This article first appeared in The Edge Malaysia Weekly on March 18, 2019 - March 24, 2019

SIX months ago, Datuk Syed Zaid Albar was a private-sector man. Now, he is chairman of the Securities Commission Malaysia (SC), setting the direction for the statutory body tasked with developing and regulating the capital market.

It seemed an unconventional choice for Syed Zaid was a lawyer who had been in practice for 38 years, predominantly in corporate law, capital markets, conventional banking and Islamic finance.

But in his first interview since taking office on Nov 1, Syed Zaid tells The Edge that he views his three-year term as a form of national service. He also notes that he had, in fact, come in with some familiarity with the organisation from his private practice days.

“Comparing my knowledge before and after I came here, it is clear that for the most part, the SC works. That’s why the capital market is fundamentally stronger today compared with the 1990s,” he says.

Syed Zaid took the hot seat at the SC at a critical time for the local capital market. Months after the historic 14th general election in May 2018, the fallout from the 1Malaysia Development Bhd (1MDB) scandal was in full flow and the SC had sprung into action.

It had established a special committee at the board level to address “potential gaps or lapses” in its processes. The impetus was that much of the 1MDB money siphoned off had been raised via the capital market, which comes under the SC’s purview.

The review is ongoing and any action will be decided on after it is completed, Syed Zaid had said at a public media briefing.

In the interview, he disagrees that the 1MDB scandal where there was wrongdoing despite existing corporate governance processes exemplifies a systemic failure within the corporate governance framework.

“Referring to 1MDB as a systemic failure suggests that there is a failure of the whole market, which to me is neither true nor accurate.”

Instead, the fact that the wrongdoing became publicly known and prompted a change in federal government “showed that we are moving in the right direction”, he says.

Apart from the board level review, on Jan 30, the SC fined auditing firm Deloitte RM2.2 million — the maximum sum possible — for four breaches related to the RM2.4 billion sukuk murabahah programme issued by a subsidiary of 1MDB in 2014.

According to Syed Zaid, the sanction against Deloitte served as a “clear message” to professional services companies as to the importance of discharging their duties and obligations properly.

“Above and beyond the financial penalty, remember that the most valuable asset to a professional services firm is its reputation,” he adds.

Syed Zaid says the SC had also referred the matter to other relevant entities, such as the Audit Oversight Board (which oversees auditors and auditing firms) and the Malaysian Institute of Accountants, for review.

An ‘AAA’ market

So, having occupied the hot seat for nearly five months now, what is the plan for the commission?

“When I accepted the job, I took a longer view and asked myself, ‘What is my vision of the capital market and the SC?’” he reflects.

“I can summarise it as the 3As.  I would like to build a capital market and a regulatory institution that are accessible, agile and accountable.”

This is not to say that the SC needed fixing. According to the new chairman, he inherited an organisation with strong foundations, although he also says there is always room for improvement.

Simply put, the triple-A plan is premised on three overarching objectives, according to Syed Zaid. The first is to expand the capital market to be more accessible to the full spectrum of issuers, investors and intermediaries.

“We are not here just to serve the big end of town but also to broaden opportunities to the underserved segments of the market, such as the micro, small and medium enterprises (MSMEs) and unlisted larger companies [to tap the market for funds].”

In addition to the MSMEs, there are about 12,500 companies that have outgrown the former category but make up nearly half the Malaysian economy, he adds.

The second goal is to modernise the capital market, both in terms of its “plumbing” as well as capital-raising avenues and business models that operate within it, Syed Zaid says.

Part of this modernisation push is a review of the primary market framework that is already underway. Interestingly, this review includes a reconsideration of the SC’s approach to approving initial public offerings as well as intermediary licensing processes.

And alongside these two objectives is the push for more accountability and higher adoption of corporate governance standards. Ideally, boards and shareholders would not only consider the interests of the companies and shareholders in isolation but also wider societal responsibilities wherever possible.

“We want to transform the behaviour of boards and shareholders, emphasising a culture of stewardship,” says Syed Zaid. “This will be reinforced by the modernisation of the SC with tools and upskilling of supervision and surveillance capabilities for prompt and effective regulatory action.”

Structural hurdle

It is apparent that in the big picture, the endgame of the triple-A strategy is the creation of a more vibrant and inclusive capital market ecosystem.

However, that entails tackling a structural demand-side issue that has shackled the Malaysian capital market for years, particularly on the retail investor participation front.

