Petrina Tan and Sheba Gumis provide an overview of the Financial Services Act 2013 and the Islamic Financial Services Act 2013.
 
The Financial Services Act 2013 (“FSA”) and the Islamic Financial Services Act 2013 (“IFSA”) came into operation on 30 June 2013 (with the exception of certain provisions relating to insurance and takaful matters which will be discussed later in the article). The FSA and the IFSA are the culmination the Government’s effort to modernise and harmonise the various laws that govern the financial services sector in Malaysia.  
 
OVERVIEW
 
The FSA and the IFSA have been characterised as “omnibus” financial legislation. The FSA, which is based on a similar framework to that of the United Kingdom Financial Services Act 2012 and the Australian Financial Services Reform Act 2001, repeals the Banking and Financial Institutions Act 1989 (“BAFIA”), the Insurance Act 1996 (“IA”), the Payment Systems Act 2003 and the Exchange Control Act 1953 and combines the regulation of the matters under the repealed legislation under a single act and licensing regime.
 
The IFSA repeals the Islamic Banking Act 1983 and the Takaful Act 1984 (“TA”) and combines the Islamic financial and takaful services under the aforementioned acts in a similar fashion. The IFSA provides for the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities. It also provides for the oversight of the Islamic money market and Islamic foreign exchange market to promote financial stability and compliance with Shariah.
 
The principal regulatory objectives of the FSA are to promote financial stability and protect the rights and interests of consumers of financial services and products. The objectives of the IFSA are similar but, in addition, pertain to compliance with Shariah.
 
Compared to the preceding legislation, there is a greater sense of regulatory control and consumer protection under the FSA and the IFSA. There is also more extensive regulation on the shareholding of licensed persons under the new legislation. Additionally, a financial ombudsman scheme is introduced for the first time in Malaysia.
 
REGULATION OF SHAREHOLDING
 
Acquisition of Interest in Shares
 
Similar to the BAFIA, the IA and the TA, there are requirements under the FSA and the IFSA to obtain the approval of Bank Negara Malaysia (“BNM”) or the Minister of Finance ("Minister") for the acquisition of interest in shares that exceed the prescribed percentages, or result in a change in control, of a licensed person.
 
A “licensed person” under the FSA refers to a person who is licensed to carry on banking business, insurance business or investment banking business and under the IFSA, refers to a person who is licensed to carry on Islamic banking business, takaful business, international Islamic banking business or international takaful business.
 
“Interest in shares” is defined in identical terms in Schedule 3 of both pieces of legislation and includes both legal and beneficial interest in shares. Such interest can arise when a person enters into a contract to acquire shares or has a right to have a share transferred to him. A person is also deemed to have an interest in shares where he holds shares jointly with another person. There are exceptions to this, such as where the interest is held by a person as security or as bare trustee.
 
Both the FSA and the IFSA require a person to obtain BNM’s approval before he enters into an agreement to acquire an interest in shares which would result in him holding an aggregate interest of 5% or more of shares in a licensed person.
 
The FSA and the IFSA also require a person to obtain BNM’s approval before entering into an agreement to acquire an interest in shares which would result in him holding an aggregate interest in shares of a licensed person of, or exceeding, any multiple of 5% or the percentage holding that triggers a mandatory offer under the Malaysian Code on Take-Overs and Mergers (i.e. 33% or the 2% creeping rule).
 
The approval of the Minister is also required before a person enters into any agreement which will result in that person holding an aggregate of more than 50% of the interest in shares of a licensed person under the FSA or the IFSA.
 
It is important to note that for the purposes of determining the interests held, or to be held, by a person in a licensed person, the interests of that person are to be aggregated with shares held by his spouse, child, family corporation and persons acting in concert with him.
 
Control over a licensed person
 
Sections 88 and 100 of the FSA and the IFSA respectively require a person to obtain the approval of the Minister before taking control of a licensed person.
 
A person is deemed to have control if he (a) has an interest of more than 50% of shares in a licensed person; or (b) unless proven otherwise, has the power to inter alia appoint the majority of the directors of a licensed person, or to make and effect business and administration decisions of a licensed person, or is a person in accordance with whose directions, instructions or wishes the directors or senior officers of a licensed person are accustomed or under an obligation to act.
 
Disposal of Interest in Shares
 
The FSA and the IFSA also require a person who has an aggregate interest in shares of a licensed person of (a) more than 50%; or (b) 50% or less but has control over the licensed person, to obtain the approval of the Minister before entering into an agreement which would result in that person holding less than 50% interest in shares in, or ceasing to have control over, the licensed person.
 
