Dr Zeti Akhtar Aziz: Banking and information and communications technology
developments - legal aspects
Address by Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, to the Banking and Financial Law
School, Kuala Lumpur, 24 April 2001.
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Distinguished Guests
Ladies and Gentlemen
Good morning,
It is indeed a great pleasure to welcome all delegates to the 3rd Annual Banking and Financial Law
School. The objective of the Banking and Financial Law School is to contribute to a structured learning
programme for members of the legal profession who provide legal counsel to financial institutions.
Indeed, Bank Negara Malaysia, the Bar Council and IBBM have been collaborators in this effort for a
long time.
The theme for this year's law school is the impact of developments in ICT - Information and
Communications Technology - upon legal aspects of financial services in Malaysia. It is a subject that
is of increasing interest to bankers and central bankers around the world. There is increasing
recognition of the enormous potential for these developments to transform the financial industry in a
manner that will bring tremendous gains to businesses and consumers. There is also mounting
evidence that ICT is not only creating new alternative delivery channels, but is bringing about
compelling changes to the financial landscape that may threaten the very existence of the traditional
financial institutions. Whether or not such developments do in fact take place, it is of paramount
importance that financial institutions and central banks are well placed to manage the challenges and
opportunities brought about by developments in Information and Communication Technology.
Essentially, the potential benefits from the new technology need to be exploited without undermining
the security and stability of the financial system.
Ladies and Gentlemen,
Central bankers around the world operate within a wide range of economic systems and structures.
Within the context of each respective systems, an administrative, regulatory and legal infrastructure is
necessary to protect and develop the interests of commerce. As lawyers, you would appreciate that
business and commerce flourished with the invention of limited company law. The limited liability
company structure and provisions of company law provides the structure for managing complex
business risks. The corporate structure spawned economic development across the globe, and over
the years have evolved into entities with their own character and identity. A global protocol comprising
business practices and ethics evolved largely from man-made common law. With the development
arising from advances in information and communications technology, a new phase of growth has
emerged. Although often based on the notion of the limited company, the identity of these new
businesses are very different. These newly emerging entities do not recognise national boundaries,
nor local jurisdictions or markets. Instead of operating within the established contracts and
international agreements, crafted and executed by law firms and government agencies, these new
entities are operating within the context of their own rules in the world of e-commerce. The Internet
provides an unregulated, open communication channel and information repository that is growing at
an exponential rate. The rate of economic development within e-commerce has far exceeded the rate
of development of the legal and administrative infrastructure. Indeed, the market is often of the view
that such infrastructure may in fact be limiting and cause more harm than good.
Consumers however hold a different view, and have approached the developments with more
cautious optimism. While there will be gains on efficiency and convenience, this is balanced against
the security and other risks associated with these developments. Consumers need to be provided with
confidence that contracts will be honoured, and deposits are secure. New business rules will only be
viable if the appropriate laws necessary to give confidence to the users are formulated and
implemented. Lawyers need therefore to understand the drivers of the new economy, the evolution
taking place in the e-commerce business models and the new risks inherent in the digital
infrastructure.
Ladies and Gentlemen,
Allow me to provide our perspective on some of the broad issues facing the financial system and
central banking in this electronic age. Central banks continue to have the responsibility to manage the
economy and the financial system to assure macro-economic and financial stability. Much of the
stability, will stem from the confidence that investors, including retail depositors have in the financial
system. Financial transactions and commitments must be undertaken in a manner that provides no
room for question on the integrity of the payment channel within the country. In the event that there
are irregularities or omissions, there must be clear rules and procedures to safeguard the interests of
all relevant parties. Therefore, a sound regulatory and legal framework must be in place to provide this
minimum level of comfort. Such a framework would need to include the relevant legislation, technical
skills to implement the requirements of the legislation and sufficient flexibility to cope with the
continuing changes taking place in the world of electronic banking today.
