Regulation too needs transparency

The SC is right to open up on its regulatory philosophy and activities

MANY regulators aren’t great at consistently communicating with the public, particularly when it comes to enforcement matters. When there are significant developments in their actions against wrongdoings, they seldom go beyond issuing press releases, and that too when there’s good news to report, such as them reaching milestones or notching up major triumphs.

When was the last time a Malaysian regulator announced that it had lost a fight it badly needed to win? Probably never.

And it’s not often that a regulator discusses what it wants and how it goes about getting what it wants. Usually, most of our knowledge on the subject is from the staid language of the laws and guidelines it enforces. Anything more has to be gleaned from speeches, reports and interviews.

The bottom line: it’s hard to get inside a regulator’s head if you’re not among those who deal regularly with it. This is important because if we don’t properly understand a regulator’s approach to its work, how do we assess its effectiveness? It’s easy to say a regulator is not doing its job because we believe a lot of people are getting away with offences, but is that fair? Is enforcement measured only by the number of bad guys caught?

The Securities Commission (SC) is something of an outlier among our regulators in the sense that it tries harder to communicate with stakeholders on how it carries out its regulatory functions.

In March last year, for example, the commission published a 30-page booklet that elaborates on its regulatory philosophy. The main purpose here is to explain its two pillars of regulation – proportionality and transparency – and the nine outcomes that the SC seeks from its regulation.

What’s equally pertinent is the regulator’s statements in the document’s conclusion.

“The decisions we make must take into account various factors, including the protection of investors, growth and confidence of the market and also impact of such decisions on the industry. With this in mind, stakeholder engagement will remain an important aspect of our regulation,” says the SC.

It adds: “To communicate our expectations to our stakeholders, we will continue to publish additional guidance on our regulatory approach, and may publish further details on our regulatory principles and outcomes.” We should hold the SC to that commitment.

Another way to get some insight into the SC’s thinking on regulation is to read its publication called The Reporter. Like the booklet on regulatory philosophy, The Reporter can be downloaded from the SC’s website.

Previously billed as the regulator’s “enforcement and supervision bulletin”, The Reporter was little more than a digest of highlights and updates of the SC’s enforcement actions. That doesn’t do a lot in terms of communicating new and meaningful information to the public.

After almost eight years – the first issue came out in January 2008 – The Reporter was revamped, with the first new-look issue available in November last year. It covers developments between January and August 2015. The next issue is also the latest, and it looks at the subsequent eight-month period that ended in March this year.

The overhaul of The Reporter is linked to the SC’s regulatory philosophy, in particular the transparency pillar.

“The Reporter will now function as one of the SC’s communication channels to share among others, observations from its thematic reviews, new regulatory initiatives and developments, emerging risks, including other issues that have direct implication on market participants and investors,” says the commission. “This publication will also highlight good practices and common areas of deficiencies in the industry to promote and reinforce good conduct.”

The two most recent issues of The Reporter are promising. They featured a wide range of topics such as the lodge-and-launch framework for wholesale products; the evaluation of Malaysia’s ability to combat money laundering and terrorism financing; equity crowdfunding; quality of the listed companies’ financial reporting; and clients’ asset protection.

Some of the articles are esoteric and are more relevant to market participants than to the man in the street. But there are nuggest of information that can be very helpful to others.

According to the report on financial reporting, the SC’s surveillance found several areas in which some listed companies have not complied with the accounting standards. Among these are the classification of loans between long-term liabilities and current liabilities; measurement of liabilities arising from financial guarantees; recognition of contingent assets; and presentation and disclosures.

But what captures the SC’s attention the most is some companies’ accounting treatment for the impairment of assets.

The regulator has observed that there’s poor understanding of what exactly is a cash-generating unit, which is key to a correct impairment assessment.

In addition, some companies use assumptions that are overly aggressive and unsupported when making cashflow projections. A related problem is the use of inappropriate discount rates in computing net present value of projected cashflows. Also, the projections aren’t adequately assessed.

The article ends with messages to listed companies and their directors, auditors and investors. That has value and utility.

It’s a step in the right direction when a regulator chooses to help its stakeholders understand and manage regulatory expectations. After all, no regulator is strong enough to do it all. It needs to work together with the public and market participants, and that can’t happen if information doesn’t flow well in both directions.

Executive editor Errol Oh likes the term ‘policy wonk’.