Improving transparency and benchmarking against best international practices have been key in transforming the Malaysian capital market as an efficient source for raising longer-term funds to finance economic activity. Reflecting the importance accorded to meeting international standards, 43 of the 152 recommendations in the Capital Market Masterplan that were released in 2002 were related to improving transparency and promoting higher standards of disclosures. To-date, 37 of these 43 recommendations have been implemented.
Although Malaysia has not undertaken the IMF/World Bank Financial Sector Assessment Program (FSAP), the Securities Commission (SC), as the competent regulatory authority for oversight of the capital market, has voluntarily undertaken independent assessments under the various standards set by the IMF/World Bank, and the International Organisation of Securities Commissions (IOSCO). The SC has also supported the move to comply with international best practices on accounting-related matters.
A. Code on Corporate Governance for Listed Companies
Malaysia embarked on extensive corporate governance reforms since 1998. Key reforms included introduction of a code of corporate governance and immediate steps to implement changes in the composition and role of board of directors. Out of 10 recommendations to strengthen corporate governance embodied in the Capital Market Masterplan, nine have been implemented since 2004. These included strengthening of disclosure rules, corporate whistleblower protection and major reforms to overhaul government-linked corporations (GLCs).
Malaysia voluntarily agreed to be assessed under the Corporate Governance Reports on the Observance of Standards and Codes (CG ROSC) by the World Bank in 2005, based on a methodology that is benchmarked against the internationally accepted OECD Principles of Corporate Governance. Malaysia has published the CG ROSC that was completed in 2005.
Overall, Malaysian compliance with the CG ROSC principles are at a high level.
Malaysia has fully observed one of the 32 benchmarks (on accounting standards) and has largely observed nearly all of the benchmarks under the six categories of methodology (81% of 32 benchmarks). Since then, Malaysia continued to close the gaps on the remaining shortcomings, the most significant being amending the Companies Act 1965 (CA) to address gaps in related-party transactions, penalties for contravention by directors, private enforcement capacity of investors and disclosure; amending the listing requirements for stricter disclosures by listed companies; implementing measures to expand the role of the audit committee in line with international best practices; the Capital Market & Services Act 2007 (CMSA) enhancing the effectiveness of regulatory oversight of the SC by empowering it to institute civil proceedings; and transforming GLCs into high-performing entities and upgrading of GLC boards.
B. IOSCO Assessment on Objectives and Principles of Securities Regulation (IOSCO Principles)
In 2008, the SC voluntarily undertook an independent assessment by IOSCO to benchmark its compliance against IOSCO’s 30 core principles on securities regulation. The principles covered the responsibilities of the regulator, its enforcement powers, the regulation and supervision of primary and secondary markets, market intermediaries, the management and operation of unit trusts, and clearing and settlement. The Malaysian capital market regulatory framework was assessed as fully compliant with virtually all of the IOSCO Principles. Malaysia was rated fully implemented for 28 out of 29 principles, and also for 18 out of the 19 recommendations for Principle 30 on clearing and settlement.
The SC has continued to enhance its regulatory framework, processes and protocols in identified areas. Steps are also being taken to address the measures required to become fully compliant with the other two remaining Principles.
C. Compliance of CRAs with IOSCO Code
Following the release of the revised IOSCO Code, the domestic credit rating agencies (CRAs), RAM and MARC, have adopted the revised IOSCO Code in their own code of conduct. The updated codes, published in early 2009, broadly aimed at enhancing standards and conduct of credit rating agencies in the quality and integrity of the rating process, CRA independence and avoidance of conflicts of interest, CRA responsibilities to the investing public and issuer, and disclosure of the code of conduct and communications with market participants. The adoption of the IOSCO Code by RAM and MARC is an important achievement as only seven CRAs had implemented the code, namely Fitch, Moody’s and Standard & Poors, the Japan Credit Rating Agency and the Dominion Bond Rating Service.
D. Assessments on Compliance with the 40+9 Recommendations by the FATF
In January 2007, Malaysia was assessed for compliance with the 40+9 recommendations of the Financial Action Task Force on Money Laundering (FATF) on anti-money laundering and combating the financing of terrorism (AML/CFT). The Mutual Evaluation Report is published on the APG website. Measures undertaken by the SC for the capital market sector contributed to a high level of compliance. Malaysia was rated as fully compliant with nine and largely compliant with 24 recommendations.
In 2008, the SC implemented several measures to implement the recommendations in the Mutual Evaluation Report. These included measures on market conduct and business practices for stockbrokers and licensed representatives, amending the provisions in the SC’s guidelines relating to customer due diligence requirements and politically exposed persons and setting up a networking group to encourage a more proactive participation by the capital market intermediaries towards ensuring higher standards of AML/CFT compliance.
E. Compliance with International Accounting Standards
In addition, the SC is also working closely with the respective Malaysian accounting boards to integrate accounting principles, with a commitment on full convergence with international accounting standards by 2012.
April 14, 2009