Since the introduction of the Capital Markets and Services Act 2007 (CMSA), Malaysia’s capital market intermediaries have been required to obtain a capital market service licence (CMSL) from the Securities Commission of Malaysia. The licence is a crucial authorization for businesses operating in the capital markets, and helps to ensure investor protection and promote trust in Malaysia’s regulatory framework.
However, with the rise of digital platforms and fintech, the line between regulated businesses and service providers has become increasingly blurred. This has led to a need for businesses to understand whether they fall under the Capital Markets and Services Act 2007 and whether they require a capital market service licence to conduct regulated activities in Malaysia’s evolving fintech industry.
In this article, we explore the requirements for obtaining and maintaining a capital market service licence for digital platforms, and discuss the importance of complying with the guidelines on conduct for capital market intermediaries issued by the Securities Commission. We will provide insights on how businesses can navigate the regulatory landscape and ensure compliance in today’s rapidly evolving fintech industry.
Capital Markets and Services Act 2007
The Capital Markets and Services Act 2007 (CMSA) is an important piece of legislation in Malaysia’s financial industry. The act aims to regulate and enhance the efficiency, transparency, and integrity of the country’s capital markets. Under the CMSA, capital market intermediaries must obtain a license from the Securities Commission to operate legally in the country. The CMSA provides a single licensing regime for capital market intermediaries, which includes capital market service licence (CMSL) holders, registered persons, and persons registered under Section 76A of the CMSA to provide capital market services.
The relevance of the CMSA to the topic of digital platforms and fintech is significant. With the increasing use of digital platforms and the rise of fintech in the financial sector, the CMSA has had to evolve to meet the changing demands of the industry. In particular, the need to distinguish between regulated businesses and service providers has become more complex in the digital age. Therefore, the CMSA has had to keep up with the rapid pace of technological change to ensure that it remains an effective regulatory framework for the financial industry.
In the context of the evolving fintech industry in Malaysia, it is crucial for businesses to understand the requirements for obtaining a CMSL and to be aware of the regulations governing their activities. Failure to comply with the CMSA and the guidelines on conduct for capital market intermediaries issued by the Securities Commission can lead to serious consequences for businesses, including fines and even criminal charges. Therefore, it is essential for businesses to navigate the regulatory landscape carefully and ensure compliance with the relevant laws and guidelines.
The Securities Commission has issued guidelines on conduct for capital markets intermediaries under Section 377 of the CMSA. The guidelines set out standards of conduct and corporate governance for capital market intermediaries to follow in order to promote trust and transparency in the capital market.
Capital Market Service Licence
A capital market service licence (CMSL) is divided into different categories which cover different types of services where the applicant is required to apply for a licence to carry on the business in any one or more of the following eight activities which are regulated by the Securities Commission:
(a) Dealing in securities – to allow licensees to buy and sell securities on behalf of clients
“Securities” mean debentures, stocks or bonds issued or proposed to be issued by any government; shares or debentures of a body incorporated or unincorporated body; or units in a unit trust scheme; or prescribed investments.
(b) Dealing in derivatives – to allow licensees to deal in derivatives on behalf of clients
“Derivatives” means any contract, either for the purposes of creating an obligation or a right or any combination of both, of which its market value, delivery or payment obligations are derived from, referenced to or based on, but not limited to, underlying securities or commodities, assets, rates, indices or any of its combination, whether or not a standardised derivative or an over-the-counter derivative.
(c) Clearing for securities or derivatives
“Clearing for securities or derivatives” means, whether as principal or agent, carrying on the business of assuming obligations for the delivery and payment of a person’s transaction relating to listed securities or standardised derivatives as set out in the rules of the approved clearing house.
(d) Fund management – to allow licensees to manage investment funds on behalf of clients
“Fund management” means undertaking on behalf of any other person the management of (a) a portfolio of securities or derivatives or a combination of both, by a portfolio fund manager, whether on a discretionary authority or otherwise; or (b) an asset or a class of asset in a unit trust scheme by an asset fund manager.
(e) Dealing in a private retirement scheme
“Dealing in private retirement schemes” means, whether as principal or agent, making or offering to make with any person, or inducing or attempting to induce any person, to enter into or to offer to enter into any agreement for or with a view to (a) acquiring, or disposing of beneficial interest under a private retirement scheme; or (b) making contributions to a private retirement scheme.