Maximum Permissible Holdings by an Individual
 
Both the FSA and the IFSA stipulate that the maximum permissible interest in shares that may be held by an individual in a licensed person is 10%.
 
The requirement in the IFSA may be waived by BNM if it is satisfied that the individual will not have the power to exercise control over the licensed person and has given a written undertaking not to exercise control over the licensed person.
 
On the other hand, the FSA does not confer any discretion on BNM to waive the 10% shareholding limit imposed on individuals under the FSA.
 
FINANCIAL GROUPS
 
The concept of ‘financial groups’ is introduced in Part VII of the FSA and Part VIII of the IFSA. BNM is empowered to exercise oversight over financial groups for the purposes of promoting the safety and soundness of a licensed person.
 
One of the key features of these Parts is that any company which seeks the Minister’s approval to hold an aggregate interest in shares of more than 50% in a licensed person is required to apply to BNM to be approved as a “financial holding company”.
 
A financial holding company is prohibited from carrying on any business other than that of holding investments in corporations which are primarily engaged in financial services or other services in connection with, or for the purpose of, such financial services. A financial holding company is subject to the same prudential requirements as those imposed on a licensed person. It is worth noting that BNM may require more than one company within a corporate group to be approved as a financial holding company.
 
CONSUMER PROTECTION 
 
Both the FSA and the IFSA contain numerous provisions on consumer protection, the majority of which are contained in Part VIII of the FSA and Part IX of the IFSA.
 
These Parts introduce a new definition of “financial consumer”, which refers to any person who uses, has used or may be intending to use, any financial service or product inter alia (a) for personal, domestic or household purposes; or (b) in connection with a small business as may be specified by the Bank.
 
The new provisions confer power on BNM to specify standards on business conduct to a financial service provider to ensure that a financial service provider is fair, responsible and professional when dealing with financial consumers.
 
Section 124 of the FSA and Section 136 of the IFSA prohibit a financial service provider from engaging in any business conduct set out in Schedule 7 of the FSA and the IFSA. Examples of prohibited business conduct include misleading and deceptive conduct, exerting undue pressure in relation to the provision of any financial service, demanding payments from a financial consumer for unsolicited financial services or colluding with any other person to fix or control the features or terms of any financial service or product to the detriment of a financial consumer, other than any tariff or premium rates or policy terms which have been approved by BNM.
 
Interestingly, Schedules 8 and 9 of the FSA highlight specific matters relating to insurance business in the context of consumer protection, such as pre-contractual duty of disclosure for consumer and non-consumer insurance contracts. Similar provisions are found in Schedules 8 and 9 of the IFSA in relation to contracts for consumer and non-consumer takaful contracts.
 
As of 30 June 2013, Schedule 8 of both the FSA and the IFSA have come into effect. These schedules set out the mandatory terms of insurance policies and takaful certificates. However, Section 129 and Schedule 9 of the FSA and all but two of the provisions of Schedule 9 of the IFSA have yet to come into operation. These provisions lay down the requirements in relation to pre-contractual disclosure and representations for insurance and takaful contracts.
 
FINANCIAL OMBUDSMAN SCHEME
 
One of the key changes to strengthen consumer protection under the FSA and the IFSA is the establishment of a financial ombudsman scheme to ensure effective and fair handling of complaints and to resolve disputes in connection with financial services or products.
 
Each financial service provider is required to be a member of the financial ombudsman scheme and to comply with the terms of its membership. The operational details of the scheme, including the type of disputes that may be referred, eligible complainants, membership requirements, procedures, fees charged and awards are to be set out in regulations.
 
The FSA and the IFSA expressly prohibit a dispute that has been referred to the financial ombudsman scheme from being lodged with the Tribunal for Consumer Claims under the Consumer Protection Act 1999. This demarcation of jurisdiction between the financial ombudsman scheme and the Tribunal for Consumer Claims avoids multiplicity of claims and disparity between decisions.
 
CONCLUSION
 
The FSA and the IFSA reflect a commitment on the part of the Malaysian Government to create a more robust and well-regulated legal framework for financial services. It is laudable that the protection of consumer rights is accorded due recognition, perhaps taking the cue from the Lehman Brothers mini-bonds saga in Singapore which saw mom and pop investors lose their hard-earned savings as a result of investing in sophisticated structured financial products.
 
It is also interesting to note that under the IFSA, Islamic financial institutions which have hitherto been subject to a light-touch regulatory framework, are now placed on a substantially more level playing field with their counterparts under the FSA.