To be fair, part of addressing that challenge will mean attracting more listings to the stock market to diversify available offerings for investors (see box).

In a nutshell, the majority of the Malaysian population especially the bumiputeras, who are generally more conservative when it comes to investing have access to institutionalised wealth creation instruments. These include unit trust fund Amanah Saham Bhd, retirement savings fund the Employees Provident Fund as well as pilgrimage fund Lembaga Tabung Haji.

Such instruments are attractive as they provide some security against risk associated with directly investing in the capital market. Historically, such institutionalised instruments have yielded reasonably attractive and stable returns for the capital they manage.

While these institutions participate heavily in the local stock market, they tend to take a very long-term view, which means a significant part of the market becomes illiquid and less vibrant compared with the regional peers.

“There are pros and cons to that as they (the institutions) provide some stability to the market” says Syed Zaid, although he acknowledges the illiquid effect. “Moving forward, we will need to look at the liquidity of the market and see how this can be improved.”

He also acknowledges that there is a growing preference for passive investment than active portfolio management.

That said, it is worth noting that the new generation of investors are more attracted to new investing platforms coming into the ecosystem.

And the SC is riding that preference to attract new and younger investors to the market (see story on Page 68). The idea is “to make it more affordable and convenient for investors to access the market”.

“The psyche of retail investors has changed. Many in the 25 to 35 age group are tech-savvy and demand more convenient access to investment products, so it is important to provide them with options in terms of different investment products and services through different channels,” Syed Zaid says.

Recognising the shift, the SC, stock exchange operator Bursa Malaysia Bhd and industry participants are actively reaching out to potential investors through roadshows and outreach programmes, he adds.

“We are also concurrently working on widening entry into the capital market for investors to access different investment products and services according to their needs.”

Place for market makers?

That said, while the new investing avenues may attract an influx of younger investors, this does not necessarily mean they will also participate in the traditional stock market.

For perspective, the local equity market capitalisation stood at RM1.7 trillion last year, a little over half the overall capital market size of RM3.1 trillion. The rest comprises debt securities outstanding that are primarily bonds.

In comparison, alternative fundraising channels for MSMEs remain relatively nascent with RM261.5 million raised by 693 issuers.

At the heart of the issue is the fact that many of the investors can still get reasonably good returns via institutionalised instruments while avoiding much of the risk.

That means in order to attract direct retail participation, the stock market needs to be liquid and vibrant enough so that investors have reasonable prospects of obtaining even higher returns though, again, at their own higher risk.

It is a chicken-and-egg situation. To be fair, some initiatives to promote better liquidity are underway, such as the proposed reduction of settlement period from three days (T+3) to two days (T+2), which Bursa Malaysia aims to implement by the middle of this year.

However, a bigger solution may be required in the long term and this could be where market makers come in, according to industry players.

In essence, a market maker is a trading entity that churns out trading volume to keep the market liquid, enabling investors to buy or sell more easily.

Opinion is generally split on the pros and cons of having market-making entities in the stock market. In Malaysia, market-making is present but in specific segments only at the moment, including structured warrants, exchange-traded funds and futures contracts. The aim is mainly to promote liquidity.

“The nature of these activities is different from market-making in a formal or structured framework, where market-making is targeted at a specific segment and a market maker must meet certain obligations, such as providing two-way quotes, carrying a certain level of stock inventory and achieving a certain volume,” says Syed Zaid.

So, is there a place for market makers on the local stock exchange?

“If there are proposals from the industry, the SC may consider such proposals for the equity market, taking into account the target segment, obligations of the market makers, structure of the incentive design and controls to ensure market fairness and orderliness,” he responds.

In a broader sense, it is also important that making the markets more attractive to the younger generation of investors is a collaborative industry effort, he adds.

“When it comes to innovation, the push should not just come from the regulator. The industry as well as issuers should take the lead in exploring how they can meet the demands of the new and upcoming generation of investors.”

All things considered, should Syed Zaid’s triple-A vision become a reality, then the Malaysian capital market is poised for some transformative years ahead.

But he declines to give a deadline for the process or discuss specific measurable outcomes that could be used to assess the three objectives.

Instead, the measure of success, to him, lies in providing inclusive opportunities for all to access the capital market, having market players that are differentiated by strong value propositions and having company boards and shareholders that not only think about their interests but also their societal responsibilities.

“Personally, what is important to me is not what we do but how we do it. I am committed to push for the continued betterment of the market and the institution over the course of my (three-year) chairmanship.”

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