Regulatory Landscape of Malaysian Banking Industry: Conduct Risk Management

Introduction

The Bank Negara Malaysia (BNM) has emphasized the importance of competent Shariah scholars within Islamic finance institutions. This is part of a broader effort to strengthen the regulatory landscape of the Malaysian banking industry, with a specific focus on conduct risk management.

Strengthening Talent Development Ecosystem for Islamic Finance

Competent Shariah Scholars: The BNM emphasizes the need for competent Shariah scholars not only in the Shariah Committee but also amongst Board of Directors, Senior Management, and working-level staff.
Shariah Governance Framework: A new regulatory framework will come into force in the second half of 2019, increasing scrutiny on the governance of Shariah standards and operational requirements.

Market Conduct Risk Management

In 2018, BNM turned up the pressure on banks regarding market conduct risk. Requirements were proposed to ensure fair treatment of borrowers, protect financial consumers from unfair loan or financing contract terms, and address persistent credit card debt.

Conduct Risk Programme Implementation

To manage conduct risk effectively, banks need to implement a programme that addresses drivers and restores trust. This includes:

Supervision
Benchmarks
Algorithmic Trading
Escalation
Investigation
Litigation
Material Risks
Challenge
Stress Testing
Policies
Training
Risk Assessments
Surveillance
Post-Trade Reviews
Metrics
Monitoring
Tools

Deloitte’s View on Conduct Risk

Conduct risk is defined as the risk that a firm’s employees or agents may harm customers, other employees, the integrity of the markets, or the firm itself. Deloitte emphasizes the importance of understanding misconduct, changing culture, and building detective and preventative capabilities to manage conduct risk.

Implementing a Conduct Risk Programme

Key Steps:

Establish a Clear Governance Structure: Define roles and responsibilities across three lines of defence (First Line, Second Line, and Third Line).
Conduct Risk Assessments: Identify potential risks, vulnerabilities, and gaps in controls.
Develop Policies and Procedures: Create comprehensive policies and procedures to address conduct risk.
Implement Monitoring and Surveillance Tools: Utilize tools to monitor and detect potential misconduct.
Provide Training and Awareness: Educate employees on conduct risk management and the importance of ethical behavior.
Review and Update Programme Regularly: Continuously review and update the programme to ensure it remains effective.

By following these steps, financial institutions can effectively manage conduct risk and maintain a culture of good conduct within their organization.