15 May, 2016
Background
Malaysia recently concluded negotiations on the Trans-Pacific Partnership Agreement (“TPPA”) with 11 countries, namely United States of America, Singapore, Japan, Australia, New Zealand, Brunei, Canada, Chile, Mexico, Peru and Vietnam.
The motion to sign and ratify the TPPA was passed by Malaysian legislature most recently on 28 January 2016. This is in advance of the proposal by the 12 nations to sign the TPPA in Auckland on 4 February 2016.
The TPPA seeks to promote greater economic integration, as well as lift entry and trade barriers between the member countries. In particular, the TPPA requires member countries to adhere to commitments to develop the financial sector, unless a member country has negotiated exceptions to such commitments. We have set out the key areas of significance and the potential implications on the Malaysian financial market.
National / Most-Favoured Nation Treatment
Under the TPPA, financial institutions and investors must be treated equally with respect to, amongst others, establishment and acquisition of interests in financial institutions. There should not be favourable treatment to local financial institutions and local investors or those from any member country.
As a matter of policy, Bank Negara Malaysia (i.e. the Central Bank of Malaysia) (“BNM”) currently imposes restrictions on foreign shareholding on Malaysian banks and insurers and limits the number of new licensees. Malaysia's commitments under the TPPA could result in a liberalisation of such restrictions for investors from TPP member countries. However, the liberalization is subject to the reservation made by Malaysia, i.e., that Malaysians should continue to have an "economically meaningful share" of the financial sector and that the grant of new licenses should be in the "best interest" of Malaysia.
Therefore, while we do not anticipate that foreign shareholding in the financial sector will be fully liberalised, there is now a new avenue for foreign entrants or existing players from TPP member countries to enter the Malaysian financial market and potentially not be subject to foreign shareholding limits, or otherwise have a higher threshold of foreign equity participation in financial institutions.
Other anticipated changes are as follows:
a) Banking Industry
Market access
Towards promoting market access, Malaysia has committed to allow foreign-owned Malaysian banks from TPP member countries to establish a greater number of new physical branches and new off-premises automated teller machines, subject to reciprocal treatment from the bank’s home country. This will allow such banks to increase their penetration of the Malaysian market, and also promote financial inclusion.
b) Insurance Industry
Expedited availability of insurance services
The TPPA requires member countries to adopt regulations which allow insurance services to be made available on an expedited basis. BNM presently allows for expedited availability of certain insurance products through the "launch-and-file" system and it is possible that BNM may allow additional products under the "launch-and-file" system.
c) Capital Markets Industry
ASEAN Collective Investment Scheme ("CIS") Framework
Pursuant to the Framework, fund managers based in Malaysia, Singapore and Thailand can offer CIS constituted and authorised in their home jurisdictions directly to investors in the other countries under a streamline authorisation process, i.e. fund passporting.
Given that not all ASEAN nations are party to the TPPA, such preferential treatment accorded to ASEAN CIS may have to be extended to the TPP member countries as well. If implemented, this will likely drive growth and liquidity in this segment of the capital markets of Malaysia, Singapore and Thailand.
Bumiputera participation
The TPPA restricts member countries from requiring that persons of a particular nationality be engaged for senior managerial or essential positions. In line with such commitments, the Securities Commission of Malaysia could revisit the minimum Bumiputera participation requirements presently imposed on directors, representatives and employees of capital markets and services licence holders.
Outsourcing
Presently, Malaysian financial institutions are subject to restrictions on outsourcing activities to places outside of Malaysia. Pursuant to commitments in the TPPA, it is expected that obtaining approval for outsourcing abroad to member countries will be more straightforward provided that there is reciprocity (i.e., the member country allows Malaysian owned financial institution operating in its country to outsource their activities abroad on the same conditions).
Cooperation and Transparency
The TPPA underscores a commitment to promote regulatory transparency, and it is anticipated that there will be increased cooperation and engagement between the regulators of member countries.
As part of this initiative, Malaysian regulators will, to the extent practicable, be required to provide drafts of any future legislation to member countries for comments and address such comments. This could, over time, lead to streamlined legislations between the 12 nations, and raise the Malaysian financial sector's regulatory regime to the same level as other developed nations.
There will also be a requirement for Malaysian regulators to decide on applications submitted by an entity from a TPP member nation within 120 days of submission and, upon request by the applicant, provide reasons for denying applications. This would provide greater certainty for TPP member applicants. The provision of reasons for a denial or rejection would also enable an applicant to appropriately frame appeals.
Disputes
The TPPA introduces a new avenue for investors of member countries to challenge, by way of arbitration, measures introduced by Malaysian regulators relating to the regulation and supervision of financial institutions, markets or instruments, to the extent that such measures are inconsistent with the TPPA. This inclusion is significant as it enables private investors to bring a proceeding against the Malaysian regulators for an alleged breach of the TPPA, and will require the Malaysian regulators to process applications from TPP member countries with greater detail whilst complying with the TPPA.
Conclusion
The TPPA provides the platform for investors from TPP member countries to compete more effectively with their Malaysian counterparts. The requirement for Malaysian regulators to consider and address comments from other member nations may result in Malaysian legislation taking a leaf from the statutory and regulatory regimes of more sophisticated TPP member countries, and raising our standards in the process. This is anticipated to promote growth and development of the Malaysian financial sector.
For further information, please contact:
Adeline Wong, Partner, Wong & Partners
adeline.wong@wongpartners.com
