Securities Commission Malaysia issues Guidelines on Product Governance
01 July 2025
The Securities Commission Malaysia (“
SC”) issued the
Guidelines on Product Governance (“
PGG”) and a set of
Frequently Asked Questions – Guidelines on Product Governance (“
FAQ”) to assist in the understanding of the PGG. The PGG will come into effect on
2 January 2026 (“
Effective Date”).
The PGG seeks to strengthen investor protection and to encourage responsible product development and distribution in the capital market.
The product governance framework in the PGG embodies controls, policies and procedures (“
CPPs”) that are put in place across the lifecycle of unlisted capital market products
1. The CPPs, among others, ensure that unlisted capital market products are designed and distributed to the identified target market and perform in the manner the investor has been led to expect.
This article provides a summary of the main requirements set out in the PGG.
Applicability
The PGG applies to a product issuer
2 and a product distributor
3 that issues or distributes unlisted capital market products except the following:
- Ordinary shares4;
- Over-the-counter derivatives contracts that are customised specifically for an investor;
- Venture capital or private equity funds; and
- Products hosted or funds raised on the platform of a recognized market operator or initial exchange offering operator that is registered by the SC.
A product issuer and a product distributor must comply with the requirements in the PGG for a product that is:
- issued and made available to investors after the Effective Date; or
- existing but has undergone significant changes to the structure, feature and risk profile of the product, and is made available to investors after the Effective Date.
For the purposes of paragraph (b) above, the product issuer’s board of directors must identify a person from senior management to assess changes to the structure, feature and risk profile of an existing product for the purpose of determining whether such changes constitute a significant change. In making such determination, that person must evaluate the risk implications from the perspectives of both the product issuer and investors.
Product Governance
A product issuer and a product distributor (severally a “firm”) is required to consider and give due regard to the interests of investors, at all stages of the product lifecycle, namely the design, distribution and after-sale stages.
Product governance seeks to align the firm’s interest with the investors’ interests. The CPPs ensure that the products are designed and distributed to the identified target market and perform in the manner that the investors have been led to expect. Hence, the CPPs must identify, manage and mitigate risks that result from the misalignment of the firm’s interests and the investors’ interests.
Effective product governance requires a firm to have the right culture. Its board of directors through its leadership can ensure that the firm has the right culture in giving due regard to investors’ interests.
Design of Product
General
At the product design stage, a product issuer’s CCPs must ensure the following:
- the product is designed to meet the likely needs and objectives of an identified target market;
- the distribution strategy of the product is compatible with the identified target market;
- reasonable steps are taken so that the product is only made available to the identified target market; and
- prior approval is obtained from the board of directors or senior management before the product is launched.
Target market
To reduce the risk of product mis-selling, a product issuer must identify the target market for each product and take reasonable steps to ensure that such product will only be made available to such market. The target market for each product must be identified with sufficient granularity to avoid the inclusion of any investor for whose needs and objectives are not compatible.
Pre-launch testing
Before a product is launched, the product issuer must test if the product meets the needs and objectives of the identified target market. As such, a scenario analysis must be conducted on the product prior to its launch to assess:
- the likelihood of the product being consistent with the likely needs and objectives of the identified target market; and
- the benefit of the product to the target investors under different market conditions to determine its likely benefit or value to them.
If the results from the scenario analysis show that the product is not likely to be consistent with the likely needs and objectives of the target market, the product issuer must either adjust the design of the product or modify the target market to ensure better investor outcomes.
Distribution strategy
The product issuer must take reasonable steps that will, or are reasonably likely to, result in distribution of the product being consistent with the identified target market. For this purpose, the product issuer must, among others, set an appropriate distribution strategy for the product.
In setting the distribution strategy for the product, the product issuer must consider all circumstances relating to the product’s distribution including:
- the distribution channels and methods;
- the marketing and promotional materials; and
- the selection of product distributors.
The product issuer must also adequately supervise and monitor the distribution of its product. If it has any reason to believe that the distribution of the product is or is likely to be inconsistent with the identified target market, steps must be taken to align the distribution efforts towards the identified target market of the product.
Product approval
The product issuer’s board of directors or senior management must approve all new products as well as any existing products that have undergone significant changes before they are made available to the identified target market. Prior to giving its approval, due consideration must be given to the following:
- the objective of introducing the product as well as the identified target market of the product;
- the key features of the product and the method of distribution;
- the assessment of the potential risks associated with the product and how these risks will be managed and disclosed to investors;
- the appropriateness of the product for its identified target market, including whether any fees or charges imposed is fair, and whether the product’s distribution strategy is consistent with the product’s identified target market;
- the skills, expertise and resources required to manage any risk associated with the product throughout the product’s lifecycle including whether any controls need to be put in place to identify and manage any risk;
- the disclosures relating to the product including any promotional material; and
- whether the product fully complies with all applicable legal and regulatory requirements or restrictions, including a description of any unresolved legal or regulatory issues.
