1. The rise of Fintech
1.1 In this digital age, financial technology (“fintech”) has been increasingly embraced as both businesses and consumers move to digital solutions, including e-commerce, contactless payments and digital financial services.
1.2 In Malaysia, it was recently enshrined in the Twelfth Malaysia Plan 2021-2025 that the Government of Malaysia will undertake efforts to position Malaysia as a regional center for fintech, offering both conventional and Islamic fintech services[1]. Furthermore, Bank Negara Malaysia (“BNM”) had also indicated its commitment in its Financial Sector Blueprint 2022-2026 to, among other things, facilitate greater digitization of business models within financial services and to advocate for and support the growth potential of Malaysia’s wider fintech- ecosystem[2].
1.3 As it evolves, fintech has also transformed the platforms where companies or entities can conduct alternative fundraising activities for their business in Malaysia. This article will focus on regulatory overview of fintech fundraising platforms in Malaysia.
2. Fintech Regulatory Regime in Malaysia – General
2.1 Activity-based regulation
Malaysia does not have a specific regulatory regime that applies to fintech companies. In general, the nature or type of business activities carried out by a fintech company will dictate how it will be regulated under existing laws and regulations. The regulatory framework that generally applies to traditional financial services is still relevant, and will include laws such as the Financial Services Act 2013, Islamic Financial Services Act 2013, Money Services Business Act 2011, Capital Markets and Services Act 2007 as well as various standards and guidelines issued by BNM and Securities Commission Malaysia (“SC”).
2.2 Main regulatory bodies
(a) BNM and SC are the main regulatory bodies regulating fintech in Malaysia. Broadly speaking, fintech companies can relate to:
(i) financial markets such as banking, money and payment services will be regulated by BNM; and
(ii) capital markets such as trading in securities or derivatives, fundraising, fund management and investment advice will be regulated by the SC.
(b) Notwithstanding the above, certain fintech businesses may fall under both regulators. This is illustrated in the case of digital assets, where BNM and SC clarified in a joint statement[3] in 2018 that the issuance and trading of digital assets will be regulated by SC, and where the digital assets involve a payment function, actors trading in such digital assets will be regulated by BNM.
(c) Both regulators have taken an active role in the previous years to encourage the development of the fintech space in Malaysia:
(I) SC
In September 2015, the SC launched the Alliance of FinTech Community (aFINity) to catalyze and nurture fintech development in the Malaysian capital market and is intended to serve as a platform for continuous interactions between the SC as a capital market regulator and all relevant fintech stakeholders such as innovators, financial institutions , public agencies, ecosystem actors and investors[4].
Since then, the framework for alternative forms of fundraising, namely equity crowdfunding (“ECF”), peer-to-peer funding (“P2P financing”) and first exchange offer (“IEO”) has been introduced by the SC. In addition to the licensing of ECF and P2P financing operators in Malaysia, recently in March 2022 SC had registered a total of two (2) IEO operators to provide an alternative route for eligible businesses to raise funds via the issuance of digital tokens in Malaysia[5].
(ii) BNM
In October 2016, a Financial Technology Regulatory Sandbox Framework was introduced by BNM in 2016 to facilitate deployment and testing of fintech solutions in a live environment[6]. BNM also introduced a licensing framework for digital banks in December 2020, with the aim of enabling innovative application of technology to raise the financial prosperity of individuals and businesses and promote sustainable growth[7]. In accordance with this, in April 2022 BNM had announced a total of five (5) successful applicants for the digital banking licenses approved by the Minister of Finance[8].
Furthermore, BNM announced in November 2021 that it is conducting inter-agency efforts to pass the Consumer Credit Act with the aim of strengthening the regulatory arrangements to govern all consumer credit activities, including “Buy now, pay later (BNPL)” schemes that are on the rise in the fintech space in Malaysia.
BNM’s commitment to update its regulatory approach for fintech can also be seen in the issuance of the exposure draft of an electronic money policy document (“e-money”) issuers in June 2021 (“Draft Guidelines for e-money“). E-money is a payment instrument that stores monetary value paid in advance by the user to the issuer of e-money and is fast becoming one of the main payment methods in Malaysia. The draft e-money guidelines, when finalised, will replace the electronic money (e-money) guidelines issued in 2008 and apply to authorized e-money issuers under the Financial Services Act 2013.
