Regulatory and Governance in Takaful PDF

REGULATORY AND GOVERNANCE IN TAKAFUL PREPARED BY: DR NORASHIKIN ISMAIL LEARNING OUTCOME 1) Explain the regulatory framework and laws governing Takaful operations in Malaysia. 2) Deliberate on the Shariah compliance requirements f...

REGULATORY AND GOVERNANCE IN TAKAFUL PREPARED BY: DR NORASHIKIN ISMAIL LEARNING OUTCOME 1) Explain the regulatory framework and laws governing Takaful operations in Malaysia. 2) Deliberate on the Shariah compliance requirements forTakaful operations in Malaysia. 3) Illustrate on Shariah Governance framework applicable to Takaful operators in Malaysia. 2  ISLAMIC FINANCE ECOSYSTEM IN MALAYSIA  Malaysia enjoys a mature IF ecosystem with dynamic & resilient players; diverse products & comprehensive enabling infrastructures  As of 2020, Malaysia’s market share of total global IF assets is 18.4%  Solid growth in Islamic Banking and Takaful  Malaysia’s global leadership in Islamic finance is the result of concerted efforts by the Government, financial regulators, and industry players Source: BNM Financial Sector Blueprint 2022-2026 LEGAL & REGULATORY FRAMEWORK FOR TAKAFUL The operations of Takaful in Malaysia is subject to the legal and regulatory framework set up by the regulatory authorities; legislations (i.e. Act of Parliament) applicable; regulations issued by regulatory authorities; and dispute resolutions. A special Shariah governance framework is also designated to the Takaful operators to ensure Shariah compliance operation of the Takaful business  DEVELOPMENT OF TAKAFUL  Commendable roles of BNM & TOs in developing dynamic, resilient & efficient Takaful industry  Four stages of gradual approaches to realize a sustainable growth for Takaful industry  LEGAL & REGULATORY FRAMEWORK FOR TAKAFUL The operations of Takaful in Malaysia is subject LEGISLATIONS REGULATORY to the legal and regulatory framework set up by AUTHORITIES & REGULATIONS the regulatory authorities; legislations (i.e. Act of Parliament) applicable; regulations issued by regulatory authorities; and dispute resolutions. A special Shariah governance framework is also SHARIAH DISPUTE designated to the Takaful operators to ensure GOVERNANCE RESOLUTIONS Shariah compliance operation of the Takaful business  R REGULATORY AUTHORITIES FOR TAKAFUL PUBLIC/GOVERNMENT ASSOCIATIONS RELATED TO INTERNATIONAL STANDARD AUTHORITIES TAKAFUL SETTING BODIES Central Bank MTA AAOIFI Labuan FSA MITBA IFSB ROLES OF REGULATORY AUTHORITIES There are several roles of regulatory authorities for Takaful among others are: i. To increase the effectiveness of the Takaful system; ii. To maintain financial stability of the Takaful industry. iii. To avoid any negative impact from the fluctuate financial market; iv. To standardize the policies and guidelines for Takaful operators. v. To regulate and monitor performance  REGULATORY AUTHORITIES FOR TAKAFUL Regulatory authorities are the institutions established by law & Regulator & supervisor of Takaful, Regulator of Labuan (offshore) having the legal Re-takaful Operators and offshore takaful windows authority to issue International Takaful Operator regulations/policies Shariah Supervisory Council (SSC) Shariah Advisory Council (SAC) of for Labuan FSA as the highest for Takaful BNM as the highest authority for authority for Shariah matters in Shariah matters in Takaful offshore Takaful ROLE OF BNM FOR TAKAFUL INDUSTRY Central Bank of Malaysia is empowered with regulatory, supervisory and enforcement role in addition to its developmental role a) Formulation of comprehensive regulatory framework, institutional & infrastructure building with effective & efficient consumer protection b) Formation of strategic initiatives aimed to institute a comprehensive financial infrastructure supported by key ancillary institutions through holistic developmental plans FINANCIAL SECTOR BLUEPRINT  DUAL FINANCIAL SYSTEM IN MALAYSIA  One of the Central Bank of Malaysia’s powers in carrying out it financial stability functions  The existence of dual financial system comprising Section 27 conventional and Islamic financial systems is acknowledged Central Bank Act 2009  The dual system refersto; The financial system in  Islamic and conventional co-exist side-by-side Malaysia shall consist of  Intentions to build a comprehensive dedicated the conventional infrastructure financial system and the  Requires dedicated laws/regulations & National Shariah Islamic financial system. regulatory body  E.g. Malaysia, Kuwait, Qatar, Bahrain, UAE 7 ©Dr. Irwani Abdullah IIUM 2022 INDUSTRY ASSOCIATIONS Malaysian Takaful Malaysia Insurance & Takaful Industry associations Association (MTA) Broker Association (MITBA) issue regulations for A statutory association under the Takaful