Welcome to the Asia-Pacific Economic Cooperation’s (APEC) regional seminar on ‘Investor Education: A Challenge for the Regulators’ jointly organized by the Asian Development Bank (ADB) and the Securities Industry Development Centre (SIDC) of Malaysia. It is indeed a privilege for us to host all of you to a seminar on a subject, which is very close to the heart of the Malaysian Securities Commission. I am sure you will have very interesting and productive discussions in the next two days. Even so, I hope that some of you, if not all, have made plans to see a bit of Malaysia, or at least enjoy the sights and sounds of Kuala Lumpur.
Why Investor Education?
Over the years, the regulatory approach taken by regulators was to punish offenders after they have committed the offence (if we can catch them in the first place!). Of course, by the time we apprehend the crooks, investors may have already suffered huge amount of losses and no amount of punishment on the offenders could overcome the stresses and pain suffered by the investors. While laws can protect investors from being made fools by others, laws cannot protect investors from making fools of themselves! No amount of regulation would be able to protect investors if greed continues to be their sole investment criteria thus making them susceptible to undesirable elements existing in financial markets everywhere. Thus, the question before us is why not provide the investors with the necessary weapon to protect themselves? By providing investors with the necessary education they would be able to have the tools to protect themselves from suffering huge losses arising from investment decisions made out of sheer ignorance or greed or both.
When faced with situations where investors lost a lot of money due to schemes and scams in the markets, most regulators would start to think about introducing new laws or tightening existing ones. We tend to forget that new regulations can result in added cost – either direct costs that have to be borne by investors or intermediaries – or indirect costs in term of greater administrative burden or reduced efficiency in the capital market. At the Securities Commission (SC), we take the view that too much regulation would be bad for industry as it may stifle enterprise and risk taking, hence our guiding principle is “no more regulation than necessary”. Another example is the flexible risk based approach used by the Financial Services Authority of the United Kingdom. It shows how regulators are trying to provide for a business friendly approach but still meeting their regulatory objectives. What we can then do is to complement the flexible approach with comprehensive and systematic investor education programmes.
Ladies and Gentlemen,
Investor Education as a risk management tools?
One of the most discussed subjects in our industry currently is the issue of risk management. Time and again, we hear that investors had suffered losses due to bad investment decisions. Although it is not our job to prevent losses incurred by investor due to normal investment decisions, I consider it as a regulator’s duty to at least provide the investors with the necessary knowledge to make investment decisions and to appreciate that all investments carry some risk, and therefore risk management should be clearly understood by them. Investors can be educated on the very simple investment philosophy that “higher returns will come with higher risks”. We do not want investors that have been burnt by the market never to ever return, especially in markets in our region where retail investors are significant participants in the market. And worse, we do not want them to influence others from taking part in the markets. Hence for regulators in developing markets, investor education is not an option but a necessity. We want to ensure their continued participation in the market but we want them to be well informed and educated investors.
Internet revolution
Another compelling reason for investor education relates to the Information and Communications Technology (ICT) revolution. The Internet, in particular, makes it possible for investment decisions to be made and executed from home. And it has also enable investors to access information and investment opportunities in other markets. Hence given that technology provides the opportunity for investors to make even bigger investments and in a borderless marketplace, they need to be fully informed of the risks that they could be exposing themselves to.
Of course there are unimaginable good things that have come about because of the internet but it has also been used by unscrupulous people to defraud gullible investors. As regulators, we are not in the position to sit next to the investor to ensure that they do not click the computer mouse. Thus knowledge and awareness are the only tools that investors have to protect and guide them in face of the ICT Revolution.
Disclosure based regime
In a merit-based environment, regulators take paternalistic approach and decide on the merits of an investment before it is allowed to be offered to investors. Apart from being inefficient this approach becomes less appropriate as the market gets more developed.
With the move to a disclosure-based regime (DBR), the onus will shift from the regulators to investors in evaluating the merits of the investments in the capital market. A DBR regime means that investors are expected to make their own decision based on the information provided. However, an overload of information is not necessarily good for investors. An investor facing with a deluge of information but having limited knowledge on how to analyse them could end-up making incorrect investment decisions that maybe detrimental to their investment goals. As regulators, we should ensure that an investment decision made by ordinary investors is not only an informed one but also the correct one. I believe, under the circumstances the often-used phrase, “informed investment decision” should now be replaced with “correct investment decision” when it comes to ordinary investors. Our job is to ensure that the investors not only make decisions that are supported by the necessary correct information, but also decisions that are suitable for their investment goals. I strongly believe that it would be irresponsible for us to simply leave the investors to the mercy of the caveat emptor rules without the necessary basic knowledge on investments.
