I WOULD like to begin by sharing the wisdom of a common proverb, “Trust takes years to build, seconds to break and forever to repair”. While the complexities of trust have been the subject of great discourse, an appreciation of its delicate nature and profound effect is — in my view — a necessary expression of wisdom and foresight. We may choose to trust under confidence that our best interests would be advocated and our exposures protected. Yet, within the brisk instance of a breach, the entire stability of its state could be undone, prompting a continued attitude of scepticism, suspicion and doubt.
Despite this fragility, trust grows in importance as a consequence of its ability to inspire confidence. Confidence galvanises the selection of certain choices — and choices made manifest in discrete and tangible actions. These actions influence the ways in which individuals interact within their relative social and economic environments — not only affecting the willingness for cooperation and collaboration but also impacting the daily realities of consumer choices and behaviours.
It is in reflection of such that collective levels of trust amongst various societal actors have been widely regarded by economists, political scientists and researchers to possess widespread capabilities in determining broad trends. These include fundamental associations to market forces, economic performance and societal wellbeing.
Today, the far-reaching influence of trust has stemmed into urgent discourses surrounding the state of global affairs. In June, I had the privilege of co-chairing the high-level Salzburg Global Finance Forum of high-level policymakers. In my speech at the opening of the forum, I highlighted several pertinent global trends that threaten the harmony of our prevailing socioeconomic order. These include the widening fissures of income inequality, increasing risks of climate change, surging debt levels amongst major economies and anxieties surrounding job security.
These are but a few features of our global landscape that has cultivated strong challenges against status quo, promulgating feelings of unease, and in some cases, leading aggressive motions for change. In developed economies, nationalist movements expressing anti-globalisation sentiments have demanded policy readjustments towards protectionism — steps perceived in their minds as cures for various structural inequities. It is important to note that these occurrences are symptomatic of a global environment lacking trust.
As stakeholders convene with intent to embark upon the challenging journey of restoring trust, we must remain cognisant that we dwell in a unique era that brings about distinct opportunities and uncertainties. Unprecedented technological evolution, rapid informational dissemination, intensifying competition and growing consumer demands have all catalysed the substantial degree to which the world is inextricably linked — connecting nations, markets, businesses and people in a vast and complex tapestry.
Trust as a Backbone of Our
Financial Markets
This depth of inter-connectivity is particularly evident in the financial markets, where risk transmission and tolerance is realised across a broad spectrum of market segments. The recognition of these transmissions of risk is a simple yet profound understanding that the actions of a few could impact the conditions of many.
Several experiences within markets have showcased and reminded us of this — demonstrating instances of market failures that diminished trust and propagated market manipulative behaviours beyond the confines of national borders and economic boundaries. The LIBOR 2 (London Interbank offered rate) scandal represents one such example where dealers were discovered colluding to manipulate interbank reference rates. This led to a loss of trust in a key benchmark, resulting in massive fines for financial institutions and moves towards developing a more robust, transaction-based reference rate.
Where market failures are concerned, there is perhaps none more historically recent and stark than the global financial crisis — an event which observed the collapse of large financial institutions and resulted in severe disruption in developed markets, an impact which echoed throughout all four corners of the globe.
As a consequence, systemic risk recognition begun to surface in mainstream conversations surrounding stability, expressing concerns that financial institutions and corporations had
manifested into “too large” entities whose downfall would cascade in widespread adversity. Businesses crashed, communities lost the capacity to form stable livelihoods and families witnessed the dissipation of their wealth. Ordinary citizens sustained the brunt of the ensuing recession only deepened by
the prevalence of diminishing
liquidity and a credit crunch. As
a result, many stakeholders developed disenchantment towards financial markets, provoking a call for change.
Investor Confidence: Underpinning the Discipline of Market Forces
Amongst the various lessons that the global financial crisis conveyed, it has also raised insights into the paradigms of trust and, its delicate stability that characterises relations between markets and regulators.
Looking at some of the statistics, the world’s largest banks have paid US$321 billion in fines as at end-2016 for regulatory breaches. To put things into context, that is slightly more than the GDP of Malaysia and the same as that of Hong Kong. Take Wells Fargo as an example. Firstly, Wells Fargo estimated that 2.1 million accounts had been opened by its staff without customer consent. Then, it was revealed that 570,000 of its auto loan customers were charged for insurance that they did not need. Some auto loan customers actually defaulted because of the insurance burden and had their vehicles repossessed. A few days after news broke, the bank conceded that another 1.4 million unauthorised accounts had been discovered.
With such large-scale and far reaching transgressions, it is no surprise that these infractions have instigated periods of hesitation and uncertainty towards financial markets. As Governor Mark Carney, puts it, “Trust arrives by foot and leaves by Ferrari”. I would go further to say that, “Trust happily leaves in another man’s Ferrari”, because people do not need to have a bad experience themselves to lose trust. All they need is to hear of another person’s bad experience and distrust will arise.
This simple but powerful illustration underscores the very nature of consumer and investor confidence which ultimately forms the bedrock of financial markets. In particular, it highlights the importance of how aligned interests lead to trust, and misaligned interests lead to suspicion.
In the capital market, the opportunity for investors to realise returns remains a key element of market performance. Investors who perceived themselves to be disadvantaged may very well reduce their exposure, or in light of increased risk — demand higher returns. Reduced investor participation in markets will affect and lead to lower liquidity and higher costs of capital.
Where trust exists in the capital market, capital is allocated from those with excess funds to those who need it in a manner that lowers the cost of capital and provides liquidity. Where trust exists, time and resources are not unnecessarily wasted in verifying information and counter-parties. This ultimately leads to the efficient mobilisation and allocation of capital, thereby supporting the capital markets active role in sustaining development within the real economy.
In the context of Malaysia’s RM3.1 trillion capital market, we have witnessed healthy levels of fundraising over the past five years, with an average of RM116 billion raised annually. This has enabled the capital market to play an active role in supporting business activity, infrastructure development and the real economy.
Similarly, savings mobilisation has grown significantly with Malaysia’s strong fund management industry having established itself over the years. Assets under management (AUM) are now RM750 billion in the first half of 2017. It is one of the fastest growing segments of the capital market; growing 15.8 per cent per annum over the last 10 years from a size of RM161 billion.
Similarly, the unit trust industry has also experienced a significant increase in net asset value (NAV) from RM122 billion in 2006 to RM409 billion as at end June 2017. These private fund managers, together with public institutional investors, make up in excess of RM1.3 trillion.
This scale of fund mobilisation and savings by Malaysian investors shows that there is trust and confidence in the capital market. Therefore, the Securities Commission recognises that building trust and confidence must, and will always remain as a core constant of our efforts. This demands robust market infrastructure and a regulatory architecture that enables transactions to occur fairly, orderly and in a transparent manner, and where investors are protected.
*Part 2 tomorrow — The imperatives in regulatory discipline: the 3 Ts
Tan Sri Ranjit Ajit Singh is the chairman of Securities Commission Malaysia