Trust happily leaves in another man’s Ferrari

veloped 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.