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 forT...

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 Source: BNM Financial Sector Blueprint finance is the result of concerted efforts 2022-2026 by the Government, financial regulators, and industry players 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 LEGISLATI REGULATO subject to the legal and regulatory RY ONS & framework set up by the regulatory AUTHORIT REGULATI IES authorities; legislations (i.e. Act of ONS Parliament) applicable; regulations issued by regulatory authorities; and SHARIA DISPUTE dispute resolutions. H RESOLUTI A special Shariah governance GOVERNA ONS framework is also designated to the NCE Takaful operators to ensure Shariah compliance operation of the Takaful business  R REGULATORY AUTHORITIES FOR TAKAFUL PUBLIC/ ASSOCIATIONS INTERNATIONAL GOVERNMENT RELATED TO STANDARD AUTHORITIES TAKAFUL SETTING BODIES Central MT AAOI Bank A FI Labuan MITB IFS FSA A B 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 Regulator & supervisor of Regulator of Labuan established by law Takaful, Re-takaful (offshore) offshore Operators and International takaful windows & having the legal Takaful Operator authority to issue Shariah Supervisory Council Shariah Advisory Council (SSC) for Labuan FSA as the regulations/policie (SAC) of BNM as the highest authority for s for Takaful highest authority for Shariah matters in offshore Shariah matters in Takaful 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 Section 27 comprising Central Bank Act conventional and Islamic financial systems is 2009 acknowledged  Islamic and conventional co-exist side-by-side  The dual system refers to; The financial system  Intentions to build a comprehensive in Malaysia shall dedicated infrastructure consist of the  Requires dedicated laws/regulations & conventional National Shariah regulatory body financial system and the Islamic financial  E.g. Malaysia, Kuwait, Qatar, system. Bahrain, UAE 7 ©Dr. Irwani Abdullah IIUM 2022 INDUSTRY ASSOCIATIONS Malaysian Malaysia Insurance & Industry Takaful Takaful Broker Association Association (MITBA) associations issue regulations for (MTA) A statutory association under the Established under Registrar of Takaful Act 1984 (now repealed), Societies as the Insurance industry practices which stated that all Takaful Brokers Association of Malaysia operators in Malaysia are required (IBAM) but later in 2006 was to ensure good to be members of MTA before they renamed as MITBA to reflect the conduct of Takaful can commence operations inclusion of Takaful Brokers in the country. They issue code Objective: To promote the interests MITBA is now the largest and the only Malaysia’s statutory of ethics & of its members and to supervise association approved by BNM to self-regulation within the Takaful represent the interest of insurance conduct, industry and Takaful brokers guidance documents etc. INTERNATIONAL STANDARD SETTING BODIES Accounting and Auditing Islamic Financial Association of Organization for Services Insurance Islamic Financial Board (IFSB) Supervisors (IAIS) Institutions AAOIFI (AAOIFI) is an Islamic IFSB is an international IAIS is the global international standard-setting standard- setting body autonomous non-for- organization that responsible for profit corporate body promotes and enhances developing and that prepares the soundness and assisting in the accounting, auditing, stability of the Islamic implementation of governance, ethics and financial services principles, standards Shariah standards for industry through and guidance as well as Islamic financial issuance of global supporting material for institutions and the prudential standards the supervision of the industry. insurance sector APPLICABLE REGULATIONS Legislations & Regulations for Takaful Enabling Governing Policy Laws Laws Documents Central Bank Companies Act Takaful Operational Malaysia Act 2009 2016 Framework Islamic Financial Shariah Governance Contracts Act Services Act 2013 Policy 1950 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 The Act that governs the operation of system of the country i.e. Takaful such as licensing, prudential conventional and Islamic financial requirements, corporate governance, system consumer protection etc The role of BNM as regulatory Shariah requirements for Takaful authority for IFIs including TOs operators The power of BNM to issue policies and Special provisions on Takaful in Schedule guidelines 8, 9, 10 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 Malaysian Duty of the Sec 51 – 57 Section Section 51- Section Section of CBM to financial CBM to Establishment promote system develop and of SAC as the monetary and consist of promote highest 60 27 5 financial conventional Malaysia as an authority to 57 stability in the and Islamic international decide rulings country