A Regulatory Overview on Fintech Fundraising Platforms in Malaysia

1.     Rise of Fintech

1.1   In this digital age, financial technology (“fintech”) has been increasingly embraced as businesses and consumers alike shift towards digital solutions, including e-commerce, contactless payments and digital financial services.

1.2   In Malaysia, it was recently entrenched in the Twelfth Malaysia Plan 2021-2025 that the Government of Malaysia will undertake efforts to position Malaysia as a regional centre for fintech, offering both conventional and Islamic fintech services[1]. Further, Bank Negara Malaysia (“BNM”) had also indicated its commitment in its Financial Sector Blueprint 2022-2026 to, among others, facilitate greater digitalisation of business models in financial services and to advocate and support the growth potential of Malaysia’s broader fintech ecosystem[2].

1.3  In tandem with its developments, fintech has also transformed the platforms through which businesses or entities may undertake alternative fundraising activities for their business in Malaysia. This article will focus on the regulatory overview on fintech fundraising platforms in Malaysia.

2.1   Activity-Based Regulation

Malaysia does not have a specific regulatory regime applicable to fintech businesses. Generally, the nature or type of business activities carried out by a fintech business will dictate how it is to be regulated under the existing laws and regulations. The regulatory framework generally applicable to traditional financial services remains relevant, and would include laws such as the Financial Services Act 2013, the Islamic Financial Services Act 2013, the Money Services Business Act 2011, the Capital Markets and Services Act 2007 as well as various standards and guidelines issued by BNM and the Securities Commission Malaysia (“SC”).

2.2   Main Regulatory Bodies 

(a) BNM and the SC are the main regulatory bodies that regulate fintech in Malaysia. Broadly speaking, fintech businesses which relate to:

(i) financial markets such as banking, money and payment services would be regulated by BNM; and

(ii) capital markets such as dealing in securities or derivatives, fundraising, fund management and investment advice would be regulated by the SC. 

(b) Notwithstanding the above, certain fintech business activities may fall under the purview of both regulators. This is illustrated in the case of digital assets, wherein BNM and the SC clarified in a joint statement[3] in 2018 that the issuance and trading of digital assets will be regulated by the SC, and where the digital assets involve a payment function, players dealing in such digital assets will be regulated by BNM. 

(c) Both regulators have taken an active role in the preceding 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 catalyse 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, government agencies, ecosystem players and investors[4].

Since then, the frameworks for alternative forms of fundraising namely equity crowdfunding (“ECF”), peer-to-peer financing (“P2P Financing”) and initial exchange offering (“IEO”) have been introduced by the SC. In addition to the licensing of ECF and P2P Financing operators in Malaysia, the SC had recently in March 2022 registered a total of two (2) IEO operators to provide an alternative avenue 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 the deployment and testing of fintech solutions in a live environment[6]. BNM also introduced a licensing framework for digital banks in December 2020, with an aim to enable the innovative application of technology to uplift the financial well-being of individuals and businesses and foster sustainable growth[7]. Pursuant thereto, BNM had in April 2022 announced a total of five (5) successful applicants for the digital bank licences as approved by the Minister of Finance[8].

Further, BNM announced in November 2021 that it is driving inter-agency efforts to enact the Consumer Credit Act with an aim to strengthen the regulatory arrangements to govern all consumer credit activities including “Buy Now Pay Later (BNPL)” schemes which are on the rise within the fintech space of Malaysia.

BNM’s commitment in updating its regulatory approach for fintech can also be seen in the issuance of the exposure draft of a policy document for electronic money (“e-money”) issuers in June 2021 (“Draft E-Money Policy”). E-money is a payment instrument that stores monetary value that is paid in advance by the user to the issuer of e-money, and is quickly becoming one of the main payment methods in Malaysia. The Draft E-Money Policy, when finalised, will replace the Guideline on Electronic Money (E-money) issued in 2008 and be applicable to approved issuers of e-money 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 recognised market operators (“RMO(s)”) and governed by the SC. For these purposes, the Capital Markets and Services Acts 2007 (“CMSA”), administered primarily by the SC, is the main governing legislation. To operate a recognised market, a person is required to apply to the SC under Section 34 of the CMSA to be registered as a RMO.