Established under Registrar of Societies industry practices to Act 1984 (now repealed), which stated as the Insurance Brokers Association of ensure good conduct of that all Takaful operators in Malaysia are Malaysia (IBAM) but later in 2006 was required to be members of MTA before renamed as MITBA to reflect the Takaful in the country. they can commence operations inclusion of Takaful Brokers They issue code of ethics & conduct, guidance documents Objective: To promote the interests of its MITBA is now the largest and the only Malaysia’s statutory association etc. members and to supervise self-regulation approved by BNM to represent the within the Takaful industry interest of insurance and Takaful brokers INTERNATIONAL STANDARD SETTING BODIES Accounting and Auditing Organization for Islamic Islamic Financial Services Association of Insurance Financial Institutions Board (IFSB) Supervisors (IAIS) (AAOIFI) AAOIFI is an Islamic IFSB is an international IAIS is the global standard- international autonomous standard-setting organization setting body responsible for non-for-profit corporate body that promotes and enhances developing and assisting in that prepares accounting, the soundness and stability of the implementation of auditing, governance, ethics the Islamic financial services principles, standards and and Shariah standards for industry through issuance of guidance as well as Islamic financial institutions global prudential standards supporting material for the and the industry. supervision of the insurance sector APPLICABLE REGULATIONS Legislations & Regulations for Takaful Enabling Laws Governing Laws Policy Documents Central Bank Malaysia Companies Act 2016 Takaful Operational Act 2009 Framework Contracts Act 1950 Islamic Financial Services Shariah Governance Policy Act 2013 13  THE ENABLING LAWS There are two main legislations for Takaful in Malaysia Central Bank of Malaysia Act 2009 Islamic Financial Services Act 2013 The Act that governs the dual financial system of The Act that governs the operation of Takaful such the country i.e. conventional and Islamic financial as licensing, prudential requirements, corporate system governance, consumer protection etc The role of BNM as regulatory authority for IFIs Shariah requirements for Takaful operators including TOs Special provisions on Takaful in Schedule 8, 9, 10 The power of BNM to issue policies and guidelines on Takaful  CENTRAL BANK OF MALAYSIA ACT 2009  Vested the power to the Central Bank of Malaysia to perform its functions and roles  Applicable also to Islamic financial business and IFIs in Malaysia  Power of CBM to ensure IFIs comply with the Shariah principles and requirements Principal roles of Malaysian Duty of the CBM Sec 51 – 57 Section 5 Section 27 Section 51-57 Section 60 CBM to promote financial system to develop and Establishment of monetary and consist of promote Malaysia SAC as the financial stability conventional and as an highest authority in the country Islamic financial international to decide rulings system (dual Islamic financial on Shariah financial system) centre matters 15 CENTRAL BANK OF MALAYSIA ACT 2009 IFIs in monetary policy operations Islamic Recognition of financial dual financial business system CBMA 2009 100 Sections, 3 Schedules [15provisions Empowerment relate to IF ] to carry out IF Development & related promotion of mandates MIFC Membership of IFSB REGULATIONS & POLICIES ON TAKAFUL BNM issued regulations for takaful/retakaful industry in Malaysia The purpose of regulations To ensure the operation of Takaful in accordance with the law and policies To ensure Shariah Compliance Protection of public interest – to ensure that TO as custodian of public funds is financially solvent and able to meet all its obligations to the participants and claimants Promotion of fairness & equity - to ensure that takaful operations are fair and equitable Professional competence and integrity - to foster competence and ensuring high level of governance of TOs Financial and economic well-being – to ensure Takaful industry plays an active role in the development and resilience of the nation’s financial and economy 26  BNM POLICY DOCUMENTS ON TAKAFUL No Guidelines/Policy Documents Date issued No Guidelines/Policy Documents Date issued 1 Financial Reporting for Takaful Operators 29 April 2022 10 Shariah Governance Policy December 2019 Licensing Framework for Digital Insurers and 2 04 Jan 2022 Management of Customer Information 17th Oct 2017 Takaful Operators 11 and Permitted Disclosures 3 Takaful Operational Framework 26 June 2019 Operating Cost Controls for Life 29th Dec 2017 12 Introduction of new products by insurers and 15 May 2015 Insurance and Family Takaful 4 takaful operators 13 Prohibited Business Conduct 15th