financial Islamic on Shariah system (dual financial matters financial centre system) 1 CENTRAL BANK OF MALAYSIA ACT 2009 IFIs in monetar y policy operatio ns Islami Recognition c of dual financi financial al system busine ss CBMA 2009 100 Sections, 3 Schedules Empowerme [15 Development nt to carry provisions & promotion out IF relate to IF of MIFC related ] mandates 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 2 6 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 2 04 Jan 2022 Management of Customer 17th Oct 2017 and 11 Takaful Operators Information and Permitted Disclosures 3 Takaful Operational Framework 26 June 2019 Operating Cost Controls 29th Dec 2017 12 Introduction of new products by insurers 15 May 2015 for Life Insurance and 4 Family Takaful and takaful operators 13 Prohibited Business Conduct 15th July 2016 5 Compliance 10 May 2016 Risk Based Capital 17th Dec 2018 14 Framework for Takaful 6 Corporate Governance 3 August 2016 Operators Anti-Money Laundering, Countering Financial Reporting for Takaful 2nd Feb 2018 15 Financing of Terrorism and Targeted Operators 7 31 December Financial Sanctions for Financial 2019 Investment Management for 20th April 2009 Institutions (AML/CFT and TFS for FIs) 16 Takaful Operators 8 Perlindungan Tenang 2 July 2021 17 Internet Takaful 10th Feb 2004 Direct Distribution Channels for Pure 3 September 9 17th Sep 2007 Protection Products 2018 18 Medical & Health Takaful Business  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 Sec 6 IFSA : money market and Islamic foreign exchange market The principal regulatory  promoting financial stability and objectives of this Act are  Consolidates compliancethe withIslamic ShariahBanking Act to promote financial 1983 (IBA) & Takaful Act 1984 (TA) and stability and compliance repeals both 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 Section 2 of IFSA occurrence of pre-agreed 2013 events”  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; AUTHORISED TAKAFUL INSTITUTIONS Licensed International Takaful Broker Takaful Takaful Operator Approved takaful broker Operator Licensed conducting business of Licensed international soliciting, negotiating or takaful takaful operator to procuring takaful certificate operator who is conduct the with a granted a licence to international takaful TO, or renewal or conduct business in continuance of takaful takaful business currencies other certificate by a person, for a than ringgit takaful participant other than for himself and  LICENSING OF TAKAFUL COMPANY Takaful Operator Must be a public company Takaful Operator & Application to be made to Minimum capital of RM100 International Takaful BNM million Operator are licensed by Supporting documents as Must pay annual fee of RM25,000 per Minister upon required by BNM class of business recommendation of BNM by Takaful broker is to be Section International Takaful Section approved BNM A public company incorporated in 8 9 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 Any person who carries on these businesses without Takaful Broker upon recommendation authorisation commits an May be a private company or any by BNM company approved by BNM Upon the grant of offence and is liable to Must have professional indemnity licence/ approval, the imprisonment not exceeding cover of an amount specified by BNM prescribed institution shall Section 10 years million oror Section tofine not Minimum capital funds of RM1million commence business period 10 exceeding both. RM50 8 within the SHARIAH REQUIREMENTS Duties of Takaful Institutions on Shariah Requirements Ensures that its aims & operation, Compliance with Establishes business affairs and Shariah Shariah activities are in i.e. compliance compliance with Committee with the ruling Shariah at all times of the SAC Notifies BNM any non Shariah Complies with Ensures are compliant activity, the Shariah consistent with immediately stop standards the standards from such activity & specified by specified by BNM submit rectification BNM 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 Appointment of auditor subject to approval of BNM of Remuneration of auditor to be paid by TO auditor Auditor to notify BNM within 7 days of his cessation from office TO must appoint actuary who is the employee of the Appointed TO actuary Appointment of actuary is subject to approval of BNM Actuary to notify BNM within 7 days of his cessation TO must from establish & maintain separate fund for different office Establishment types of takaful and business Managemen Takaful fund must be separated from shareholders fund t of Takaful TO manages takaful on behalf & for best interest of takaful and participants Shareholders’ TO must give due regards to fair treatment & reasonable Fund 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 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.