3.2   Subject to fulfilling the prescribed registration requirements, the following fintech fundraising platforms are deemed to be RMOs:

(a) ECF platform – an online fundraising platform for start-ups or micro, small and medium enterprises to obtain capital through small equity investments from a group of investors;

(b) P2P Financing platform – an online fundraising platform which facilitates a debt-based fundraising method that is akin to a loan wherein investors provide financing to a business by subscribing to investment notes or Islamic investment notes; 

(c) Property crowdfunding (“PCF”) platform – an online fundraising platform for homebuyers to obtain financing for the purchase of property from a group of investors who subscribe for investment notes or Islamic investment notes;

(d) E-services platform – an online fundraising platform which arranges or facilitates the sale, purchase or subscription of a capital market product offered by a holder of a Capital Market Services Licence (“CMSL”) granted under Section 61 of the CMSA to investors; and

(e) IEO platform – an online fundraising platform for businesses to raise funds through IEO i.e. the offering of digital tokens to investors.

3.3   To supplement Section 34 the CMSA in relation to the registration of a RMO, the SC has issued specific guidelines to prescribe the relevant registration and ongoing operating requirements for RMOs. In particular, the SC has issued:

(a) Guidelines on Recognized Markets (“RM Guidelines”) to regulate, among others, ECF, P2P Financing, PCF and E-services platforms; and

(b) Guidelines on Digital Assets (“DA Guidelines”) to regulate IEO platform. 

3.4   Apart from the RM Guidelines and DA Guidelines, fintech fundraising platforms would also be governed by other applicable guidelines or practice notes issued by the SC from time to time. For instance, in view that the technical infrastructure of fintech fundraising platforms is heavily reliant on information technology (IT) systems which collect and process critical data, fintech fundraising platforms must also observe the requirements under the Guidelines on Management of Cyber Risk to manage cyber risks and mitigate cyber threats to protect investors’ confidential data.

3.5    That being said, the regulatory frameworks as set out above in relation to fintech fundraising platforms are by no means exhaustive, and a fintech fundraising platform must also comply with such other Malaysian laws and regulations as may be applicable to it, including but not limited to the following:

(a) Anti-Money Laundering / Countering Financing of Terrorism (“AML/CFT”)

Fintech fundraising platforms are generally required to observe AML/CFT laws and to establish adequate AML/CFT frameworks in its operations. The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”) was amended on 24 December 2021 to, among others, extend the application of Part IV of the AMLA (concerning the reporting obligations of reporting institutions) to RMOs[9].

(b) Personal data protection and privacy

The Personal Data Protection Act 2010 (“PDPA”) and the regulations or guidelines issued thereunder apply to any person who processes and has control over or authorises the processing of any personal data in respect of commercial transactions.  

(c) Anti-corruption and whistleblowing

Fintech fundraising platforms are also generally required to impart anti-corruption and whistleblowing measures within their organisations that are appropriate to the nature, scale and complexity of their businesses, in accordance with the Malaysian Anti-Corruption Commission Act 2009 and the Whistleblower Protection Act 2010, as well as the guidelines or regulations made thereunder.

4.     Perspective

4.1   The SC reported a growth of 149.2% in alternative financing for 2021 from 2020, with RM1.4 billion raised from ECF and P2P Financing platforms[10]. It is beyond doubt that the SC’s efforts in recognising fintech forms of fundraising and in implementing the relevant frameworks has benefitted businesses in Malaysia, especially small and medium enterprises which traditionally have limited means of financing their businesses.

4.2   At the same time, fintech fundraising platforms have also served to democratise access to investment opportunities for a broader spectrum of investors, and investors may take comfort in the fact that such platforms are under the purview of a robust regulatory regime overseen by the SC. To boot, it is worth mentioning that the recent registration of two (2) new IEO operators will open new doors to businesses and investors alike, and we eagerly anticipate for the fintech fundraising space in Malaysia to be further stimulated in the near future.

[1] Twelfth Malaysia Plan, 2021-2025 (epu.gov.my)