July 2016 5 Compliance 10 May 2016 Risk Based Capital Framework for 17th Dec 2018 14 Takaful Operators 6 Corporate Governance 3 August 2016 Financial Reporting for Takaful 2nd Feb 2018 Anti-Money Laundering, Countering Financing 15 Operators of Terrorism and Targeted Financial Sanctions 7 31 December 2019 Investment Management for Takaful 20th April 2009 for Financial Institutions (AML/CFT and TFS for 16 FIs) Operators 8 Perlindungan Tenang 2 July 2021 17 Internet Takaful 10th Feb 2004 Direct Distribution Channels for Pure Protection 3 September 2018 17th Sep 2007 9 18 Medical & Health Takaful Business Products  ISLAMIC FINANCIAL SERVICES ACT 2013  The Act that provides for:  the regulation and supervision of Islamic financial institutions, payment systems and other relevant entities  the oversight of the Islamic money market and Islamic foreign exchange market Sec 6 IFSA :  promoting financial stability and compliance with Shariah The principal regulatory objectives of this Act are to  Consolidates the Islamic Banking Act 1983 (IBA) & promote financial stability and Takaful Act 1984 (TA) and repeals both compliance with Shariah DEFINITION OF TAKAFUL Takaful is “an arrangement based on mutual assistance under which takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to the takaful participants or their beneficiaries on the occurrence of pre-agreed events” Section 2 of IFSA 2013  SHARIAH GOVERNANCE A set of institutional and organisational arrangements through which Islamic financial institutions ensure that there is an effective independent oversight of Shariah compliance over the issuance of relevant Shariah pronouncements, dissemination of information and an internal Shariah compliance review  TAKAFUL BUSINESS Takaful business refers to “the business relating to the administration, management and operation of a takaful fund for its takaful participant which may involve elements of investment and savings and includes retakaful business”  Takaful business includes activities relating to: i. receiving proposals to participate in takaful arrangements; ii. negotiating proposals to participate in takaful arrangements on behalf of a takaful operator iii. issuing of takaful certificates for takaful arrangements; iv. collection or receipt of takaful contributions on takaful certificates for takaful arrangements; v. settlement or recovery of takaful claims on takaful certificates for takaful arrangements. AUTHORISED TAKAFUL INSTITUTIONS Licensed Takaful International Takaful Takaful Broker Operator Operator Approved takaful broker conducting Licensed takaful Licensed international business of soliciting, negotiating or operator who is granted takaful operator to procuring takaful certificate with a a licence to conduct conduct the international TO, or renewal or continuance of takaful business takaful business in takaful certificate by a person, for a currencies other than takaful participant other than for ringgit himself and includes retakaful broking for a TO  LICENSING OF TAKAFUL COMPANY Takaful Operator Must be a public company Takaful Operator & International Application to be made to BNM Minimum capital of RM100 million Takaful Operator are licensed by Supporting documents as Must pay annual fee of RM25,000 per class of Minister upon recommendation of required by BNM business BNM Takaful broker is to be approved by BNM International Takaful Section 8 Section 9 A public company incorporated in Malaysia or a branch established in Malaysia by a foreign institution Minimum capital of RM10 million Must pay annual fee of RM25,000 per class of business Approval by Minister upon Any person who carries on these recommendation by BNM businesses without authorisation Takaful Broker Upon the grant of licence/ commits an offence and is liable to May be a private company or any company approved by BNM approval, the institution shall imprisonment not exceeding 10 Must have professional indemnity cover of an commence business within the years or fine not exceeding RM50 amount specified by BNM prescribed period Section 10 million or to both. Section 8 Minimum capital funds of RM1million SHARIAH REQUIREMENTS Duties of Takaful Institutions on Shariah Requirements Ensures that its aims & operation, business Compliance with Shariah Establishes Shariah affairs and activities are i.e. compliance with the Committee in compliance with ruling of the SAC Shariah at all times Notifies BNM any non Shariah compliant Complies with the Ensures are consistent activity, immediately stop from such activity & Shariah standards with the standards specified by BNM specified by BNM submit rectification plan to BNM within 30 days Reference: Section 28, 29 & 30 of IFSA  PENALTIES FOR NON- COMPLIANCE WITH SHARIAH  Sec. 28(5) & sec. 29(6)  imprisonment for a term not more than 8 years, or  a fine not exceeding RM25 million, or  both.  