The Financial Services Act and the Islamic Financial Services Act 2013 which came into force in June this year has provided the Bank with statutory duty to foster fair, responsible and professional business conduct amongst financial service providers. Such regulatory developments mark an important milestone in modernising Malaysia’s financial sector which goes beyond the mandate of preserving financial stability. These laws ensure a robust financial consumer protection regime. The new legislations provide explicit powers for the Bank to set and enforce standards on business conduct for financial service providers that ensure financial consumers are treated fairly. The laws also specifically prohibit financial service providers from engaging in unfair or deceptive business conduct including making false, misleading or dishonest representations, and tied selling. It is important to highlight that the new legislation also provides enhanced protection in respect to consumers’ pre-contractual disclosure obligations in consumer insurance contracts. Among others, an insurer or takaful operator must pose specific questions to consumers for its underwriting purpose. The legislation also sets out various remedies that an insurer may rely on depending on the type of pre-contractual misrepresentation made by the consumers. Changes were also introduced under the new laws to deliver a more efficient regulatory regime for insurance and takaful intermediaries including introduction of an approval and registration regime. The changes made were more reflective of the risks presented by such entities, with the regulatory oversight focusing primarily on promoting professional conduct in activities that relate to businesses that are approved or registered.

The current global crisis, however, exposes another important dimension of systemic risk where interactions within the financial system, as opposed to interactions between the financial system and the macroeconomy, have played a critical role in amplifying the losses. As we know, back in 2007, losses associated with the subprime mortgage market were initially estimated to be in the order of $ 50 billion. Thereafter, the dynamic of the interactions within the financial system, driven by risk management practices of banks, the response to the funding liquidity constraint by market participants, and heightened concern about counterparty risk, resulted in a protracted period of market distress, the drying up of liquidity, and set the stage for a spiral of losses. As it turns out, writedowns and losses worldwide have grown enormously. And to an appreciable extent, this amplification of losses is related partly to the interactions and the feedbacks within the financial system. Therefore, compared to the “time-dimension” of risk associated with procyclicality through which credit risk is a major propagation channel, the current crisis shows that the dynamic of the interactions within the financial system can also be very damaging, particularly in the financial system that is large and complex. In the current crisis, the forces at work were the positive feedback loops and the interactions amongst them. The interactions operated through the propagation channels of joint exposures to common risk drivers and network linkages between the financial institutions. In general, the feedbacks within the financial system can be both positive (i.e. selfreinforcing) or negative (i.e. dampening).