Mr Singh MD, SC Malaysia Opening Keynote Address FIMM 2011
Today’s theme of “Emerging trends: Growth with Governance” fittingly complements the philosophy articulated in the SC’s Capital Market Masterplan 2 (CMP2). The theme “Growth with Governance” came about from our assessment of the major challenges for our capital market in terms of expanding its role in driving growth and innovation and to address concerns about the efficacy of markets in the aftermath of the global financial crisis. We must learn from the lessons of past financial crises that growth is only sustainable if it is underpinned by a proper system of accountabilities and governance. Therefore, the hallmark of the market that we aspire to build is one that will be distinguished by the quality of its governance. I am pleased that FIMM has chosen this theme given that the investment management industry is amongst the key driver of capital market growth.
However, as in other areas of the capital market, the pursuit of excellence requires that we have greater awareness and understanding of the risks associated with investing and that we build the capacity to manage these risks appropriately. In this regard, we must learn from the lessons of past financial crises that growth is only sustainable if it is underpinned by proper systems of accountabilities and governance. This is particularly true in your industry where the public image of professionalism and trust is so widely relied upon in day-to-day selling activities.
The SC recognises the important role played by unit trust consultants in devoting time and continued effort to ensure that investors are better informed of all fund options as well as to offer the best option to them. In this regard, unit trust consultants are not only the first point of contact but through regular contact, play critical role in ensuring their investors’ financial needs continue to be met.
Malaysian Capital Market Outlook
A decade ago, we launched the first Capital Market Masterplan (CMP) to develop our capital market’s capabilities in supporting the country’s capital and investment needs and long term nation-building efforts. We strengthened our capital market by enhancing domestic capacity, developing strategic sectors, gradually liberalizing market access, improving our market processes and infrastructure, and positioning the Malaysian capital market in the international arena. The effectiveness of these measures has been borne out in a tripling of Malaysia’s capital market, from RM718 billion a decade ago to RM2 trillion in 2011, with many market segments leading the region.
Today, Malaysia has one of the most comprehensive capital markets in the region. Our equity market is highly developed relative to GDP with the largest number of PLCs and 3rd largest market capitalisation in ASEAN, whilst our bond market is the 3rd largest in Asia. Our collective investment scheme (CIS) industry has also grown steadily over the years. Unit trusts continued to be the largest segment of the CIS industry; having grown five-fold over the last decade. The industry net asset value (NAV) of RM43.3 billion as at end 2000 has surpassed the RM200 billion mark in 2010 and stood at RM241.08 billion as at end of August this year. This figure represents nearly 20% (19.41%) of the NAV of Bursa Malaysia Market Capitalisation.
The substantial growth of this industry reflects the decisions of a broad cross section of the investing public who participate in the capital market through the medium of unit trust funds and who are committing ever-increasing amounts of their income and savings to the funds. Given the trends, the industry is expected to grow its asset under management (AUM) from RM377 billion to RM1.6 trillion over the next 10 years, and the penetration rate for unit trusts is likely to almost double from 18% to 34% over the same period. This presents great opportunities for the unit trust industry as an avenue for fund raising, particularly for the projects identified under the Economic Transformation Programme (ETP). This also presents an opportunity to contribute to more efficient intermediation of savings to promote capital formation, increase private sector participation in business, to deepen market liquidity, facilitate risk-taking and product diversity.
To further diversify and add value to domestic savings intermediation, the role of the investment management industry will be expanded with the establishment of the Private Retirement Scheme (PRS) industry. Quality private pension providers would be approved, each offering a range of retirement options under the PRS.
PRS will promote greater choices for long term retirement savings and complement EPF. Government encouragement for individuals to voluntarily save more for their retirement, has been clearly demonstrated by the recent budget announcement by the Prime Minister where amongst other incentives, individuals would enjoy personal tax relief of three thousand ringgit annually for the next 10 years. This incentive is important in shaping and changing individual’s behaviour and providing a catalyst for growth of this new industry. Growth of the PRS industry would create positive spin-off effects in enhanced economic activity and growth, as long term savings are channelled through the capital market.
Just recently, on October 3rd, the amendments to the CMSA which establishes the regulatory framework for the entire PRS framework came into effect. A strong regulatory framework would ensure the security of savings within the system and safeguard the interests of contributors. Marketing and distributing PRS is an important component whereby a value-add intermediation process will assist contributors to sustain their living standards and quality of life post retirement.
