Technology is evolving and extending its reach increasingly into the financial sector, businesses are being disrupted by its changes. One example are savvy entrepreneurs looking to provide online platforms to match lenders and borrowers The Securities Commission Malaysia ("SC"), the regulator that oversees the securities and capital markets industry, took note of the flourishing peer-to-peer lending model. In April 2016, it revised the Recognized Markets Guidelines ("Guidelines") by adding a specific regulatory regime that appears to permit peer-to-peer lending but prescribes stringent requirements for peer-to-peer platform operators .
The SC as the primary regulator
Although peer-to-peer lending relates to the lending by retail investors, and borrowers are often small corporations, the SC has taken the lead in this realm. This is to be contrasted with certain other jurisdictions where such matters would fall within the purview of the Central Bank. In Malaysia, the SC is the primary regulator for peer-to-peer lending on the basis that: (i) peer-to-peer platform operators are deemed to be recognized market operators (i.e., similar to a stock market or a derivatives market operated or maintained by an operator registered with the SC); and (ii) investors (i.e., lenders) would be deemed to issue an "investment note" (i.e., the agreement evidencing the monetary loan, which in turn would fall within the definition of 'securities'), as a form of security given by the issuer (i.e., the borrower).
Although the SC is the primary regulator, it is anticipated that there will be a need to amend the Malaysian Moneylenders Act ("MA") to make peer-to-peer lending viable. Unless the MA is amended, investors (i.e., the lenders) may have to obtain a moneylending license under it. The time, cost and resource to be expanded to obtain such a licence will inhibit the interest of investors to lend, and in turn affect the potential for peer-to-peer lending to grow.
New requirements for platform operators
In keeping with ensuring that peer-to-peer lending is undertaken in a systematic manner, and does not prejudice the soundness of the financial system, the SC has prescribed stringent requirements and obligations to be adhered to by platform operators facilitating peer-to-peer lending. Operators must be a Malaysian incorporated entity with a paid-up capital of no less than 5 million Ringgit Malaysia (approximately US$1,212,000). The operator is also tasked with implementing risk scoring systems, undertaking a risk assessment on issuers and institutionalizing processes to manage a default by issuers.
These prudential requirements are further supplemented by the requirement for the operator to monitor and implement an anti-money laundering compliance regime. This is notwithstanding that the funds received from investors, and subsequently disbursed to investors, are ultimately held within trust accounts maintained with a locally licensed financial institution. This serves to ensure that operators are held to high standards and demonstrates Malaysia's commitment to combat money laundering. The alternative would have been for the SC to defer anti-money laundering compliance to the local financial institutions that are receiving and disbursing the funds, and hence leaving the Malaysian Central Bank to monitor compliance.
Borrowers must be Malaysian incorporated corporations
Unlike other jurisdictions, it is also noteworthy that only locally incorporated corporations (i.e., registered sole proprietorships, partnerships, incorporated limited liability partnerships, private limited or unlisted public companies) are permitted to be registered as borrowers on a peer-to-peer platform. A foreign incorporated entity will need to establish a Malaysian subsidiary if it intends to tap Malaysian investors for funding.
Further initiatives to watch
The regulation of financial technology is slowly taking shape in Malaysia. The regulation of peer-to-peer lending by the SC is the beginning of many other initiatives. The SC has indicated that it supports and wants to facilitate market-based innovation in financial technology. In the same vein, the Malaysian Central Bank had, at the end of May, indicated that it has been consulting with financial institutions with a view to issuing a comprehensive regulatory framework to regulate financial technology. Technology for financial institutions will be a space to watch in Malaysia.