No doubt you are familiar with the initiatives that have been undertaken by the Malaysian Government
to establish the Multimedia Super Corridor (MSC). A major component of the project was the
introduction of new legislation, the Digital Signature Act, Computer Crimes Act and Communications
and Multimedia Act, all of which will provide the pillars of the legal framework for e-commerce
transactions in Malaysia. At this point in time, the legislation remains largely untested, but e-commerce
transactions are already being performed on a daily basis. Currently, in the banking arena there is still
a clear demarcation between the electronic, paperless world of the Internet, and the more paper
intensive, manual signature based world of conventional banking transactions. In the meantime, the
pace of transition from manual over-the-counter services, to remote electronic delivery channels are
expanding. The growing demand for on-line real-time financial services, reinforced by increasing
pressures for cost efficiencies in banking operations will lead to greater digitisation of banking
transactions.
This changing environment requires financial institutions to be adaptive and responsive. At the same
time, a regulatory framework that will enable markets to evolve needs to be in place. The rapid
advances in ICT needs a regulatory framework that promotes innovation, while reinforcing the
prudential limits to ensure that elements of instability do not emanate from such innovations.
Regulators will need to take into account the nature and dimensions of the change so as to devise the
appropriate regulatory response that will provide a conducive environment for the financial industry to
develop. Towards this objective, Bank Negara Malaysia has formulated the Financial Sector
Masterplan to provide the direction and road map for the development of the financial sector which
takes into account the changing financial requirements of the economy going forward and the
implications of the changes brought about by the changes in technology.
The Financial Sector Masterplan aims to evolve a competitive, resilient and dynamic financial system,
with best practices, that are able to meet the more sophisticated demands of consumers and
businesses, able to embrace advancements in technology, able to face the challenges from
globalisation and liberalisation and able to withstand the economic cycle, thereby contributing to
overall economic growth and stability. The Financial Sector Masterplan highlights the need to give
greater attention to the development of ICT by the financial services sector. As part of this process,
the surveillance of the financial sector through the use of ICT will also be enhanced.
Ladies and Gentlemen,
During this three-day programme, it will be impossible to capture the many issues that are relevant to
legal aspects of e-commerce. However, among the important issues is the global dimension of
ecommerce. E-commerce is as much a global topic as it is a domestic issue, and in recent years has
become a part of the international agenda for the World Bank, World Trade Organisation and similar
bodies. Although there is no framework in the WTO that governs e-commerce trade, WTO members
adopted a declaration on global e-commerce in 1998 in which members have agreed to the following:
i. Not to impose customs duties on electronic transmissions of goods or services. This practice
is to be reviewed at the next WTO Ministerial Conference and any extension will be agreed
upon by consensus; and
ii. To set up a comprehensive work programme (WP) to examine all trade-related issues
arising from e-commerce. So far, the work programme has been exploring how e-commerce
should be dealt with in the context of existing WTO Agreements. For financial services, the
relevant work of the work programme is being undertaken by the WTO Council for Trade in
Services which looks at the treatment of e-commerce in the General Agreement on Trade in
Services (GATS) legal framework.
The work of the WTO would thus be of considerable interest to banking institutions that provide
transaction or advisory services on international trade conducted through an e-commerce virtual
trading exchange. The banking institution's in-house legal counsel would need to be aware of these
developments, and understand the potential implications. In particular, matters of jurisdiction and
interpretation of local regulations will pose many dilemmas. In view of this, policymakers within the
financial services sector have a vested interest in resolving differences, and creating a more
harmonious legal environment within the global system. To promote international awareness of
differences in legal jurisdictions, international bodies such as the World Bank, have established a
series of databases that are accessible through the Internet.
Closer to home, there are various regional initiatives underway to promote and build on e-commerce
initiatives. One example is the APEC Electronic Commerce Task Force, which was established during
the First Senior Officials meeting held in Penang, Malaysia, in February 1998. The work plan of the
task force is built on and complements the work being undertaken in a number of established APEC
bodies, in particular the Telecommunications Working Group (TEL WG), the Transportation Working
Group (TPT WG), the Industrial Science and Technology Working Group (IST WG) and the Committee
on Trade and Investment (CTI) and its sub-committee on Customs Procedures (SCCP). The Task
Force is in the process of concluding Stage One of its 12 month work-program and is embarking on
Stage Two, which includes an ambitious but vital program of regional technical cooperation. Initiatives
such as these can be expected to dramatically alter the rules of international trade, and consequently
the opportunities accorded to financial institutions. But these initiatives will tread on the corridors of
international law, and will require legal experts to develop new and innovative contracts in the digital
world.