Moving forward, SC’s operational guidelines on PRS which will set out the detailed eligibility and operational requirements for the PRS providers, Trustee and the Scheme is expected to be released in November. This will be followed by the approval of the PRS providers, schemes and other PRS intermediaries.
There are also ongoing efforts to streamline national initiatives to promote venture capital and private equity industries. Additionally, to foster a conducive environment for product innovation, a framework for product offerings will be streamlined to increase process efficiencies, while disclosure and other regulatory requirements will be refined to ensure safeguards for investors. In this regard, a great step forward has been taken with the passage of our Capital Market and Services (Amendment) Act 2011. While considerable progress had already been achieved, the amendments to the Capital Market and Services Act reflect our commitment under the CMP2 to further improve market efficiencies and facilitate a wider range of asset classes and products structures.
All these developmental and growth strategies are only sustainable when complemented by a well regulated market to bring about the trust for the private sector to function as a source of dynamic growth. Our regulatory approach taken in CMP2 is to increase intermediation efficiency by requiring our intermediaries and institutions to strengthen their governance standards and capabilities. We believe that regulation functions most effectively when it reinforces market and self-discipline and enriched by an extensive participation and engagement to ensure that the rights and interests of stakeholders are properly safeguarded.
Regulation should not be seen as purely a regulator’s role. Self-regulatory organisations and the industry itself have joint responsibility for developing practices and establishing standards designed to foster investor confidence which is essential to the maintenance of sound and orderly securities markets. But the primary responsibility rests with you the representatives of the industry, upon whom investors rely for guidance in their investments.
FIMM as an SRO
Even before the formation of FIMM, the SC has had a strong collaborative relationship with the industry’s trade association in developing a robust and vibrant unit trust industry. FIMM had been earlier tasked in the testing and registering of Unit Trust Consultants (UTCs), Institutional Unit Trust Advisers (IUTAs) and Corporate Unit Trust Advisers (CUTAs). FIMM had also played a role in investor education and awareness programs through its promotional and advertising campaign.
On 20 January 2011, the SC had recognized FIMM as an SRO to undertake self-regulation to complement SC’s effort in ensuring a more efficient and effective regulatory framework for the industry. As an SRO, FIMM is expected to uphold public interest objective of enhancing market integrity, market efficiency and investor protection. Coming from a trade association background, FIMM must now balance the regulation over its members with the advocacy of their interests and the investing public. Nothing should take precedence over public accountability.
A Self-regulatory organization (SRO) is an organisation recognised by law, that represents its members and is organized for the purpose of regulating the operations, standards of practice, and business conduct of its members and their representatives with a view to promoting the protection of investors and the public interest through the establishment of rules that promote ethics and equality.
In discharging its SRO responsibilities, FIMM is expected to demonstrate proactive monitoring of the industry behavior and fair and consistent disciplinary measures must be taken against any misconduct or non-compliances. A clear signal to the market must be conveyed that inappropriate behaviors will not be tolerated and relevant actions will be taken to deter any recurrence. This is necessary as it would enhance investor confidence and protection.
Investor education is another means of assisting regulators and the SROs alike in achieving the goal of protecting investors. We believe that educated investors better understand their rights and are more likely to contact their SRO and regulators to obtain additional information or file complaints. Educated investors also play an important “watchdog role”, which increases the likelihood that regulators and SROs will identify potential fraud and abuse situations before effective damage occurs. I am therefore pleased that the Securities Industry Development Corporation, the training and education arm of the SC, and FIMM have put in significant effort in creating public awareness and educating investors on the benefits and associated risks of investing in unit trusts. FIMM has made commendable progress in providing industry expertise in the development of the unit trust industry, and I am confident they will continue with their efforts. It is only through such collaborative efforts that we can build a sustainable and inclusive economy that generates long-term wealth for everyone.
Malaysia’s unit trust industry is unique. Unlike most other countries where funds are distributed by brokers, fund managers or banks, it is acknowledged that one of Malaysia’s main and most successful distribution channels is the unit trust consultants (UTCs). The support, hard work and determination of such individuals has not gone unnoticed, whom have contributed significantly in the growth of an industry that experienced a compound annual growth rate of 18% over the past decade.
