Financial Service Act (FSA)

The proposed Financial Service Act (FSA) and Islamic Financial Service Act (IFSA) will extend beyond commercial banks to have a huge impact on the insurance industry when officially enacted.

The insurance industry players had been having closed meetings and discussions with Bank Negara Malaysia (BNM) on the matter whereby proposed provisions would include the requirement for composite players to convert into a single insurance business, the corporatisation of private Islamic financial services companies, the 50 per cent ownership cap on Financial Holding companies (FHCs).

Both the FSA and IFSA would entail stricter enforcement of group-wide risk and capital management on financial services, as well as greater regulatory control over financial areas such as shareholder control and core operations.

The research house noted that the proposed acts were passed by the Dewan Rakyat in November
2012 and might come into force as early as May 2013 once gazetted.

“The FSA will prohibit insurers to operate both life insurance (LI) and general insurance (GI) simultaneously. The same conditions apply to takaful companies with regards to simultaneous general and family takaful operations via the IFSA,” the report underscored.

As such, insurance and takaful companies holding composite licences would be directly affected. However, players would be given a five-year transition period to convert into single insurance businesses.

RHB Research opined that these new laws might lead the affected insurance and takaful players to the path of setting up entities to manage their GI and LI operations separately in order to retain the businesses.

The research house believed that the separation of insurance or takaful businesses under different
managements might result in stronger and sharper business focus and might promote industry growth in the long run.

It noted further that the new rules were in line with insurance laws globally, aimed at cutting down on instances where composite insurers diverted long-term life insurance investments to plug short-term cash flow gaps arising from general business claims.