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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Nov 9 - 15, 2015.

 

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REGULATING the financial technology (fintech) industry in its early stages is an important step to instil confidence among investors. This, in turn, will allow the industry to flourish. 

Goh Ching Yin, executive director of market development at the Securities Commission Malaysia (SC), says this is because fintech is part of the financial services industry. “[Since] the industry interacts with the capital market and banking space, trust and confidence must be put in place. That is why regulations have to come in early.” 

The SC is the first regulator in Asean to come out with regulations for the fintech industry. Goh says the regulations are aimed at protecting investor interest and encouraging the industry’s development.

“The idea is that when we see the development coming and the market is ready to deploy it, we try to capitalise on this and make it happen. At the end of the day, it is about delivering cost efficiency and giving better outcomes to investors and end-consumers. It is about getting the outcome we want,” he says. 

Goh, who took on his current role in 2007, is leading a team to help bring local fintech companies to the next stage. 

The growth of the fintech industry in the West has caused quite a stir in the financial services industry, inviting both positive and negative views from the parties involved. Some, like the banks, worry that their business will be affected by these new disruptors, while others say the technology could be used to enhance existing services. 

Although fintech is largely seen as a disruptor in the financial service market, Goh does not look at it that way. “We see it as a platform to enable businesses to deliver products and services better,” he says. 

At the World Capital Markets Symposium on Sept 4, the SC announced an initiative — the Alliance of Fintech Community — aimed at getting all the fintech players on board to make the conversation happen and proper regulations possible. The regulator has gone all out to attract participation, and has brought together 20 players, from large financial institutions and core banking technology providers to start-ups, in just two months.

Two equity crowdfunding (ECF) platforms will be officially launched at the end of the year, while the guidelines and framework for peer-to-peer (P2P) lending will be announced by the first quarter of 2016, says Goh.

The framework for robo-advisers — online wealth management service providers that offer automated, algorithm-based portfolio management advice without the use of human financial planners — is still in the pipeline and will be introduced at a later date, he says. 

Local financial institutions have begun to realise the potential of the fintech industry. In the middle of the year, Maybank partnered venture capital firm 1337 Ventures to invite start-ups from Southeast Asia to pitch their fintech ideas. RHB, meanwhile, has entered into a partnership with Startupbootcamp FinTech to bring digital innovations in financial services to the Malaysian market. 

“Financial institutions may also be interested in deploying fintech as a means to offer financial services and products to customers in the near future. For example, wealth management products currently offered by these institutions can be repackaged via a self-service robo-advisory app, which may allow end-consumers more choice in their investment mix and the ability to decide for themselves,” says Goh. 

Another example, he says, is financial institutions may want to offer robo-advisory services on top of their existing e-banking services. “This could help the bank tap the younger generation and keep its customers within its community. Otherwise, the customers will be attracted to the robo-advisory services of other banks.”

Based on information provided by the SC, global investments in fintech start-ups have tripled to nearly US$3 billion (RM12.9 billion). According to a recent report by Accenture, fintech investments are expected to reach US$8 billion by 2018.

“Areas within fintech that are are fast gaining prominence globally include crowdfunding, which is a way for small businesses to raise capital over the internet. [In this respect,] timing is everything; two years ago may have been too soon for Malaysia, but we believe the introduction of ECF in 2015 will create more avenues for entrepreneurs to raise capital for their businesses,” says Goh.

According to SME Corp Malaysia’s 2014 annual report, the total amount of financing required by SMEs last year stood at about RM91 billion. Fintech can help address the financing gap faced by small and medium enterprises, which may have difficulty obtaining capital from banks.

More protection for investors

The SC released guidelines on ECF in February, to regulate the platform and protect investor interest. In the guidelines, it lists out the criteria for registering funds, such as the appointment of those responsible for the platform, requirements for reporting and disclosure of audited accounts as well as the obligations of the operator. 

The SC has put in place certain measures, such as a six-day cooling-off period for investors to cancel their purchase and an auction period for investors to sell their shares every six months. Investors are also given up to 14 days to exit the project if the project or issuer undergoes a “material adverse change”. 

The regulator has also imposed a maximum investment amount for each category of investors — retail investors can invest up to RM5,000 per issuer and a maximum of RM50,000 over a 12-month period, while angel investors can invest up to RM500,000 over a 12-month period. There are no financial restrictions for sophisticated investors.

According to the guidelines, issuers are required to disclose key information, such as the offering and amount to be raised, to the ECF operator. The operator, meanwhile, is required to submit its latest audited financial statements to the SC after the close of its financial year. 

Investors in ECF platforms tend to have a higher risk appetite and are willing to invest in such platforms despite the risks associated with them. Goh calls this “emotional investing”, or investing in things one has an affinity for. Such investors are less concerned about the potential returns.

“They invest in a cause, and the emotional level is very high. It is not so much about the money. Backers are typically less driven by monetary returns and more by an innate desire to see the project owner succeed,” he says. 

“Let’s say [an investor] likes the kind of watch the business is selling. Although the watch may not appeal to most people, he doesn’t mind investing in it because he is one of those who likes it and doesn’t mind what people are going to say.”

Goh says investors usually follow the path of renowned angel investors or venture capitalists. More often than not, he says, they pick a reputable name to follow and invest with as they are comforted by the validation that these renowned investors bring to the deals — they are not necessarily picking the product or deal itself. Simply put, ECF allows retail investors to own a small piece of equity in what could be the next big thing a few years down the road — the next Facebook, Oculus, Twitter, Uber or Airbnb, so to speak.

Platform operators are reminded to warn investors of the risks when investing in these fintech platforms as early-stage businesses tend to be very risky and highly illiquid. “We told the operators that when they put [the platform] up, they have to put up adequate risk warnings and notice on their website — telling investors that they must be prepared to lose their investments. The warning must be there.” 

In July, it was reported that a P2P platform was one of the factors that contributed to the turmoil after the stock market crash in China. The Shanghai Composite Index in July had more than doubled its value in less than a year, reaching a peak of 5,166 points, before experiencing a meltdown and plunging to 3,507 points in the following months. 

The high market sentiment had prompted China investors to borrow money from the P2P platform to catch up with the stock market rally without foreseeing the outcome. These are the people who suffered the most when the markets crashed, which forced the government to tighten its grip on internet financing platforms.

According to a report by The Wall Street Journal, China’s P2P market had almost tripled in value in 2014, from a year earlier, citing the estimates of a China P2P firm called 01caijing. The number of lenders had jumped 187% to 1,983 platforms.

Goh makes it very clear that the SC guidelines only allow the platforms to deal with companies. “As our focus is to widen the avenue for SME financing, we will be facilitating this mode of financing [P2P lending] for businesses only,” he says, as this could lead to the events that took place in China.

 

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