The Capital Market Masterplan 2021-2025 (CMP3) continues with the fine tradition of the Securities Commission Malaysia (SC), having been well established, of embracing development and change — not just of the capital markets but also in the performance of its regulatory role, and beyond.
Right from the start over a generation ago, the SC has always seen its purpose as being both a facilitative agent for market innovation and a prohibitive institution of enforcement. That facilitation or enforcement is also always for the good of society at large.
The SC’s evolving regulatory approach, which appears in the final chapter of the CMP3, envisions shared accountability among all participants in the capital markets. The SC states there will be “no more regulation than necessary” and, in the next five years, the principles-based regulation first outlined in 2015 will be more extensively applied.
Lest it be assumed, however, that the SC will become a soft touch, the regulator is quite clear it is not abandoning but will introduce a different protection framework. Precisely the new technologies that drive market development will be utilised in regulation, supervision and enforcement.
So, there will be regulatory technology (regtech), supervisory technology (suptech) and shorter time frames in enforcement with the use of technology. The application of artificial intelligence (AI), for instance, to monitor corporate governance (CG), which started in 2018, will become more extensive with governance in a glance (GiG).
While there will always be human intellectual intervention, upon which the outcome of the enlightening CMP3 is based, the crucible in which much of the change and development in capital markets has been elucidated is primarily fired by new technology, products and processes — and challenges.
Covid-19 was mentioned, of course — how could it not be — but perhaps because of time constraints, the changes it imposed on investor behavioural patterns and the expanded reliance it inculcated, on not always reliable online sources of investment advice, were not adequately discussed.
The Institute of Capital Market Research (ICMR), which I chair, is doing some interesting work on new retail investor behaviour during the time of Covid-19, as well as on financial literacy in the digital world, which could expand on these two matters recognised in the CMP3, but not adequately drilled down because of the time constraints for the release of the report.
Another matter also mentioned in the CMP3, for which the SC does not carry the responsibility alone, is the worrying situation in respect of retirement support. The numbers are disturbing.
The Employees Provident Fund (EPF) balances of the majority of contributors have been depleted. Forty-two per cent of members have less than RM10,000. About 14 million people, or 62% of the working age population, are not covered by any form of statutory contribution whatsoever, and this is likely to increase with the rise of the gig economy. Life expectancy after retirement — the pension gap — is 19.2 years in Malaysia, higher than other countries in the region.
There is mention in the CMP3 of a need for more pension asset managers and retirement schemes, but maybe the SC should take the lead to review and propose solutions for the highly inadequate retirement savings of Malaysians. This is a political time bomb that should be defused as soon as possible.
What also needs to be more granular is the recognition of getting micro, small and medium enterprises (MSME) access to finance. This is a longstanding matter that must obtain a better solution. The CMP3 notes that MSMEs contribute 60% to Malaysia’s GDP. They are also significant in human terms, especially after the ravages of Covid-19 on the livelihoods of the lower-income group. Can there not be SC leadership in “Project MSME access to capital market finance”?
On the other hand, the CMP3 is bold and clear in presenting the SC’s undoubted area of professional responsibility, the “multi-layered” capital market, which demonstrates a laudable understanding of business development and financing needs. This is best captured in Diagram 1.
The CMP3 reviews what the record has been in gaining the financing needs and talks sensibly about enhancement and what more needs to be done. In the process, it is underlined — it is so easy to be overwhelmed by new products — that the capability and capacity of the capital market to direct capital towards productive economic activities that ensure businesses continue to obtain access to financing, should not be forgotten.
Common or garden equity and corporate bonds remain important, with a total value last year of RM3.4 trillion, up from RM2 trillion in 2011.
Most pleasing to read in the CMP3 is a true commitment to climate action. The challenging obstacles and issues of transition to a low-carbon economy are not ducked. An important note is a point not often made. That there is a need for transition financing “outside the parameters of green financing and from a broader range of capital providers”.
There is a cost that has to be financed, something glossed over in Western narratives on climate action. The SC in the CMP3, on the other hand, signals the risks to the valuation of listed companies from the decommissioning in a low carbon economy, which has to be compensated. The suggestion of real estate investment trusts (REITs) for real property left behind in the migration to green products and services is a good start.
The CMP3 also observes there must be a clear definition of transition taxonomies so that transition labels do not become an attempt at greenwashing (which is the technical term for hoodwinking investors). There is an absolute need not only to raise capital but also to harmonise taxonomies. The SC should be one of the national and regional leaders in both of these efforts.
There is traction globally in sustainable finance bonds, which doubled to US$544.3 billion in 2020 from 2019. The assets under management of ESG funds also doubled to US$60 billion in the same period. There is some way to go. But there is some movement. Hopefully, in our country and region, the SC can provide further impetus.
The profound understanding and belief in sustainable development to be found in the CMP3 is uplifting. The convergence of ESG with other values is well captured in Diagram 2.
One of the problems in pushing for climate action is the abstract way the undoubted crisis is presented. Yes, atmospheric CO is up a third on 1960s levels, the past six years have been the hottest on record, or the world’s oceans in 2020 were the hottest ever recorded. But unless all this hits you in the face, you are distant from them. However, they may hit you soon.
What does sustainable development mean to the common person unless it is brought home to him that his health, which is even more critical in this age of Covid-19, is a sustainable goal, which along with clean water and other infrastructure, will ensure he lives safely and is able to work.
Diagram 2 is an extremely useful starting point from which to extract the reality to life from that convergence of abstract values. The SC — maybe I am asking too much of it — should again lead the charge to give meaning to its objective of realising climate action financing. Rigid boundaries in different realms of responsibility cause cracks through which the best intentions fall.
The SC has a huge task ahead, which has been so ably identified in the CMP3. It has
responsibility for the capital markets, yes. But the CMP3 has a significance beyond capital markets. It reassures me of the necessary connection between the financial economy and the real economy, that the lives of ordinary people will remain and be revitalised.
The SC should work with other national actors, including the government, to realise the higher objectives of the common good, even as it concentrates on capital markets.
Tan Sri Dr Munir Majid was founding chairman of the Securities Commission Malaysia