emerging and current regulatory issues in the capital...

SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC

Emerging and Current Regulatory Issues in the Capital Market (Session 1)

Module 4

V4


2

Notice

• The views expressed here are solely those of the speaker in his private capacity and do not in any way represent the views of the Securities Industry Development Corporation (SIDC) or the Securities Commission Malaysia (SC).

• The cases mentioned in this presentation have been prepared, cited or described on the basis for discussion rather than to illustrate either effective or ineffective handling of a business situation.

• Cases that are under investigation will not be discussed or commented on. • No part of this presentation may be reproduced, stored in a retrieval system

or transmitted in any form or by any means without the permission of the SIDC.


3

Risk Management

Stress Test

• Capacity testing

• Volatility

Systemic Risk

• Too big to fail

• Standalone vs financial hypermarkets


4

Changes to Financial Landscape

• Banking

• - Commercial

• - Investment

• Insurance

• Capital market

Blurring of Lines and Increased Linkages

• New products

• New services

• Dotcom bubble

• Sub Prime Mortgages Greater Financial Innovation


5

Prudential Standards - BNM

• The prudential framework is regularly reviewed and

updated to adapt to changing market realities and takes into

account developments in international standards and

guidance issued by the Basel Committee on Banking

Supervision, the International Association of Insurance

Supervisors and the Islamic Financial Services Board.


6

Capital Adequacy Requirements – Total Risk Requirements

Operational risk

Counterparty risk

Large-exposure risk

Underwriting risk

Position risk


7

Reputation Risk

Reputation Risk

Peripheral Parties

Employee Action

Company Action


8

Not adhering to KYC protocols

• Know your customer (KYC) and Continuous Due Diligence (CDD).

• Why?

• - to prevent money laundering , terrorist financing, proceeds from

unlawful activities (and fraud in general), and

• - to give appropriate advice to investing clients.


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Key Elements of AMLA Framework

• 1. Internal Controls, Policies and Accountabilities

• 2. Know Your Client

• 3. Education and Training

• 4. Monitoring and Detection

• 5. Reporting Obligations and Procedures

• 6. Record Keeping

• 7. Compliance Programme


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Case Study – Ethics vs Morality You are the director assigned to look into human resource matters. There is a vacancy for the Head of Compliance. You have been asked to interview the two finalised candidates, A and B for recruitment. You have reviewed the resumes of both candidates and find that both are well qualified and experienced and equipped to do the job, although A is slightly better compared to B. Two days before the interview, you receive a phone call from a very dear old friend. The friend has fallen onto hard times and is unemployed and divorced.


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The friend shares that it is so difficult to even put food on the table for the four children, three of whom are still school-going. Incidentally, the friend states that B is the eldest son and that the whole family was counting on him being employed as that would really help the family through the current difficult times. The friend concludes by conveying eternal gratitude to whatever help you can give. Your friends parting words to you are “May God bless your soul”. What are the issues involved? How will you decide on this issue? How will you rationalise your decision?


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Conflicts of Interest

Primary Interest Secondary Interest


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• Duties of Directors

• Integrity of Research

• Protection of Clients Primary Interest

• Financial Gain

• Professional Advancement

• Do Favours (family, friends) Secondary Interest


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• PO Trading in Competition with Client

• Conflict: PO buys or sells before the client and gets a better price

for itself than for the client.

• Duty: The PO must give the client’s order priority.


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• PO Trading as Principal with the Client

• Conflict: the PO’s interest to achieve the best price for itself can

conflict with the duty to obtain the best price for the client. The

client may be able to buy or sell at a better price elsewhere.

• Duty: The PO must make full disclosure of the fact that it is acting

as a principal.


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• PO is Underwriter of Shares and Also Acts for Clients Who Buy

Shares

• Conflict: The PO faces losses if the underwritten issue is not fully

subscribed. Its interest in encouraging clients to buy the shares

conflicts with its duty to act in the best interest of its clients.

• Duty: The PO must disclose that it has acted as an underwriter so

that clients are aware that its advice may be biased.


