Malaysia – Guidelines for Introduction of New Banking Products – Overview and Summary of Requirements

  • By: Staff Editor
  • Date: April 11, 2013
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Malaysia implemented these guidelines with the objectives of promoting sound product risk management practices, to enhance consumer protection and to assign greater flexibility for financial institutions to respond to changing market conditions. This article provides a brief overview of the regulatory requirements included in the guidelines.
These guidelines place greater responsibility on the Board, senior management and Shariah Committee. The rules apply to all financial institutions and cover the development, offering and marketing of new financial products and services by financial institutions.
These guidelines generally do not apply to:
  • stock-broking and capital/fund raising activities of an investment or Islamic bank;
  • the introduction of new delivery channels such as internet, telephone or mobile banking and payment gateway services; and
  • new/improved systems or processes which generally enhance the operations of financial institutions.
Framework for Introduction of New Products
General Conditions
  • The following general conditions must be met prior to introducing a new product:
  1. The product must fall within the ambit of prescribed/approved business activities of the banking institution.
  2. The financial institution has the capacity to adequately manage and control the risks associated with the product.
  3. Adherence to principles relating to the fair treatment of consumers.
  4. The institution must not knowingly offer a product that has been prohibited in other countries and which could potentially give rise to public concerns.
  5. The product must comply with all necessary approvals required for its offer.
  6. The institution that offers Shariah-compliant products shall ensure a sound and robust Shariah governance framework.
  7. The new Shariah-compliant product or variation must meet the following conditions:
  • It (including its accompanying documentations)must be approved by the financial institution’s Shariah Committee (SC);
  • Its underlying Shariah contract, structure and features must be similar to the products that have been approved by the Shariah Advisory Council (SAC); and
  • It must be consistent with the SAC resolutions.
  • A financial institution that meets the above conditions may offer the product to customers upon complete submission of information as per the ‘launch-and-file’ system.
  • The completed information has to be signed off by the senior management, namely Chief Executive Officer, Chief Risk Officer or Chief Operating Officer.
General Exception
  • The ‘launch-and-file’ system is not applicable to the following products:
    • Products involving innovative structures that are being introduced in the Malaysian market for the first time.
    • Shariah-compliant products that require the SAC resolution.
    • Investment products that could potentially expose the investor to losses exceeding the principal amount invested.
    • Designated payment instruments (DPI) requiring the Bank’s approval pursuant to section 25 of the Payment Systems Act 2003.
  • A financial institution shall not offer products (includes Shariah-compliant products) covered under this section until:
    • The expiry of 14 days from the date of receipt by the Bank of the complete submission of information; or
    • For DPI, the receipt of the Bank’s approval pursuant to section 25 of the Payment Systems Act 2003.
Product Risk Management
  • Product management program
    • Financial institutions are expected to develop and implement appropriate policies and procedures, across the process value chain, to prudently manage risks associated with the products offered by the institution.
    • It is also important that the management of product risks is well integrated within the financial institution’s overall governance framework and risk management system.
    • Financial institutions should also ensure the adequacy and security of the IT systems and infrastructure to support their product suites.
  • Product authorization
    • The policies and procedures for managing product risk should be formally endorsed by the Board and properly documented.
    • Importantly, the policies and procedures must be communicated in a timely manner to all relevant levels within the organisation and periodically reviewed.
  • Ongoing monitoring and control of product risk
Financial institutions should ensure that adequate procedures are in place for the ongoing identification, measurement and mitigation of existing and potential risks inherent in the institution’s product offerings.
  • Compliance with Shariah principles
For Shariah-compliant products, financial institutions should ensure that the product development process is comprehensive and robust to minimize the possibilities of the new product to be later nullified on Shariah grounds.
Fair Treatment of Consumers
  • Financial institutions are expected to give due regard to the interests of consumers in the development, marketing and sale of new products.
  • Policies and procedures regarding product offerings and sales activities should be aimed at mitigating reputational risk and safeguarding the financial institution from liability under applicable anti-fraud and fair practice laws and regulations.
  • The policies and procedures should comply with relevant principles and guidance issued by the Bank, including, principles concerning product transparency, proper advice, and fees and charges.
Customer suitability assessments
  • Financial institutions that include investment products within the product range should develop and implement internal customer suitability procedures aimed at ensuring that these products are only sold to suitable customers.
  • Components of effective customer suitability procedures include:
    • Processes that clearly describe the types of consumers that a product would generally be suitable for
    • Clear lines of authority for approving transactions with customers that do not meet generic customer suitability categorizations
    • Sales personnel who are suitably trained to properly analyze customers’ needs and risk appetites
    • Effective supervision of personnel involved in sale
    • Appropriate documentation and record keeping to aid reviews of compliance with approved procedures.
  • Financial institutions should not recommend products to customers unless the institution is reasonably satisfied that the product is suitable for the particular customer.
Supervisory Action
  • It is the responsibility of the senior management to ensure that the conditions and requirements set out in these guidelines are adhered to at all times, with effective oversight by the board.
  • For this purpose, the Board is required to submit an annual attestation to the Bank by 30 June of each year that the conditions and requirements of the guidelines have been met throughout the reporting period.
  • Financial institutions that fail to meet the conditions and requirements under these Guidelines will be subject to appropriate supervisory action by the Bank.
Additional Resources

Read the Malaysian guidelines for introduction of new banking products in full here.

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