Written by Wendy Ho and Jeremy Ling Tze Yu
On the 13th of January 2021, RWC’s managing partner Mr. Richard Wee was invited by the Malaysia Digital Economy Corporation (MDEC) vide the Fintech Booster platform to speak on the topic of ‘Fintech and the Law’ via Zoom. As one of the partners of Fintech Booster, RWC was given the opportunity to assist potential Fintech start-ups by conducting an informative session on the regulatory aspects of Fintech.
As we all know, Fintech is the combination of ‘financial’ and ‘technology’. It is the line of business based on using technology in providing financial services, so as to allow companies to improve their use and delivery to consumers. Fintech is particularly prevalent in areas such as cryptocurrency, crowdfunding, e-wallets, and smart contracts. Furthermore, recent developments have shown that Malaysia is ready to embrace Fintech through the announcement of partnerships from prominent companies such as Caltex, Shopee Pay, Grab Pay and Fave. It is undeniable that, with the ever-increasing evolution of technology, the rise of the integration of Fintech in the local financial scene is just a matter of time.
Applicable Fintech laws
When it comes to Fintech, two acts of parliament come into mind: The Financial Services Act 2013 (FSA) and the Capital Market and Services Act 2007 (CMSA). The FSA regulates and provides supervision of conventional financial institutions, payment systems and operators thereof and the oversight of the money market and foreign exchange market.
As for the CMSA, the Securities Commission of Malaysia (SC), which regulates the Malaysian capital markets, has adopted a Digital Markets Strategy intending to enhance access to financing, increase investor participation and develop a synergistic ecosystem for the capital markets in Malaysia. Under the CMSA, the SC regulates activities such as stockbroking, financial planning and P2P lending.
The increasing popularity of e-Wallets is yet another sign of the significance of Fintech in Malaysia. E-money is defined under the FSA as ‘any payment instrument, whether tangible or intangible, that stores funds electronically in exchange of funds paid to the issuer; and is able to be used as a means of making payment to any person other than the issuer.’ In short, it is a payment instrument that contains monetary value that is paid in advance by the user to the e-money issuer. Mr. Richard further emphasised on the importance for e-Wallet companies to uphold a fiduciary image or trust and confidence as, pursuant to section 2 of the FSA, an e-money issuer must be a person who undertakes to be responsible for the payment obligation in respect of a payment instrument resulting from a user being issued with or using the payment instrument.
Pursuant to the Financial Services (Designated Payment Instruments) Order of 2013, e-money is prescribed as a designated payment instrument, which consequently requires approval from Bank Negara Malaysia to be issued. Section 9 of the FSA required an applicant who is desirous of being an e-money issuer to submit the application in writing to the Bank together with such information as may be specified by the Bank. Moreover, section 12 of the FSA states that approval shall not be granted by the Bank if the company’s capital funds is less than the minimum amount as prescribed by the Minister.
On 31st December 2020, Bank Negara Malaysia issued the much-anticipated Licensing Framework for Digital Banks (“the said Licensing Framework”), which followed six-month public consultation period. Unlike online banking, digital banking purports to digitize of all traditional banking activities and services and so as to allow customers to conduct all aspects their banking via their electronic devices. With that being said, digital banks will be required to comply with the requirements under the FSA or Islamic Financial Services Act 2013 (IFSA), including standards on prudential, Shariah, business conduct and consumer protection, as well as on anti-money laundering and terrorism financing.
Since digital banks are recognised as banking business of similar definition as per section 2(1) of the FSA but differs in the means of conducting such businesses, they are therefore required to be licensed by Bank Negara Malaysia, as provided for in the said Licensing Framework. Paragraph 5.2 of the said Licensing Framework indicates that a licensed digital bank would be a) a person licensed under section 10 of the FSA to carry on digital banking business; and b) a person licensed under section 10 of the IFSA to carry on Islamic digital banking business.
e-KYC, or electronic-Know Your Customer, is a security and verification technology employed to confirm the identity of customers when conducting digital transactions, such as when you need to open financial accounts online. It offers convenience as the digital onboarding process of customers can now be carried out anytime and anywhere, without requiring you to visit the physical premises of financial service providers. e-KYC establishes business relationships and conducts customers due diligence by way of electronic means, including an online channel and a mobile channel. Our Mr. Richard Wee had also briefly touched on the growth in the area of RegTech (Regulation Technology) as it has a massive component of KYC within its operations. Fintech start-ups may consider venturing into RegTech to enhance their KYC or e-KYC.
The identification and verification process through e-KYC requires a financial institution to demonstrate on a continuing basis secure and effective measures. They are required to adopt an appropriate combination of factors when establishing these measures and are to take into account three basic authentication factors, namely, something the customer possesses (e.g. identity card, registered mobile number), something the customer knows (e.g. PIN, personal information) and something the customer is (e.g. biometric characteristics). Lastly, e-KYC may utilise artificial intelligence, machine learning and other forms of predictive algorithms to ensure accurate identification and verification. This may result in automation of the decision-making process for customer onboarding, thus reducing the need for human intervention.
At the end of the webinar, Mr. Richard expressed his anticipation and excitement for the introduction of Fintech activities such as digital banking and e-KYC to finally be available in Malaysia. As the nations around us progress and embrace the digitalization of financial services and activities, we ought to equip ourselves with the facilities and capabilities to improve our Fintech scene as well. Bank Negara Malaysia’s framework, the expansion and partnerships by e-wallet companies, and existing legislations such as the FSA and CMSA signs that the incorporation of Fintech into the lives of Malaysians is just around the corner.
Uploaded on 19 January 2021