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• PO Owns Shares and Recommends These Shares to Clients, But

Does Not Trade Directly with Them

• Conflict: It is in the PO’s interest to see a price increase for shares

that it owns. The price of the PO’s shares is likely to rise if its

clients buy those shares.

• Duty: The PO must disclose the nature of its shareholding to its

clients so that they are aware that its advice might be biased.


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Approaches to Managing Conflict of Interest

• Code of conduct;

• Training;

• Disciplinary actions on wrong-doings;

• Policy of giving/receiving gifts;

• Personal dealing by staff;

• ‘Chinese Walls’; and

• Procedures for dealing with situation where someone declares

being conflicted.


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Churning customers accounts

• Frequent buying and selling of securities with no-change-in-

beneficial-ownership (NCBO) or by ‘acting-in-concert ‘may be

construed as evidence of churning.


20

Securities Industries Dispute Resolution Centre (SIDREC)

• An independent body corporate established for the settlement of

disputes between investors and capital market intermediaries who

are its members such as stockbrokers, futures brokers, unit trust

management companies and fund managers.

• SIDREC provides investors with free, fast, convenient and efficient

avenue to refer disputes for resolution as an alternative to the

other current dispute resolution body.


21

SIDREC Claims Statistics

year

Adjudicated Adjudicated

Adjudicated

Successfully

mediated

Claims

resolved

(no med

or adj)

Claims

resolved

(no med

or adj)

Total

claims

resolved

Full award

against member

Partial award

against member

Dismissed claim

Claim

withdrawn

by claimant

Dismissed

at stage of

initial

assessment

2014 0 1 2 1 13 2 19

2013 2 2 2 0 13 1 20

2012 0 0 0 0 2 1 3

2011 0 3 0 0 0 0 3

total 2 6 4 1 28 4 45


22

Differentiating between Guidance and Advice

• What is investment Guidance?

• - where consumers are provided with information which is

designed to help them make their own investment decisions.

• Such guidance can include the following:

• - Financial and investment education

• - General information about different types of product and asset

classes along with an explanation of how the consumer’s attitude

to investment risk can be determined.

• - Specific investment concepts such as diversification.


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Differentiating between Guidance and Advice

• What is investment Advice?

• - a personal recommendation as to how consumers should invest

their money, taking into account their own particular

circumstances and their financial objectives.

• - conducting a suitability assessment (KYC).

• - take into account all aspects of a client’s investment objectives

and financial circumstances, including the risk they are willing and

able to take on, ensuring any investment recommendations are

appropriately aligned to their specific situation.


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Cybersecurity – Recent Events May 2016 - Panama Papers – hackers stole 11 million documents from the email servers of Mossack Fonseca, a law firm in the tax haven that helps set up secret shell companies and offshore accounts for the wealthy. Early 2016 - Hackers breached the Bangladesh central bank’s computer systems, stealing US$81 million by creating seemingly authentic transfer requests through the global financial messaging system SWIFT.


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Cybersecurity – Recent Events July 2015 - Cybercriminals exploited weak passwords to steal the personal data of 37 million users of Ashley Madison, a website that enables extramarital affairs. Late 2014 – North Korean hackers broke into Sony Pictures computers’, stealing movie scripts, contracts as well as embarrassing emails. And posted them on the internet.


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Data leak prevention

• Increasingly reliant on digital information.

• e-mail messages, word processing documents, spreadsheets,

database flat files and instant messaging.

• “Sensitive” or “proprietary,” information needs to be protected.

• This need can be externally driven by privacy and other types of

regulation, or internally driven by business objectives to protect

financial, strategic or other types of competitive information.


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Distributed Denial-of-Service Attack (DDoS)

Exploit vulnerability in one computer

system

• The DDOS attack master

DDOS attack master identifies and infects

other vulnerable systems with

malware

• The controlled machines

DDOS attack master instructs controlled machines to attack

specified target

• Flood of incoming messages to target system forces it to close down


Thank You

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