3. Fintech regulation of fundraising platforms
3.1 Within the Malaysian regulatory context, fintech fundraising platforms are generally classified as Recognized Market Operators (“RMO(s)”) and governed by the SC. For these purposes, the Capital Markets and Services Act 2007 (“CMSA”), administered primarily by the SC, is the main governing legislation. To operate a recognized market, a person must apply to the SC under section 34 of the CMSA to be registered as an RMO.
3.2 Subject to meeting the prescribed registration requirements, the following fintech fundraising platforms are deemed to be RMOs:
(one) ECF platform – an online fundraising platform for start-ups or micro, small and medium enterprises to raise capital through small equity investments from a group of investors;
(b) P2P funding platform – an online fundraising platform that enables a debt-based fundraising method similar to a loan where investors provide funding to a business by subscribing to investment notes or Islamic investment notes;
(c) Property crowdfunding (“PCF”) platform – an online fundraising platform for home buyers to raise finance for the purchase of property from a group of investors who subscribe to investment notes or Islamic investment notes;
(d) E-service platform – an online fundraising platform that arranges or facilitates the sale, purchase or subscription of a capital market product offered by a holder of a capital market services license (“CMSL”) provided under section 61 of the CMSA to investors; and
(e) IEO platform – an online fundraising platform for companies to raise funds through IEOs, i.e. offering digital tokens to investors.
3.3 To supplement section 34 of the CMSA in relation to the registration of an RMO, the SC has issued specific guidelines to prescribe relevant registration and ongoing operating requirements for RMOs. In particular, the SC has issued:
(a) Guidelines for Recognized Markets (“RM guidelines”) to regulate, among other things, ECF, P2P Financing, PCF and E-service platforms; and
(b) Digital Assets Policy (“DA guidelines”) to regulate the IEO platform.
3.4 Apart from the RM Guidelines and DA Guidelines, fintech fundraising platforms will also be governed by other applicable guidelines or practice notes issued by the SC from time to time. For example, given that the technical infrastructure of fintech fundraising platforms is heavily dependent on information technology (IT) systems that collect and process critical data, fintech fundraising platforms must also comply with the requirements of the Cyber Risk Management Guidelines to manage cyber risk and reduce cyber threats to protect investors’ confidential data.
3.5 That said, the regulatory frameworks described above in relation to fintech fundraising platforms are by no means exhaustive and a fintech fundraising platform must also comply with other Malaysian laws and regulations that may be applicable to it, including but not limited to the following :
(one) Anti-money laundering/fighting Financing of Terrorism (“AML/CFT“)
Fintech fundraising platforms are generally required to comply with AML/CFT laws and establish adequate AML/CFT frameworks in their operations. The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”) was amended on 24 December 2021 to, among other things, extend the application of Part IV of AMLA (relating to the reporting obligations of reporting institutions) to RMOs[9].
(b) Privacy and privacy
The Personal Data Act 2010 (“PDPA”) and the regulations or guidelines given thereunder apply to any person who processes and has control over or authorizes the processing of personal data in connection with commercial transactions.
(c) Anti-corruption and notification
Fintech crowdfunding platforms are also generally required to communicate anti-corruption and whistleblowing measures within their organizations that are appropriate to the nature, scale and complexity of their businesses, in accordance with the Malaysian Anti-Corruption Commission 2009 and the Whistleblower Protection Act 2010, as well as guidelines or regulations issued under to these.
4. Perspective
4.1 SC reported a 149.2% growth in alternative funding for 2021 from 2020, with RM1.4 billion raised from the ECF and P2P funding platforms[10]. There is no doubt that the SC’s efforts to recognize fintech forms of fundraising and implementation of relevant frameworks have benefited businesses in Malaysia, especially SMEs that traditionally have limited funds to finance their businesses.
4.2 At the same time, fintech fundraising platforms have also served to democratize access to investment opportunities for a wider range of investors, and investors can take comfort in the fact that such platforms are subject to a robust regulatory regime overseen by the SC. To start off, it is worth mentioning that the recent registration of two (2) new IEO operators will open new doors for both companies and investors, and we eagerly expect the fintech fundraising space in Malaysia to be further stimulated in the near future.