Information disclosure to product distributors
To enable the product distributors to understand and recommend or sell the product appropriately, the product issuer must make available all relevant product information to its product distributors, including:
- the product’s identified target market; and
- the distribution strategy of the product.
Record maintenance
The product issuer must ensure that complete and accurate records are maintained in respect of decisions made in relation to the identified target market and any scenario analysis conducted, including reasons behind the decisions and its underlying data. The records must also include the approval of the product by its board of directors or senior management and the information which has been shared with the product distributors.
Distribution of Product
General
The product distributor’s governance framework must comprise CPPs that are designed to ensure that:
- the product distributor understands the product that is intended to be distributed to investors; and
- the product is only distributed to investors in the target market identified by the product issuer.
In the case where the product issuer is also the product distributor, the product issuer’s CPPs must also include the requirements specified in the PGG for the purposes of a product distributor’s governance framework.
Obtaining information from product issuer
The product distributor must take all reasonable steps to gain the necessary knowledge and understanding of the product it intends to distribute to investors, including requiring the product issuer to provide additional information or training, if necessary.
Target market and distribution strategy
Upon receiving the identified target market from the product issuer, the product distributor must assess the appropriateness of the identified target market and form an independent conclusion as to the appropriateness of its client segments being targeted.
The product distributor must ensure that the product is not distributed to a non-intended target market. It must assess and determine whether its intended distribution strategy will result in the product being distributed only to the identified target market.
The product distributor must ensure that complete and accurate records are maintained in respect of decisions made in relation to its product promotion and distribution and any reviews conducted, including reasons behind the decisions and its underlying data. The records must include any information which has been obtained from and shared with the product issuer.
Distribution of product issued by foreign product issuer
In the case of a product designed by a foreign product issuer which is subject to applicable product governance requirements, the product distributor must obtain from the foreign product issuer, all relevant product information which a local product issuer would be required to make available to a product distributor under the PGG.
The product distributor must put in place effective arrangements to ensure that it obtains adequate and reliable information from the foreign product issuer about the product to ensure that the product will be distributed to an appropriate target market.
Where a product designed by a foreign product issuer is not subject to any applicable product governance requirements, the product distributor must take reasonable steps to comply with the requirements set out in the preceding paragraph.
Post-sale of Product5
The product issuer’s CPPs must include a review on the products issued, as and when necessary, to assess whether the product is in fact performing in the manner that the investor has been led to expect. The review must focus on whether:
- the product remains consistent with the needs and objectives of the identified target market;
- the distribution strategy remains appropriate; and
- information on product performance, if any, that has been disclosed to investors remain accurate.
The product issuer must also take remedial measures to address any issues raised from the product review. The remedial measures taken by the product issuer must give due regard to investors’ interests and may include ceasing further issuance of the product, contacting investors to inform them of the defect discovered and how the product issuer will remedy the defect.
Where remedial measures have been taken, the product issuer must notify the SC of these measures as soon as practicable.
The product distributor must also review the appropriateness of the identified target market of the product it distributes as well as the product’s distribution strategy, as and when necessary. Feedback must be provided to the product issuer so that appropriate changes can be made to the product design and distribution strategy.
Comments
The PGG is to be welcomed. The requirements therein, in particular, the imposition of responsibility on the product issuer’s board of directors or senior management to approve the product before launch and the repeated emphasis on the need to ensure that the product is suitable to the identified target market and to give due regard to the interests of investors throughout the product lifecycle, will go a long way to ensure that the SC’s objective of strengthening protection for investors in unlisted capital market products that fall within the PGG will be achieved.
Article by Sharifah Shafika Alsagoff (Partner) and Hafidah Aman Hashim (Partner) of the Capital Markets Practice and Phua Pao Yii (Partner) and Chong Cai Yi (Associate) of the Corporate Practice of Skrine.
1 An “
unlisted capital market product” or
“product” means a capital market product, whether issued in or outside Malaysia that is not listed and traded on the stock exchange, or traded on the derivatives exchange in Malaysia.
For the purpose of the PGG, an “unlisted capital market product” includes corporate bonds or sukuk under the Exempt Regime of Bursa Malaysia Securities Bhd.
2 A “
product issuer” refers to any person who issues an unlisted capital market product and includes an adviser.
3 A “
product distributor” refers to any person who markets and sells an unlisted capital market product, who may or may not be a product issuer.
4 The PGG applies to preference shares issued by an unlisted public company (FAQ 3).
5 The requirements of this section do not apply to a product issuer who is an adviser, that is a person who is licensed or registered to provide corporate finance advice and appointed by a product issuer for the design or issuance of the unlisted capital market product.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.