By Tan Sri Zarinah Anwar, Chairman of the Securities Commission Malaysia

It is fair to say that Malaysia’s capital market has performed well in 2009 despite the lingering effects of the global financial crisis and ensuing economic downturn. Following a correction in the world’s stock markets the year before, share prices are up, while a significant narrowing of corporate yield spreads seems to suggest a much-improved view on Malaysian corporate credit quality-at least among the higher-quality issuers. Growth in securities issuance has turned around quite sharply from the past year, reflecting what I believe to be a return of confidence in the capital market as a source of financing – the year saw Malaysia’s biggest capital-raising exercise ever, in the form of Maxis Bhd’s RM11.2 billion initial public offering. The capital market industry is also attracting stronger international interest, and several top global firms have received approval to operate in Malaysia.

But as recent events in other parts of the world have shown, the spectre of the Great Credit Crunch of 2007-08 still lurks within the global financial system. Given the strong nexus between access to finance and economic growth, and the growing role of the capital market in providing long-term financing, no country – including Malaysia – can ignore the lessons presented by the recent crisis. While our efforts to improve the resilience of the Malaysian capital market have produced significant results-Malaysians at home did not lose money as a result of mis-sold investment products; our market intermediaries did not suffer losses and there was no need to bail-out institutions; and leverage by capital market institutions remains low-the crisis did indicate areas that need strengthening.

Moreover, the capital market today plays a far bigger role in the economy than before. More people and businesses use the capital market to invest their savings and raise funds. Liberalisation has brought more financing and investment options, and has prompted more cross-border flows. As a result, the capital market now is a more efficient source of capital for economic development and is more globally integrated.

All the more reason, therefore, to provide strong assurance that the Malaysian capital market remains fair, efficient, transparent and stable. We have seen what happens when there is an erosion of trust and confidence in the capital market. It ceases to be an efficient conduit for resource allocation and risk management: savings would not be optimally invested; financing would be costly; and shocks, which would otherwise be dissipated through the market, would instead require disruptive adjustments to capital and labour. Such an environment would also distort incentive structures and encourage poor governance and misconduct. Ultimately, and unfortunately, it would be the person on the street that suffers.

Over the past year, the Securities Commission has focused its efforts on promoting confidence and trust in Malaysia’s capital market, and on helping the market to function efficiently, providing lower financing cost while remaining resilient. Learning from events in other markets, and taking into account our own circumstances, we have heightened vigilance over systemic risk, enhancing in particular our surveillance of the bond market, supervision over the conduct and prudential limits of investment management firms, and scrutiny over Bursa Malaysia’s trading, clearing and settlement systems.

We have also sought to promote confidence in the integrity of our market. Investors must be assured they are protected from misleading, manipulative or fraudulent practices. They want to have recourse to justice and know that wrongdoers will be held accountable. The landmark settlement of RM30 million in relation to the Swisscash investment scam was a major achievement in this regard. This is by far the largest settlement in the history of Malaysia’s capital market and we will be using the amount to compensate victims of the scam. Other enforcement results in 2009 were also highly encouraging. We secured custodial sentences and fines, in three cases this year relating to fraud, deceit and falsifying accounts. And in the first such ruling against a company director following civil enforcement by SC, the High Court ordered Kenneth Vun, the former managing director and shareholder of FTEC Resources Bhd, to repay the company RM2.4 million of IPO proceeds that he used for his personal benefit.

I must emphasise, however, that not all cases can yield this kind of success. The first line of defence must be investors themselves, which is why the SC intends to step up its efforts to further empower Malaysian investors. We will be conducting extensive investor education and outreach programmes to improve investment knowledge-about how to build wealth, save for education and prepare for retirement. Financial literacy training by the Securities Industry Development Corporation has already reached more than 20,000 people, including school children, teachers and parents; we are going to build on these efforts with a target of 30,000 next year. We want to demystify the jargon surrounding investments which often confuse investors; new guidelines will require providers of capital market services to use plain language in their marketing. We intend to strengthen rules concerning certain investment decisions, and are reviewing how we classify sophisticated individual investors so that those investing in complex products really do have the financial means and understanding of risks. We also want to give investors more effective ways of addressing their grievances and will be setting up an alternative dispute resolution mechanism for retail investors and their capital market service providers.

That is not to say the SC will not step in or take action where needed. Those who cheat and defraud must be punished, and we are equipping ourselves with better enforcement tools, including new provisions in the law that would allow us to take action against errant company directors who cause wrongful loss to their company. At the same time, we will be holding retail service providers more accountable for the way they do business with clients so that investors are assured of getting a fair deal: new rules on sales practices will require higher standards of conduct at all stages of a transaction, including tighter “know your client” procedures and more stringent requirements on taking into account customers’ risk appetites when making a sale.

Turning to better-functioning markets and lower costs of financing, we recognise that a competitive environment demands regulatory certainty, short time-to-market and low regulatory costs. During the past year, we have streamlined our approval processes to make our decisions more transparent and speed up time-to-market, and have introduced new procedures on prospectus exposure. In moving our regulatory approvals process to a more disclosure-based approach we have also stepped up corporate surveillance, making sure that information disclosed is true and accurate. Where directors and corporate advisers mislead the market, we will not hesitate to take enforcement action, as we did in the cases of MEMS Technology Berhad and United U-Li Corp Berhad earlier this year.

Nevertheless, while we can do all we can to make the capital market more accessible and lower the cost of financing, the success of the capital market ultimately depends on participants themselves. Malaysian companies listed on the exchange for instance need to be well managed, realise their potential to grow and add value to the stock market. Only an exchange populated with quality companies will be able to attract and sustain demand from both domestic and foreign investors.

Quality companies also means adherence to internationally-benchmarked principles of corporate governance. Since 1998, Malaysia has succeeded in improving its governance frameworks. Unfortunately, although the frameworks in place comply with international standards, many observers continue to raise concerns about implementation. The way governance is practised by some companies in our market suggests there is still much to be done before negative perceptions change. To give such assurance, the SC next year will be focusing its attention on building governance capacity in the market. We plan on instituting a comprehensive programme that would target market participants at all levels-to raise the level of governance practices by boards, senior and operational management and staff.

Poor governance has played a significant role in most financial crises. Steps to reduce systemic risk, improve investor protection and enhance market fairness and efficiency therefore have to be coupled with efforts to raise the quality of governance in the capital market. The frameworks are in place; now the market needs to walk the talk. Market participants must internalise those governance principles and reflect them in the way they conduct business. Only then can we all be truly assured of sustaining confidence and trust in our capital market in the years to come.

Article published in Special Focus of The Edge Weekly dated 28 Dec 2009