PRUDENTIAL REQUIREMENTS FOR TAKAFUL TO must appoint auditor every year Appointment of Appointment of auditor subject to approval of BNM auditor Remuneration of auditor to be paid by TO Auditor to notify BNM within 7 days of his cessation from office TO must appoint actuary who is the employee of the TO Appointed actuary Appointment of actuary is subject to approval of BNM Actuary to notify BNM within 7 days of his cessation from office TO must establish & maintain separate fund for different types of takaful Establishment and business Management of Takaful fund must be separated from shareholders fund Takaful and TO manages takaful on behalf & for best interest of takaful participants Shareholders’ Fund TO must give due regards to fair treatment & reasonable expectations of takaful participants  FAIR & RESPONSIBLE BUSINESS CONDUCT Sec. 135 (1):  Financial service (viz-a-viz Takaful) provider must ensure its business conduct is fair, responsible & professional when dealing with financial consumers  PROHIBITED BUSINESS CONDUCT Sec. 136 (1): A financial service provider must not engage in any prohibited business conduct LIST OF PROHIBITED BUSINESS CONDUCT Engage in misleading or deceptive conduct in relation to nature, features, terms or price of any financial service/product. Induce or attempt to induce consumer to do an act or omit an act in relation to any financial service/ product by— making a statement, illustration, promise, forecast or comparison which is misleading, false or deceptive; dishonestly concealing, omitting or providing material facts in a manner which is ambiguous; or recklessly making any statement, illustration, promise, forecast or comparison which is misleading, false or deceptive. Exert undue pressure, influence or threaten to use harassment, coercion, or physical force in any financial service or product Demand payments from consumer in any manner for unsolicited financial services or products. Exert undue pressure or coerce consumer to acquire any financial service or product as a condition for acquiring another financial service or product. Collude with any other person to fix or control the features or terms of any financial service/product to the detriment of any consumer Shariah Governance Framework (SGF)  Sharī’ah Governance Framework (SGF) has been introduced by BNM in year 2010  The framework has outlined the model structure of roles, functions and reporting relationships of key organs in the IFI’s Sharī’ah governance framework to ensure that the reporting on Sharī’ah matters is carried out effectively and on timely manner  SGF Objectives  To set out an expectations on an Islamic financial institutions Shariah Governance structure, processes and arrangements with the goal of ensuring operations and business activities compliance with Shariah.  To provide comprehensive guidance top the board, Shariah committee and management of Islamic financial institutions and discharging its duties on matters related to Shariah.  To ensure proper functioning of Shariah compliance through effective Shariah view and Shariah audit functions  WHY SHARIAH GOVERNANCE  To ensure transparency, disclosure of information and strict adherence to shariah principles.  To ensure effective oversight, responsibility and accountability of the board of directors, management and Shariah committee.  To ensure an operating that is compliant with Shariah principles at all times  To provide foundation for the practise of Islamic finance through the observance of the tenets, conditions and principles propagated by Islam.  Comprehensive compliance with Shariah principles would bring confidence to the general public and the financial markets on the credibility of Islamic finance operations  Takaful Operational Framework (TOF)  Takaful Operational Framework (TOF) was issued by BNM in December 2010 and made effective from January 1, 2012.  A government initiative to promote the orderly growth of Takaful business.  The coverage of TOF also includes operational processes relating to Takaful and Shareholders’ Funds.  Objectives: i. To enhance operational efficiency of Takaful business. ii. Build healthy Takaful fund which are sustainable. iii. Safeguard the interest of participants and promote uniformity in Takaful business practices.  KEY COMPONENTS OF SHARIAH GOVERNANCE REGULATION PEOPLE  The practice of Shariah governance in Takaful  The process and structure of SG process must operations based on remulation’s (IFSA, 2013, robust and efficient. SGP 2009) governance.  There must be good communication on Shariah governance in TO  TO must have its own internal guidelines on Shariah governance.