Takaful Regulations and Compliance

Regulatory and Governance in Takaful

• The regulatory framework and laws governing Takaful operations in Malaysia are subject to the legal and regulatory framework set up by the regulatory authorities.
• These legislations include the Act of Parliament, regulations issued by regulatory authorities, and dispute resolutions.
• A special Shariah governance framework is designated to Takaful operators to ensure the Shariah compliance of their operations.
• Malaysia's Takaful industry has a mature ecosystem, with diverse products and enabling infrastructure.
• As of 2020, Malaysia's market share of total global Islamic financial assets was 18.4%.
• The Takaful industry is growing, driven by efforts from the Government, financial regulators, and industry players.
• The current regulatory framework comprises regulations, legislations, and dispute resolution mechanisms designed for the good conduct of takaful in Malaysia.
• The industry's development has progressed through four stages: Infrastructure Development (1982-1992), Regional Collaboration (1993-2000), International Transformation (2001-2010) and Industry Enhancement (2010-Present).

Regulatory Authorities for Takaful

• The regulatory authorities include the Public/Government Authorities (i.e., Central Bank, Labuan FSA).
• Associations related to Takaful (i.e., MT, A, MITB, A)
• International Standard Setting Bodies (i.e., AAOI, FI, IFS, BS)

Roles of Regulatory Authorities

• The roles of the authorities include enhancing the Takaful system's effectiveness and maintain financial stability.
• Avoiding the negative impact of fluctuating financial markets.
• Standardizing policies and guidelines for Takaful operators.
• Regulating and monitoring Takaful performance.

Role of BNM for Takaful Industry

• The Central Bank of Malaysia (BNM) has a regulatory, supervisory, and enforcement role in addition to its developmental role in the Takaful industry.
• BNM formulates comprehensive regulatory frameworks.
• BNM builds supportive institutional and infrastructure with effective consumer protection.
• BNM creates strategic initiatives for a holistic, comprehensive financial infrastructure supported by ancillary institutions.

Financial Sector Blueprint 2026

• Malaysia's financial sector aims for diversity in customer choices, with digital solutions preferred.
• Increased trust in online services and accelerated digital payment adoption are expected.
• Strengthening the financial safety nets for the vulnerable, increasing insurance/takaful penetration rates, and growth in social finance solutions are projected.
• A confident and capable consumer base will take charge of their financial futures with improvements in financial literacy.
• There's a focus on a vibrant, dynamic, and globally integrated financial landscape with strong growth in alternative finance, deeper global integration in Islamic finance, along with open and interoperable infrastructures.

Dual Financial System in Malaysia

• The financial system in Malaysia comprises conventional and Islamic financial systems, coexisting side-by-side.
• A comprehensive dedicated infrastructure for the dual financial system is intended to be developed.

Industry Associations

• Malaysian Takaful Association (MTA) is a statutory associate promoting member interests and overseeing self-regulation in the Takaful industry.
• Malaysia Insurance & Takaful Broker Association (MITBA) is the largest and only BNM-approved association representing insurance and takaful brokers.
• Industry associations create regulations for Takaful practices, including codes of ethics and guidance documents.

International Standard Setting Bodies

• Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and Islamic Financial Services Board (IFSB) promote standards and sound practices for Islamic financial services, working internationally.
• International Association of Insurance Supervisors (IAIS) sets global standards for supervising the insurance sector.

Applicable Regulations

• Enabling laws include the Central Bank of Malaysia Act 2009 and Islamic Financial Services Act 2013

• Governing laws focus on aspects concerning companies, contracts, etc.

• Policy documents detail the Takaful Operational Framework, Shariah Governance Policy, etc.

Enabling Laws

• Central Bank of Malaysia Act 2009 governs the country's dual financial system (conventional & Islamic).
• BNM has the regulatory authority overseeing Islamic financial institutions (IFIs) and Takaful operators.
• BNM issues policies and guidelines for Takaful.

Islamic Financial Services Act 2013

• This act governs Takaful operations, including licensing and prudential requirements.
• It outlines corporate governance requirements and consumer protection standards.

Takaful Business

• Takaful business encompasses administrative, operational, management, and fund administration processes.
• It involves proposal receiving, negotiation, certificate issuance, and Takaful contributions collection.

Authorised Takaful Institutions

• Licensed Takaful Operators engage in takaful services.
• International Takaful Operators handle international takaful businesses.
• Takaful Brokers conduct takaful operations for various parties.

Licensing of Takaful Companies

• Application to BNM is required, along with supporting documents.
• Minister of Finance approves companies based on BNM's recommendations.
• Requirements for capital, fees, and professional indemnity are outlined.

Shariah Requirements

• Takaful operations and business activities must comply with Shariah principles outlined by the Shariah committee.
• Notifications of non-compliance and rectification plans are required to be submitted to BNM within 30 days.
• Shariah compliance involves adherence to relevant pronouncements, information dissemination, and internal reviews.

Penalties for Non-compliance with Shariah

• Failure to comply with Shariah principles may result in imprisonment for up to eight years, a fine exceeding RM25 million, or both.

Prudential Requirements for Takaful

• Takaful operators need to appoint auditors annually, whose appointments require BNM approval.
• Actuaries are also employed and their appointments require BNM approval.
• Takaful funds are managed separately from shareholder funds—with the Takaful operators acting in the best interests of participants.

Fair & Responsible Business Conduct

• Takaful providers are required to conduct business with fair, responsible, and professional dealings for consumers.

Prohibited Business Conduct

• Misleading or deceptive conduct is prohibited regarding financial services or products.
• Undue pressure or coercion in financial service/product acquisition is disallowed.
• Financial providers can not collude to control features or terms of financial service products.

Shariah Governance Framework (SGF)

• The framework (SGF) includes a model structure of roles, functions, and reporting relationships within Islamic financial institutions to ensure Shariah compliance. (Introduced in 2010)

SGF Objectives

• To set expectations for Islamic financial institutions on Shariah Governance, ensuring operational and business-activity compliance with Shariah.
• To provide comprehensive guidance to all involved (board, committees, management).
• To ensure effective Sharia compliance via active Shariah view and audit functions.

Why Shariah Governance

• Shariah governance ensures transparency, adherence to Shariah principles, and accountability among board members, management, and the Shariah committee.
• There's a need for consistency with Islamic financial practices, observance of tenets, and building confidence in the financial markets about the credibility of Islamic finance operations.

Takaful Operational Framework (TOF)

• The framework (TOF) details operational processes in Takaful, issued by BNM in December 2010, made effective January 2012.
• It's designed to encourage the orderly growth of Takaful business and enhances operational efficiency.
• TOF aims for a healthy, sustainable, and participant-interest-safeguarding takaful fund.

Key Components of Shariah Governance

• The practice of Shariah governance in Takaful operations relies on regulations based on published frameworks like IFSA (2013) and SGP (2009).
• Takaful operators must have internal guidelines on Shariah governance.
• The process and structure for Shariah Governance (SG) must be robust and efficient.

Test your knowledge on the regulations governing the Takaful industry, specifically in Malaysia. This quiz covers topics such as capital requirements, authorized issuers, and compliance with Shariah law. Ideal for those interested in Islamic finance and Takaful operations.