Errant banks and financial institutions beware

PETALING JAYA (July 8, 2013): Bank Negara Malaysia may take errant banks and financial institution to court for civil proceedings to force compliance or remedial actions, and impose hefty fines on offenders under the new financial laws that recently came into force. 

Source from (The Sun Daily): http://www.thesundaily.my/news/763197
Published: July 08, 2013

The central bank also took on added powers under the Financial Services Act (FSA) 2013 and the Islamic Financial Services Act (IFSA) 2013 as it assumes a bigger role to identify early potential risks and warnings to the financial system.

The new laws replace the Banking and Financial Institutions Act (Bafia) 1989, Islamic Banking Act 1983, Insurance Act 1996, Takaful Act 1984, Payment System Act 2003 and Exchange Control Act 1953.

Lee Hishammuddin Allen & Gledhill partner Ong Eu Jin told SunBiz that the FSA effected last Monday is an "omnibus legislation."

What this means is that the legislation covers not one sector but several sectors – banks, insurance companies payment systems providers, broking business and financial advisors.

"Under the new FSA, Bank Negara Malaysia (BNM) may institute civil proceedings to seek for court order to impose monetary penalty, injunction order, order to comply or to do certain act and order to mitigate the effect of breach, including making restitution. Civil proceedings can be commenced regardless of the fact that criminal proceedings have been instituted against a person in respect of the contravention or breach."

Ong said BNM may institute civil proceedings if there is non-compliance with the provisions of the Act, provisions of any regulations issued under the Act, directions issued by BNM under the Act and standards, condition, restriction, specification, requirement or code issued under the Act.

"BNM may impose administrative order, for example administrative monetary penalty, order to do certain act and order to mitigate the effect of breach. Any failure to comply with BNM's
administrative orders may also result in the institution of civil actions to enforce the orders.

Besides, the prosecution may commence criminal proceedings when the Act is contravened. The criminal penalties that follow for breach of each offence differ and are stipulated clearly within the Act.

"For example, an authorised business must be carried out by an authorised person under Section 8 of the FSA. If this is not adhered, a person may be liable to imprisonment or fine. Penalties for each offence are expressly stipulated in the FSA."

By way of comparison, criminal penalties have also been set out for some of the offences under Bafia. For other offences, penalties are governed under the General Penalty clause.

The General Penalty clause does not exist in the FSA.

"The FSA is an important piece of legislation as it promotes greater level of stability, accountability, governance and transparency amongst the financial institutions in Malaysia," Ong said.

He said guidelines and preemptive measures themselves may not be sufficient to achieve the objectives of the Act because it is not binding in the Courts of Malaysia.

An interesting feature of the FSA, is its recognition of "financial groups" and "financial holding company" for the purposes of regulation and supervision. Under the FSA, BNM is empowered to exercise oversight over financial groups for promoting the safety of any member of the group who is an authorised person licensed to carry on banking, insurance or investment banking business.

A financial group would be required to propose a member of its corporate group to be the "financial holding company" and this is subject to the approval of BNM. BNM may require more than one company in the corporate group to be a financial holding company.

Extensive powers are also given to BNM to issue directions to the financial holding company, its subsidiaries and officers to cease or refrain from committing an act or pursue a course of conduct in relation to its business, affairs or property.

Such a direction can be far-reaching as it can include the disposal of investments or assets by the company or its subsidiaries.

Powers are also given to BNM to remove directors and CEOs who no longer fulfill the fit or proper requirements or has failed to comply with the FSA, a direction of BNM or an enforceable undertaking accepted by BNM.