IN the present regulatory environment, a continued motion for robust capital market infrastructure and sustained trust calls for the recognition of several imperatives. While these encompass a broad range of considerations, I will try to summarise them into 3 Ts — Technology, Teaming and Transparency.
The first T, Technology has emerged with great pertinence across capital markets, introducing new challenges in the way trust is to be sustained. One such challenge is accountability. For example, who is going to be held responsible for an algorithm or artificial intelligence? In 2012, a glitch in the trading algorithm of Knight Capital disrupted the trading prices of 140 stocks listed on the New York Stock Exchange. With the advent of robo advisers today, investors are getting advice from a computer programme that cannot feel the consequences of its wrong actions. As Artificial Intelligence progresses, we will find self-learning machines augmenting their actions as they go along. In order to ensure that trust is maintained, providers of digital services must be held accountable for the actions of their creations and platforms.
Privacy of user information is the other area of big concern. While various laws are in place to require data protection and privacy, incidents of massive hacks that compromised customer and other data are, unfortunately, becoming commonplace. In the capital market, investors need to have the confidence that their data is secure. Not only is data security a significant concern, cyberfraud and cybersecurity risks have become a priority for all participants in the digital capital market. The increasing reliance of the capital market on technology also means that better cybersecurity is a prerequisite for trust.
Another technological evolution that undoubtedly warrants mention relates to the increasing accessibility and influence of social media. This has transformed the rate and breadth at which information disseminates, granting the public an ability to rapidly expose the conduct of businesses. Additionally, as more information circulates within society, society in turn demands to know more before they are willing to trust.
In today’s world where products and services can be replicated and pricing matched, trust emerges as a significant competitive advantage. Therefore, creating value with the purpose of earning customer trust is fast becoming an important consideration for businesses to remain relevant and competitive.
The second imperative, Teaming — cannot be underscored with sufficient importance. Here in Malaysia, the SC has continued to pursue proportionate regulation by emphasising the shared responsibility and collaboration among our stakeholders to build and sustain trust. An example of this shared responsibility is our approach to corporate governance. Through the Comprehend, Apply and Report (CARE) approach advocated in the Malaysian Code of Corporate Governance (MCCG), we have empowered the boards of companies while holding them accountable. Under the MCCG for instance, the Audit Committee is tasked with ensuring that the financial reporting process is appropriately carried out, including the appointment of the auditor and the audit process itself. The Audit Committee is also expected to provide auditors with views and information about transactions and issues that have an impact on the financials or audit of the company.
At the same time, we are also very prepared to step in where regulatory discipline is necessary. When there was a need to shore up confidence in financial reporting after a spate of incidents globally and some unfortunate cases locally, we established the Audit Oversight Board (AOB) to provide more confidence in the overall quality of audits and financial reporting in Malaysia. After six years of being in operation, I am happy to say that the AOB has fulfilled its objective of enhancing public trust in the audit process.
Lastly, I would like to highlight significance in cultivating a culture of Transparency. Solon, an Athenian statesman who was known as one of the seven wise men of Greece, once said, “Put more trust in nobility of character rather than on oath”. Clearly, nobility of character was something that was demonstrated and could be seen. An oath was merely asking someone to take your word for it. You cannot ask people to trust you if they do not know what is happening. In capital markets, transparency is necessary for effective corporate governance as it facilitates better disclosures and reduces information asymmetry between stakeholders and management of a company. This is not only essential for the monitoring of companies but also central in allowing investors and shareholders to proficiently exercise ownership rights.
As a regulator, we try to provide as much guidance as we can to cultivate transparency while levelling the playing field. For instance, the MCCG and Bursa Malaysia’s Listing Rules ask the same disclosures of all listed companies without compromising commercially sensitive information disproportionately. The rules on takeovers provide guidance to ensure that recommendations are clearly explained and advisers do not give nebulous explanations to their recommendations. Offering documents are required to explain how the investment product works. These are some of the measures we have taken to ensure that the playing field continues to remain level.
However, while regulators can impose certain requirements for transparency, other aspects of transparency cannot be dictated. This transparency must come from wanting to treat investors fairly; to earn their trust. I do want to point out that transparency is not just about making disclosures. There are things that cannot be cured by disclosure alone and trust in such cases means not letting investors take risks that they are simply not prepared for. Disclosures should be made to help investors reach informed decisions, rather than as a legal defence for the issuer and its advisers. Therefore, accountability must follow if there is a breach of that trust.
