Tuesday January 29, 2013
New Financial Services Act will give regulators more power for governance and checks and balances
THE new Financial Services Act (FSA) that will come into effect soon is a step in the right direction to strengthen the country's financial sector. It gives financial regulators stronger and tougher powers aimed at creating better governance and checks and balances among Malaysia's financial institutions.
We are all only too aware of the shenanigans that had taken place among the major international banking groups that led to the 2008 financial crisis that wreaked so much havoc.
To be sure, Malaysia already has a dynamic financial system, which has evolved in response to changing domestic and international trends. The FSA is part of the authorities' continuous improvement of regulating the local financial sector. It aims to provide a more uniformed framework in regulating the conventional banking sector, insurance and payment systems.
The FSA will replace several existing acts, including the Banking and Financial Institutions Act 1989 (Bafia), the Exchange Control Act 1953, the Insurance Act 1996 and the Payment Systems Act 2003.
Prior to this, the 1989 Bafia, which governs the local banking sector, had replaced the Banking Act 1973 and the Finance Companies Act 1969.
Economic and financial challenges will keep on growing with globalisation, and as the country looks to leapfrog into a high-income and developed nation status by 2020, the financing needs of the economy is expected to rise further and become increasingly more complex and diversified.
For this, a much stronger and integrated framework for the banking and finance sector is necessary to counter future risks in financial stability.
The aim of better regulation is to bring about more transparency, accountability and governance. Another goal is in making sure institutions have sufficient assets to meet their obligations.
Although the full implications of the FSA is still unclear at the moment the central bank is in the process of engaging the various stakeholders of the financial services sector some aspects of it are clear: It will give the central bank broader oversight over financial holding companies (FHC) that currently do not come under its purview.
Bafia regulates individual banking entities within these groups like the commercial and investment banks but not the FHC itself. But under the new framework, the FHC would be subjected to the same regulatory requirements as the banks under them, ie, prudential standards will be imposed, requiring them to retain more capital.
This, according to Maybank Investment Bank Research in a recent note, will impact FHCs like Affin Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd, BIMB Holdings Bhd, CIMB Group Holdings Bhd, Hong Leong Financial Group Bhd and RHB Capital Bhd.
More importantly, the new Act seeks to address concerns of the “double leverage” approach, where the FHC borrows money and, in turn, pumps it into the operating banks as equity. The recent move to take Hong Leong Capital Bhd private, according to some analysts, is perhaps part of a move to streamline and restructure the operations under the Hong Leong umbrella ahead of the new Act.
No doubt, the new FSA, which will come into affect this year, would be giving banking groups more work to reorganise and better capitalise themselves. But the stricter requirements will bode well for Malaysia's financial and banking system in the long run.
Here's another thing that the FSA is going to bring about: stricter penalties for financial crimes. It has been reported that the new Act will see a revision in the quantum for monetary penalties from the current maximum of RM10mil to RM50mil. It is also said to involve provisions of enforcement instruments for more effective enforcement.
Considering what has happened with errant banking groups in the West, this surely will be another welcomed move by all those concerned about the health of the financial sector.
l Deputy news editor Gurmeet Kaur hopes that in meeting the stricter requirements imposed by the upcoming FSA, financial institutions do not end up passing additional costs to consumers.