Investor protection
Even though capital market regulators are mandated to protect the investors, on most occasions our resources capabilities are limitless. We will never be able to be around at all the places all the time to protect the investors. The best panacea for any disease is to avoid getting it in the first place, hence the old adage of “prevention is better than cure”. Another old adage, which is very relevant in this area, is that “knowledge is power”. Thus, by giving the investors the necessary knowledge, we are empowering them to prevent themselves from falling prey to fraudulent and illegal schemes. Essentially, what we are saying is that investors should also play a role in protecting themselves. And investor education is the way to do it.
Ladies and Gentlemen,
The regulator’s challenge
The challenge for the regulator in investor education is to find the most effective way to reach the investors. First, would be the language used. When I say this, it does not refer to the English or any other lingua franca. Basically, I am referring to the language of finance. Financial language in any language be it in English, French or Chinese would be a foreign language to the average investors. Thus, it is necessary for the regulator to be able to deliver its messages in the language that can be understood by the investors.
The second challenge relates to the channel in which the knowledge is disseminated to the investors. The best medium as always is the electronic and printing media. However, these tend to be one dimensional with the investors unable to interact should they need any further clarification. Therefore, in this regard regulators would have to take the proactive approach of going to the investors themselves. I believe it is not too much to say that as regulators, the time has come for us to be the messiah of capital market knowledge.
But to do this effectively poses another big challenge. One of the main problems for regulators the world over is to have sufficient personnel to carry out its mandate. Manpower would have to be allocated accordingly to ensure that each area of operations of the regulator would be able to be carried out. Then there is the matter of cost, which is always a factor!
The ideal set-up for a regulator is to have a large number of staff with unlimited budget to carry it out effectively. This is of course, wishful thinking! I am sure all of us face constraints. This is where ingenuity is needed. One of the more effective solutions we have found is for the regulators to leverage on others, be it government or quasi-government agencies or the private sector. A clear advantage of this approach is that we would have a dedicated audience to spread our message and we would be able to pitch our delivery according to the level of knowledge of the crowd. Our experience using this approach has been very good, with the agencies approaching the SC to have even more collaborations.
Industry involvement
In our own experience, one of the most effective distribution channels of our messages is the industry players. Being close to the investors, given that they meet investors on a daily basis, their involvement is crucial for investor education. Certainly we know that their main focus is to sell products and services. As such it is imperative for the regulators to ensure that any investor education programmes delivered by the industry are not marketing strategies and that possible conflicts of interests are checked or minimised.
New generation
Apart from educating the existing investor community, it is imperative for regulators to ensure that the younger generation of investors have the necessary knowledge on finance and investment. There is a Malay saying that “to shape a bamboo, it is best to start when it is still a shoot”. Thus, the best time to start educating the investor is when they are still young. Given that the capital market would play a significant part in the financial planning of future investors, we feel that young people should be exposed to the basics of finances at an early stage. A systematic implementation of these programmes would result in a new generation of investors who are financially literate and investment savvy. This, I believe should be the aim of each regulator. To us this would be the greatest challenge of all but something that we believe is quite achievable with careful planning and support of the various quarters.
Malaysian approach
At the Securities Commission, we continue to enhance investor awareness of current market issues and their likely impact on investments. We do this by getting them to appreciate the functions of the capital market, delivered in languages and materials that are simple and user-friendly that even the inexperienced investors will be able to comprehend. More emphasis will also be given to promote awareness in smaller towns and rural areas, where initiatives will be focused on promoting fundamental capital market literacy. Such efforts will also be promoted through collaborative efforts with external parties such as exchanges, consumer groups and intermediaries.
To further enhance investor protection and education, the SC will initiate new programmes to be sustained over the medium and longer term that we hope will continue to enjoy strong support from front-line regulators and industry associations. Puan Teh Ija Abdul Jalil, the Head of Securities Industry Development Centre, our training arm, will be sharing with you in greater detail on what we have done to promote investor education in Malaysia and what our future game plan is.
Finally, I would like to thank ADB for its initiative in organizing this seminar. It is my view that the organization of this seminar is timely. The theme of the seminar, “Investor Education: A challenge for the regulators” describes very aptly what we are really facing. Indeed investor education is not particularly glamorous, takes a long time to show results and cost a lot of money! It is a big challenge, but a goal worth pursuing as the ultimate reward is a well-informed, sophisticated investment community that makes the market more mature and least prone to rumours and manipulation.
It is my hope that all of us would be able to compare notes on what each of our country has undertaken in promoting investor education, so that we would be able to find the most effective ways to enhance our investor education programmes. It is also my hope that this seminar would be the launching pad for a strong regional cooperation for a common approach in investor education. I wish a fruitful session for all of you. Indeed a knowledgeable investor is a protected investor.
Thank you.
