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The regulatory regime applicable to banks

In line with the FSB, the regulatory and supervisory framework of Malaysia in respect of the banking and finance sector was recently consolidated and updated under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) (collectively, Acts), both of which came into force on 30 June 2013, simultaneously consolidating and repealing the Banking and Financial Institutions Act 1989 (BAFIA), the Islamic Banking Act 1983, the Insurance Act 1996, the Payment Systems Act 2003 and the Exchange Control Act 1953. The Acts aim to provide a regulatory framework for both the conventional financial and shariah-compliant sectors, and endow the BNM with greater powers to counter future risks to stability in the financial sector, increase consumer protection and promote competition in the financial services sector. The Acts also contain provisions that preserve every guideline, direction, circular or notice previously issued under any repealed legislation in relation to any provision of the Acts prior to their coming into force.

Malaysia has also established its own mid-shore jurisdiction on the island of Labuan, off the coast of Borneo, which was declared an international offshore financial centre in October 1990 to complement the activities of the domestic financial market in Kuala Lumpur. Labuan is regulated and administered by the Labuan Financial Services Authority (Labuan FSA) pursuant to the Labuan Financial Services Authority Act 1996 (Labuan FSA Act). In 2008, the jurisdiction was renamed the Labuan International Business and Financial Centre (Labuan IBFC), and an entity called Labuan IBFC Incorporated was established as the jurisdiction's marketing arm in 2008. The Labuan FSA and the Labuan IBFC work together to promote Labuan IBFC's reputation as the premier mid-shore international business and financial centre in the Asia region. Entities operating in the Labuan IBFC are subject to federal laws that are specific to the Labuan IBFC. Labuan banks are subject to the Labuan Financial Services and Securities Act 2010 (LFSSA) and Labuan Islamic banks are regulated under the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA).

i The BNM

The BNM is a statutory body wholly owned by the government that was established under the Central Bank of Malaysia Act 1958 and continues to operate under the Central Bank of Malaysia Act 2009 (CBA), which became effective on 25 November 2009. The BNM reports to the Minister of Finance (Minister) and keeps the Minister informed of policies governing the monetary and financial sector.

The BNM is empowered to act as the regulator of banking institutions under the Acts and the CBA. The CBA confers the necessary powers and instruments on the BNM to achieve its mandates effectively, and legitimises the duality of both the conventional and the Islamic financial systems in Malaysia, and in doing so establishes the legal foundation for the development of an Islamic financial system within the Malaysian financial system.

The BNM's primary objectives include the prudent conduct of monetary policy, financial system stability, and the development of a sound and progressive financial sector. In carrying out the aforementioned, the BNM is responsible for advising the government on macroeconomic policies and the management of public debt. It is also the sole authority for issuing currency and managing the international currency reserves of the country. Other functions of the BNM include the regulation and supervision of financial institutions as described below, and the monitoring and supervision of payment systems, money markets and foreign exchange markets.

From a supervisory perspective, the BNM is empowered by the Acts to regulate banking institutions, and does so by way of a risk-based supervisory (RBS) approach that monitors and reviews the manner in which all financial institutions identify, control and deal with their respective business risks.

ii Securities Commission

In addition to the foregoing, financial institutions and investment banks that provide capital markets services are regulated by the Securities Commission (SC), a statutory body with investigative and enforcement powers established under the Securities Commission Act 1993 (SCA).

The SC is the regulatory body mandated to regulate the Malaysian capital market, and is directly responsible for the regulation, supervision and monitoring of all persons licensed under the Capital Markets and Services Act 2007 (CMSA) with the core objective of investor protection. The SC is also primarily responsible under the CMSA for encouraging and promoting the development of the securities and derivatives markets, and for the monitoring and supervision of public-listed companies to ensure compliance with securities laws.

The CMSA constitutes a single framework regulating the offering and licensing of capital market services, market conduct, issuances of securities, and the conduct of takeovers and mergers. Debt issuances (bond and sukuk) in Malaysia require the approval of the SC, and are further governed by various guidelines and practice notes issued by the SC under the CMSA.

iii Companies Commission of Malaysia

Banks in Malaysia fall under the general supervision of the Companies Commission of Malaysia (CCM), as the FSA and the IFSA require incorporation under the Companies Act 2016 (CA) for the undertaking of banking business. However, the IFSA provides for international Islamic banks to do business through either a locally incorporated company or a branch registered with the CCM, whereas banks in Labuan are required to be incorporated or registered under the Labuan Companies Act 1990.

iv Labuan FSA

The Labuan FSA is the sole statutory body responsible for the regulation, supervision and development of the Labuan IBFC under the Labuan FSA Act. According to the Labuan FSA website, the objectives of the Labuan FSA include promoting and developing Labuan as an international centre for business and financial services; implementing national objectives, policies and priorities for the development and administration of international business and financial services in Labuan; and acting as the central regulatory, supervisory and enforcement authority of the international business and financial services industry in Labuan.