The state of investment management industry today is largely shaped by its players. The wider distribution channels have allowed easier access to the public to invest in unit trusts. UTCs have provided personalised investment experience for investors and have managed to command more than twenty percent (20%) of market share in 2010 despite the stiff competition from traditional distribution channels and new channels such as online platforms.
Need For Responsible Selling Practices
The global financial crisis clearly demonstrates the need for “responsible selling”. This concept is by no means novel or revolutionary in the securities industry. It is inherent in the concept of professionalism which the industry must strive to maintain. You are selling a product, but you are also selling a service, one which you have carefully portrayed as a “professional” service. The function of professionalism is to insure that the private interest does not override the public interest. The investing public expects the highest standards of selling excellence from you.
As such the prevention of improper selling efforts is essential to the well-being of the unit trust fund industry and the securities markets. Inherent in unit trust fund investments, as in other equity investments, is the risk of loss as well as the possibility of gain. Wholly apart from any impropriety, it is not good business to lull an investor into unrealistic appraisals of the risks involved and into larger commitments than his circumstances warrant. The investor who is not financially able to retain his fund investment in the face of generally recognised and anticipated economic pressures needs and deserves your thoughtful concern and careful attention.
FIMM has been tasked to enhance the industry’s sales practices and distribution standards by formulating a robust sales practices regime with adequate supervision and monitoring mechanism. The highest degree of ethics and professionalism must be demonstrated by industry players and its sales force in dealing with public’s money. The SC expects FIMM to also effectively monitor and enforce compliance of its rules, securities laws and regulation and to provide adequate oversight in the inspection and surveillance activities in marketing, distribution and sales practices within the industry. Similarly, UTMCs also have a role to play and it is imperative that it steps up its oversight and monitoring of the conduct of its sales force to ensure proper and responsible selling practices are adopted. Where UTCs have downlines, the same level of oversight and monitoring should be extended to the downlines.
On SC’s part, we had published a Consultation Paper on the review of Sophisticated Investors and Sales Practices for Unlisted Capital Market Products. The following measures were proposed to strengthen sales practices for unlisted capital market products –
* The need for a “suitability assessment” before matching a particular product with the needs of a client;
* A disclosure statement, called a Product Highlight Sheet where key facts are highlighted in a comprehensive manner; and
* The issuance of guidance that would require product issuers and product distributors to give due regards to the development, marketing and sales of unlisted capital market products.
It is encouraging to note the positive feedback received from the industry and we are currently in the midst of formulating suitable and effective guidelines on these matters.
In marketing and distributing PRS, the adoption of ethical and responsible sales practices becomes even more crucial to safeguard the interest of investors for their old age. We do not want the experience from the recent financial crisis to taint our jurisdiction. Hard-earned savings in the US and Hong Kong for example, disappeared overnight through investments that were not risk appropriate.
Training and Development
As the industry continues to grow, there must be a parallel advancement in the level of skills and expertise. Recruitment and selection of new UTCs must be robust and due diligence over potential recruits must be conducted to ensure that only qualified individuals with integrity and accountability are recruited. The industry needs to not only attract new talent, it also needs to develop and train existing talent. As capital markets become increasingly complex and the pace of change more rapid, UTCs need to keep abreast of the developments and their own understanding of how products have evolved and their clients’ needs.
As an SRO, FIMM has also been tasked to enhance professionalism among UTCs and other distributors. To enhance standards of testing and selection, qualifying examinations and trainings should be reviewed and a certification program introduced to maintain the high standards of entry, professional credibility and expertise. FIMM should look into putting in place a Continuous Professional Development (“CPD”) framework that keeps distributors abreast of development and trends.
In the meantime, UTMCs must also continue to provide sufficient training platform for their sales force. Such training programs should be carried out not only upon recruitment as a consultant or upon the launch of new funds, but it must be continuous and include conduct expectations.
The capital market will undoubtedly play an important role in financing Malaysia’s transformation journey. Our capital market will naturally develop with the economy to become a fully developed nation.
I am delighted to see the considerable success of the Malaysian unit trust industry and I am confident that the industry will continue to contribute significantly to the capital market by helping build the demand side. Unit trusts funds remain a simple, efficient way for the man in the street to invest, thus playing an important role in channeling capital into the real economy. UTCs, as one of the intermediary between unit trust funds and the investors, have an important role to play.
I hope this convention will provide a fruitful learning experience for all of you. I am certain there are significant knowledge and insights that can be gained from the experienced speakers and panelists who are here with us today.