(f) Advising on corporate finance – to allow licensees to provide advice on corporate finance matters including mergers and acquisitions
“Advising on corporate finance” means giving advice concerning (a) compliance with or in respect of Part VI of the CMSA, any regulation made under section 378 and any guidelines issued under section 377 relating to any matter provided under Part VI, or relating to the raising of funds by any corporation; (b) compliance with the listing requirements of the stock exchange in relation to the raising of funds or related party transactions; (c) arrangement or restructuring of a listed corporation or a subsidiary of the listed corporation of its assets or liabilities.
(g) Investment advice
Investment advice” means carrying on a business of advising others concerning securities or derivatives or as part of a business, issues or promulgates analyses or reports concerning securities or derivatives.
(h) Financial planning – to allow licensees to provide financial planning services to clients
“Financial planning” means analysing the financial circumstances of another person and providing a plan to meet that other person’s financial needs and objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto.
If the nature of an applicant’s business falls under any of the above categories of services, the applicant must apply for a CMSL from the Securities Commission before commencing business.
Depending on the category of services applied for, applicants must meet certain requirements and comply with regulations set by the Securities Commission to ensure the protection of investors and the stability of the capital market industry in Malaysia.
In general, some of the licensing requirements include having persons being fit and proper as set out under sections 64 and 65 of the CMSA. Every applicant will be required to submit their business model and scope of activities to be carried out.
A summary of other requirements include the following:
(a) Organisational Structure- requiring the company to be incorporated in Malaysia, to have licensed directors and a compliance officer, amongst others;
(b) Shareholder Composition – for companies owned by individuals, you must have majority shareholders who must have a requisite track record of experience in capital markets; and
(c) Adequacy of Financial Resources – there are financial requirements for each regulated activity with minimum financial thresholds by way of paid up share capital.
For a more comprehensive overview, see the Securities Commission Licensing Handbook.
Digital platforms in the context of capital markets services refer to online platforms or marketplaces that facilitate the buying and selling of securities or financial products. These platforms provide a virtual space where buyers and sellers can connect and interact in real-time, without the need for physical presence. Examples of digital platforms in the capital markets space include online trading platforms, crowdfunding platforms and digital investment management platforms. Digital platforms have become increasingly popular in recent years due to their convenience, accessibility, and cost-effectiveness.
The regulators in Malaysia have encouraged the development of digital platforms and also adjusted regulatory frameworks to facilitate this growth. Whilst there is no one-size-fits-all regime for any fintech or capital markets operator, licensing requirements depend on the nature of the business and services provided by companies within this sphere.
For example, the Malaysian Digital Economy Corporation Sdn Bhd (MDEC) is an agency under the Ministry of Communications and Digital which encourages digital transformation in our economy and offers corporate tax exemptions for technology start-ups.
It is also helpful to understand whether the business as a digital platform provider is one which acts as an operator or service provider. An operator for financial or capital market services is required to be licensed as either a CMSL or Digital Investment Manager (DIM), which falls under the purview of the Securities Commission. However, acting as a service provider for a technology platform or software developer in which services are outsourced by a CMSL or DIM holder, may not require the service provider itself to be licensed, provided the requirements of Chapter 10 of the Securities Commission Licensing Handbook is adhered to by the CMSL or DIM holder.
Venture Capital and Private Equity
Businesses intending to provide fund management services and activities for private equity or venture capital funds must also register with the Securities Commission. This requirement is in the Guidelines on the Registration of Venture Capital and Private Equity Corporations and Management Corporations.
Venture capital (“VC”) enthusiasts will be pleased to learn about the available tax incentives for qualifying investments in startups. To qualify for these incentives, startups must obtain a tax incentive certification from the Securities Commission. Detailed information regarding the certification process and requirements can be found on the Securities Commission’s website, accessible here.
Malaysia’s fintech industry presents challenges and opportunities for digital platform businesses. Obtaining a capital market service licence (CMSL) from the Securities Commission is essential to protect investors and build trust in the regulatory framework. As the line blurs between regulated businesses and service providers, it is crucial to determine obligations under the Capital Markets and Services Act accurately.
This article explored the requirements for obtaining and maintaining a CMSL for digital platforms, emphasizing compliance with the Securities Commission’s conduct guidelines. By navigating the regulatory landscape and staying informed about developments, businesses can embrace fintech’s transformative potential while contributing to the growth of Malaysia’s capital market ecosystem. Adapting to changing regulations and best practices ensures compliance and success in the dynamic fintech industry.
We have advised several start-ups and established foreign companies on whether their business and companies require licensing or approvals by local regulators and authorities. Get in touch with us if you have any questions or need legal advice in this context.
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.