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THE STATE OF PLAY
The objective of preserving the integrity of the capital market and protecting investors is central to the SC’s regulatory approach. The SC’s regulatory philosophy, outlined in 2015, recognises that the market needs to continuously change to cater to investor demands and technological advancements. Thus, the SC’s regulatory approach will need to embrace and thrive through these changes7. This entails, among others, facilitating participation by investors of different levels of skills, investment knowledge and net worth in the market as well as enabling diverse business models to offer capital market services to Malaysian investors – all without compromising investor protection. When embracing such development changes, effective and efficient supervision and enforcement become critical to promoting good conduct and deterring market abuse.
Recognising investor diversity, the current regulatory approach distinguishes retail and sophisticated investors through a differentiated protection framework. Investors are segmented based on their net worth, professional background, experience and accreditation status. The design of disclosure requirements, suitability assessments and product approvals are also differentiated for the different investor segments.
In the SC’s assessment, the current segmentation criteria can be made more robust to cater to high-net worth investors, both individuals and entities, who may be vulnerable due to a lack of investment knowledge or experience. The current framework also does not consider the vulnerability of investors at different life stages, although such vulnerabilities may adversely affect their judgement when making investment decisions.
The diversity of Malaysian investors has catalysed diversification in the intermediation landscape. As a result, the presence of non-traditional, technology-based companies offering capital market services and products in Malaysia has grown while traditional financial institutions have also scaled up and broadened their range of investment offerings.
While most entities carrying out regulated activities in the capital market are supervised by the SC, there are also entities that are deemed registered within the definition of the CMSA that are also permitted to carry out regulated activities – these include financial institutions such as commercial banks, Islamic banks and insurance companies that are under the oversight of BNM. While there is a Memorandum of Understanding between the SC and BNM to co-ordinate the oversight of banks carrying out capital market activities, the regulatory architecture adopted currently is predominantly one that is entity based, whereby banks and insurance companies that carry out capital market activities are primarily supervised by BNM.
The SC’s supervision mandate covers the micro prudential soundness of licensed entities, macro prudential aspect of the markets as well as the risk identification of firms, issuers, products, transactions and markets. This entails assessing the strength of the governance, oversight and risk functions of licensed intermediaries and institutions, as well as whether necessary controls are in place to manage risks. In the last decade, the SC’s supervisory capabilities have been expanded across new intermediation models and enhanced through the greater use of data and technology, particularly in market surveillance. Other aspects of supervision are still largely dependent on traditional tools and practices, including thematic reviews, data samples, supervisory inspections and engagements. To be more future-ready, especially in identifying risks and early intervention, there is a need to tap into a wider range of data sources, strengthen the use of advanced and predictive analytics as well as develop new capabilities.
Regulatory Philosophy, SC, 2015.
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CAPITAL MARKET MASTERPLAN 3
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