and global standard setters strive to enhance, normalize and simplify the regulatory frameworks of financial markets, the aim of cultivating trust and confidence is a responsibility that is also deeply incumbent upon every market participant – each of whom hold duties as ‘custodians of trust’.
Accountants as custodians of trust
Ladies and Gentlemen,
33. Amongst the ‘custodians of trust’ are the many seated here today who have earned the privilege of being certified as accountants. The importance of this profession cannot be overly emphasized, with its significance marked not only within the domains of business and commerce but also towards the greater integrity of markets.
34. For the global markets to achieve depths of efficiency, many must invoke trust upon the quality, transparency and accuracy of financial disclosures. In this regard, accountants represent frontline roles in both safeguarding the integrity of financial statements and championing objectives in the public interests. This includes the duty of fostering public trust and confidence with purpose of achieving sustained growth in the economy.
35. It must be also noted that the accounting profession’s impact in producing and ensuring the quality of financial reporting goes beyond the realm of audit and compliance -it is the basis by which decision making, financial strategy, analysis and benchmarking is taken. Therefore, accountants hold critical gatekeeping functions as reputational intermediaries, allowing market participants to identify risks, locate opportunities, reduce uncertainties and ultimately, allocate capital efficiently.
36. Given this impact, the value of proper regulation and integrity amongst accountants cannot be overemphasized. As history has shown us, where integrity collapses, and trust erodes, a call for change may also ensue. Major scandals of the past that breached public trust called into question the quality of financial statements and the practices of accountants, thereby triggering a demand for immediate and far-reaching legislative reforms. Some of these reforms are intended to enhance transparency, the way businesses are governed and how long term value is created
37. Accountants play a vital role in maintaining good corporate governance practices and aid investors in making informed investment decisions. In today’s world of open and interconnected markets, financial reporting that adheres to internationally recognised standards provides the trust and confidence that connects investors from one country to businesses in another. Multiple studies have linked high quality reporting standards to an increase in investment levels.
38. In addition, the assurance of quality of financial information contributes to a lower cost of capital as it alleviates the need for a risk premium that would otherwise have been levied by investors and passed on to the business and the country it operates in. Better accounting standards help businesses consolidate short-term strategies with sustainable growth and long-term value creation, the importance of which is recognised by the emergence of new reporting standards.
Conclusion – Trust, A Delicate Force of Great Proportions
Ladies and Gentlemen,
39. I have provided this evening’s speech not solely to confer insights that highlight the importance of trust, but to prompt a continued reflection of its significance upon the grand realities that surrounds all of us. Trust is a delicate force – easily unsettled and quickly diminished – yet, its influence will continue to resonate in great proportions, governing individual and collective actions of the public. As the events of the past and present have shown us, high levels of trust and confidence underpin a healthy and orderly market and by extension the overall economy and welfare of society. This is why preserving trust and confidence lies at the core of what capital market regulators do.
40. While establishing trust is a complex and on going endeavour, its preservation demands a synergistic cooperation. To produce outcomes of highest success, the actions of policy makers must converge harmoniously with the will of discrete market participants.
41. Therefore, the three themes of MIA’s commemorative series are apt. Internalizing integrity and taking accountability should not be a sole consequence of compliance and repercussions, but a means to express the sheer respect and care for the trust of all stakeholder groups.