Dimensions of Trust in Market Regulations and Policies
Breaches of trust also showcase the interplay between regulators and markets. On one hand regulators place a degree of trust upon market discipline to function in an equitable and ethical manner while on the other, major transgressions in conduct have prompted specific and sometimes, stringent policy responses.
I am mindful of the cyclical nature of “trust and distrust” within markets — principally its influence upon policy and regulations. In relatively stable economic conditions, regulators may employ a ‘light touch’ approach to policy, allowing market forces to flow unencumbered. However, drastic market failures leading to economic hardships have catalysed a multitude of policy adaptations. These have manifested themselves as a consequence of subdued trust in the market, necessitating the actions of regulators to impose measures in restoring safety, fairness, efficiency and transparency.
Herein lies a principal challenge in policymaking — to have a properly calibrated approach to regulation. In our pursuit to calibrate and orientate policy making, we must remain cognisant that risk can only be accurately understood if the integrity, transparency and quality of disclosures continue to reflect accurate information and invoke trust. As national policy makers and global standard setters strive to enhance, normalise and simplify the regulatory frameworks of financial markets, the aim of cultivating trust and confidence is a responsibility that is also deeply incumbent upon every market participant each of whom holds duties as “custodians of trust”.
Accountants as Custodians of Trust
Amongst the “custodians of trust” are the many seated here today who have earned the privilege of being certified as accountants. The importance of this profession cannot be overly emphasised, with its significance marked not only within the domains of business and commerce but also towards the greater integrity of markets.
For the global markets to achieve depths of efficiency, many must invoke trust upon the quality, transparency and accuracy of financial disclosures. In this regard, accountants represent frontline roles in both safeguarding the integrity of financial statements and championing objectives in the public interests. This includes the duty of fostering public trust and confidence with the purpose of achieving sustained growth in the economy.
It must be also noted that the accounting profession’s impact in producing and ensuring the quality of financial reporting goes beyond the realm of audit and compliance — it is the basis by which decision making, financial strategy, analysis and benchmarking are taken. Therefore, accountants hold critical gatekeeping functions as reputational intermediaries, allowing market participants to identify risks, locate opportunities, reduce uncertainties and ultimately, allocate capital efficiently.
Given this impact, the value of proper regulation and integrity amongst accountants cannot be overemphasised. As history has shown us, where integrity collapses, and trust erodes, a call for change may also ensue. Major scandals of the past that breached public trust called into question the quality of financial statements and the practices of accountants, thereby triggering a demand for immediate and far-reaching legislative reforms. Some of these reforms are intended to enhance transparency, the way businesses are governed and how long-term value is created.
Accountants play a vital role in maintaining good corporate governance practices and aid investors in making informed investment decisions. In today’s world of open and interconnected markets, financial reporting that adheres to internationally recognised standards provides the trust and confidence that connects investors from one country to businesses in another. Multiple studies have linked high quality reporting standards to an increase in investment levels.
In addition, the assurance of quality of financial information contributes to a lower cost of capital as it alleviates the need for a risk premium that would otherwise have been levied by investors and passed on to the business and the country it operates in. Better accounting standards help businesses consolidate short-term strategies with sustainable growth and long-term value creation, the importance of which is recognised by the emergence of new reporting standards.
Conclusion — Trust, a Delicate Force of Great Proportions
I have provided this evening’s speech not solely to confer insights that highlight the importance of trust, but to prompt a continued reflection of its significance upon the grand realities that surround all of us. Trust is a delicate force — easily unsettled and quickly diminished — yet, its influence will continue to resonate in great proportions, governing individual and collective actions of the public. As the events of the past and present have shown us, high levels of trust and confidence underpin a healthy and orderly market and by extension the overall economy and welfare of society. This is why preserving trust and confidence lies at the core of what capital market regulators do.
1. While establishing trust is a complex and ongoing endeavour, its preservation demands a synergistic cooperation. To produce outcomes of highest success, the actions of policy makers must converge harmoniously with the will of discrete market participants.
2. Therefore, the three themes of MIA’s commemorative series are apt. Internalising integrity and taking accountability should not be a sole consequence of compliance and repercussions, but a means to express the sheer respect and care for the trust of all stakeholder groups.
TAN SRI RANJIT AJIT SINGH is chairman of Securities Commission Malaysia