The foregoing includes the licensing and regulation of licensed entities operating within the Labuan IBFC, and supervision over those entities to ensure their compliance with the applicable domestic and international standards and best practices.

The Labuan FSA is also responsible for the development of policies for the conduct of business and financial services in the Labuan IBFC, and administration of several crucial pieces of legislation, including the LFSSA and the LIFSSA, subject to the general directions and control of the Minister.

v Development Financial Institutions Act 2002

The Development Financial Institutions Act 2002 (DFIA) provides for the BNM to be responsible for the regulation and supervision of specialised financial institutions known as development financial institutions (DFIs), established by the government to specifically develop and promote national strategically important socioeconomic sectors such as agriculture, small and medium-sized enterprises, infrastructure, maritime, export-oriented sectors, capital-intensive and high-technology industries.

The provisions of the DFIA empower the BNM to monitor the activities and financial performance of these institutions and their main objective, which is to provide specific financial products and services to cater to their respective focus areas; and to ensure that DFIs are resilient, efficient and able to fulfil their respective mandates in a financially sustainable manner, while contributing to the overall stability of the financial system.

In January 2016, further amendments were made to strengthen the regulatory framework of the DFIA in line with the evolving role of DFIs in supporting Malaysia's socioeconomic development. The new amendments enhance provisions in the DFIA on corporate governance, business activities and the scope of the BNM's regulatory oversight to ensure sound financial management and an improvement in the operational efficiency and resilience of DFIs. Other amendments incorporate new provisions for the regulation of shariah governance and consumer protection, with enforcement tools to ensure compliance.

In 2018, BNM collaborated with the World Bank and DFIs to develop an enhanced performance measurement framework for DFIs. BNM is also engaging with the government to review the DFI landscape to take into account developments in the financial system and changes in Malaysia's economic structure and priorities.

At present, there are six DFIs prescribed under the DFIA: Bank Pembangunan Malaysia Berhad, Bank Perusahaan Kecil & Sederhana Malaysia Berhad, Export-Import Bank of Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional and Bank Pertanian Malaysia Berhad (Agrobank).

Licensing

Under the Acts, all persons undertaking banking business, investment banking or insurance business are required to hold a valid licence granted by the Minister. These businesses continue to fall within the oversight of the Ministry of Finance and the BNM. The Minister is the authority for the issuance or revocation of licences to carry on banking business, insurance business and investment banking business, or the imposition of conditions on those licences, and has the power to carry out investigations in certain circumstances. Specifically, licences for commercial and investment banks are issued under the FSA, whereas licences for Islamic banks and international Islamic banks are issued under the IFSA.

The CMSA provides that any person wishing to carry out capital market activities (save for registered persons) is required to be licensed by the SC, the sole authority that issues and approves licences for capital market intermediaries engaging in the regulated activities prescribed under the CMSA. Under the CMSA single licensing regime, capital market intermediaries that are fit and proper are issued with a licence that will enable them to carry on one or more regulated activities.

The two main types of licences are new capital markets services licences, which are granted to principals, and new capital markets services representatives' licences, which are granted to representatives of a principal, enabling licensed representatives to carry out one or more regulated activities on that principal's behalf.

In Labuan, the LFSSA empowers the Labuan FSA to grant licences for the conduct of Labuan banking business, which means the following:

  1. the business of receiving deposits on current accounts, deposit accounts, savings accounts or any other accounts as may be specified by the Labuan FSA;
  2. Labuan investment banking business;
  3. Labuan financial business;
  4. Labuan Islamic banking business; and
  5. such other business as the Labuan FSA, with the approval of the Minister, may specify, in any currency (including the ringgit where permitted by the Acts or such other relevant law in force).

The LIFSSA also empowers the Labuan FSA to grant licences for the conduct of Labuan Islamic banking business (i.e., the carrying on of Labuan banking business in compliance with shariah principles.