A further development is the e-ASEAN framework agreement that came into being during the Fourth
ASEAN Informal Summit in November 2000. The objectives of the framework are to promote
cooperation in the development of ICT products and services, with a view to promoting trade and
reducing the digital divide within individual ASEAN Member States. Article 5 of the framework explicitly
addresses the facilitation of growth in e-commerce, and stipulates that Member States shall adopt
electronic commerce regulatory and legislative frameworks that create trust and confidence for
consumers. Article 5 also recommends the adoption of the World Intellectual Property Organisation
(WIPO) treaties, namely WIPO Copyright Treaty 1996 and WIPO Performances and Phonograms
Treaty 1996. The use of alternate dispute resolution mechanisms for online transactions is also
emphasised. Article 6 of the e-ASEAN framework agreement addresses the issue of liberalisation of
trade in ICT products and services. Actions such as these will accelerate the adoption rate of new
technology, reduce the costs of migrating to e-commerce platforms and create pressures for a more
globally uniform code of conduct within the trading, banking and payment sectors. An understanding of
the developments in ICT, inclusive of the legal, administrative and political ramifications, is important if
the opportunities in e-commerce are to be realised.
Ladies and Gentlemen,
Another area that is of significance to bankers and central bankers is the issue of security. Security of
information has many attributes, such as confidentiality, privacy, safety, secure transmission and
nonrepudiation. Financial services is unique compared with most other products in that the entire product
can be digitised, and for that reason is eminently suited for conducting business over the Internet.
However, should the security of the financial information be breached in any manner, the
repercussions are very serious. In the inter-connected world of the Internet, how does one establish
accountability for mistakes, fraud or incidences of system failure. For that reason, a great deal of
resources and time has been invested in security systems. I also note that there will be an expert to
speak on this subject during this programme. Security, and the related subject of audit controls are
part of the process to managing the risks associated with financial transaction services offered over
the electronic channel. In order to ensure that the Malaysian banking system has proper risk
management in place, Bank Negara Malaysia has in place prudential guidelines pertaining to Internet
Banking activities.
In the digital era, the science of hacking, filtering, intercepting, spying, on-line copying, transmission
corruption and transmission re-routing are elements of a different type of forensic law in cyber-crime
management. The study of encoding, encrypting or enciphering data is perhaps not something most
lawyers have engaged in so far, but you may be find yourselves involved in this in the near future.
There is a great need to maintain an on-going training agenda to aid lawyers and bankers alike to
keep pace with the developments in ICT and to be aware of its profound implications to the business
of banking. Although there have been training and education programmes that encompass ICT in
banking and the law, there are limited opportunities for practicing lawyers to keep abreast of the
developments in all these areas. A further element that has increased the urgency for adequate
training and education is the increased global competition. The pace of business development in the
world e-commerce is very rapid, and opportunities that are not seized soon enough, may be lost to a
competitor. Since lawyers and in-house legal counsel are critical to completing business contracts and
transactions, your ability to give prompt and quality advisory services will contribute directly to
business competitiveness.
Ladies and Gentlemen,
We can expect that banking institutions will continue to invest in ICT, and that customers, especially
the limited liability corporate entities, will increasingly demand greater access to on-line financial
intelligence and transaction services despite its risks. In this environment, lawyers will be tasked with
ensuring that the interests of all relevant parties are protected. Moreover, as the country becomes
more open matters of international jurisdiction will become more and more a part of the local agenda,
even for the smaller banks and enterprises.
Essentially, there is much to be learnt about the development of e-commerce and its impact on the
financial system. This makes it all the more important to have regular exchange of information. I hope
the proceedings for the next three days will contribute towards this process. In conclusion I wish you a
successful programme. Thank you.