Financial Consumer Protection Regime in Malaysia: Assessment of the Legal and Regulatory Framework

This paper examines the status of the legal and regulatory framework for consumer protection in Malaysia, an emerging economy. Using leximetrics and notions of incomplete law, the paper explores the financial consumer protection regime in the country by examining two aspects of the legal framework: the legal infrastructure and typology of laws. The Malaysian legal framework for financial consumer protection is assessed in light of the good practices identified in international guidelines issued on the themes by OECD and the World Bank. The results highlight the complementary nature and different roles that laws, regulations, and supporting institutions play in achieving a comprehensive financial consumer protection framework in the country.

In line with the legal, regulatory and institutional developments, a large body of literature examining different aspects of financial consumer protection has appeared in the aftermath of the crisis. While some studies explore the theoretical underpinnings of regulations related to protecting consumers, others examine institutional developments. 2 In the latter category, several studies have appeared on the newly created Consumer Financial Protection Bureau in the United States (Acharya and Richardson, 2012;Braucher, 2012;Graham, 2010;Kennedy et. al., 2012;Levitin, 2012Levitin, -2013Mierzewski et.al, 2010;Worrell, 2010Worrell, -2011Zywicki, 2013) and the approaches taken to protect financial consumers in the United Kingdom (Akinbami, 2010;Consumer International, 2013).
Although a large body of literature on legal and regulatory issues of financial consumer protection (FCP) in developed economies exists, studies examining its status in emerging and developing countries are relatively scant. An exception is a 2 Theoretical studies include Gerding (2009) who investigates the link between consumer protection and systemic risks and Braucher (2012) who examines behavioural economics to justify coming up with an anti-abuse regulatory framework to avoid 'tricks and traps' by financial institutions. Haim (2013) identifies the incentives of financial institutions to develop complex products to maximize profits and proposes an appropriate regulatory response to protect the consumers.
3 World Bank study that examines the status of consumer protection and financial literacy in nine emerging markets (Rutledge, 2010). Given the meagre literature on this contemporary issue for developing countries, this paper aims to evaluate the status of the legal framework for FCP in Malaysia, an emerging economy. Legal architectural issues are discussed from two perspectives. First, the typology of law that uses Hudson's (2009) classification of finance laws that separates them into three tiers which are substantive law, specific statutes for the financial sector, and regulations enforced by a statutory regulatory body. Second, the legal infrastructure identified by Pistor and Xu (2003) that constitutes laws, regulators and dispute resolution institutions. After outlining the key features of international FCP guidelines developed by the OECD (2011) and World Bank (2012), the paper assesses the legal framework of Malaysia that governs FCP in light of international guidelines.
Leximetrics, which is a systematic method to measure the status of law and legal institutions, is used to provide a quantitative appraisal of the Malaysian FCP regime in the country. This paper is organised as follows. Section 2 identifies the key features on financial consumer protection regimes by providing a brief overview of the existing literature.
Section 3 provides a methodological overview of the study by discussing leximetrics and then presenting the elements of legal infrastructure and typology of laws. Section 4 evaluates the status of the FCP regime in Malaysia in light of the international guidelines. The last section concludes the paper.

Financial Consumer Protection Regimes: Background and Overview
The failure of the market to protect the interests of financial consumers was exemplified in the subprime lending crisis of 2007 which saw some financial institutions operating in a predatory manner in pursuit of commercial gains at the expense of consumers (Mayer et al., 2014: p. 521). The GFC also revealed other weaknesses in the consumer protection regimes such as inadequate transparency and disclosure of various risks, opacity of products sold, and a failure to protect consumers (Akinbami, 2011;Avgouleas, 2009;Worrell, 2010). The need to protect consumers is a concern for regulators as it is not only appropriate to shield consumers from fraudulent practices but also because it is considered moral and ethical to do so (Harvey and Parry, 1992: p. 13). Aside from moral reasons, there are economic justifications to regulate financial institutions and markets. One key issue relates to 4 establishing appropriate information rules so that consumers can make informed decisions (Howells, 2005). Insufficient information and fraudulent practices can lead to erosion in consumer confidence which can result in less participation in the financial sector (Cartwright, 2001: p. 38;Cartwright, 2004: p. 1).
The need to protect financial consumers becomes more important as financial markets become complex and financial products and transactions entail serious, long term financial consequences (Micklitz et al., 2010: p. 371). On the demand side, increase in consumer autonomy in sophisticated financial markets can be a cause for alarm when consumers are oriented towards "present consumption" and lack the cognitive capabilities to make sound financial decisions (Campbell et al., 2011: p. 91). In the absence of FCP regulations, the behavioural characteristics of consumers coupled with the complexities of modern financial products leave consumers handicapped in dealing with financial service providers (FSPs), particularly for those coming from poor and low income groups (BCBS, 2015). Thus, consumer protection regulation is justified as it can contribute to distributive justice in situations where bargaining powers in the market are unequal (Cartwright, 2001: p. 28).
The aftermath of the GFC saw an overhaul in financial regulations that included specific focus on safeguarding financial consumers. At the global level, initiatives were taken by the OECD and World Bank to develop guidelines and principles related to financial consumer protection. The G20 High Level Principles on Financial Consumer Protection published by the OECD in October 2011 (hereafter OECD 2011) was prepared in response to the desire of the G20 Finance Ministers and Central Bank governors to develop common principles on consumer protection. 3 A more detailed guideline entitled Good Practices for Financial Consumer Protection was published by the World Bank in 2012(hereafter WB 2012. It was mainly developed as a diagnostic tool to assess the legal and regulatory regimes related to the 3 OECD 2011 has 10 broad principles to serve as a guide in enhancing financial consumer protection. These are recognising financial consumer protection as central to a legislative and supervisory framework, giving a mandate to oversight bodies responsible for financial consumer protection, the equitable and fair treatment of consumers, the prohibition of fraud and exploitation, the importance of disclosure and transparency, enhancing financial education, and finally effective dispute resolution. 5 consumer protection of different countries. While WB 2012 guidelines cover specific issues related to different financial sectors such as banking, insurance and the securities markets, it outlines some common good practices that apply to all financial consumers. 4 Based on the academic and regulatory literature, the key features of a sound FCP regime can be presented under the following five themes.

Legislative Empowerment and Supervisory Framework:
There is a need for a legal and regulatory framework for instituting an environment for protecting financial consumers. This would entail specific laws and regulations related to consumer protection that applies to organizations supplying different financial services. WB 2012 identifies legal institutions for consumer protection as the first item in its good practices and OECD 2011 requires that FCP should be an integral part of a country's legal, regulatory and supervisory framework.
Another aspect of the legal and regulatory framework is the legislative empowerment to form governmental bodies to ensure that consumer interests are protected (Consumer International, 2013: p. 2). Accordingly, OECD 2011 stresses the need for an oversight body to ensure that the legal and regulatory mandates are fulfilled. WB 2012 identifies the establishment of specific prudential supervisory bodies for consumer protection as a key component of good practices. This would require setting up institutions that enforce the protection of consumers, having a regulatory oversight body responsible for ensuring that the laws and regulations are applied, and requiring institutions to redress any violations. While some countries may have an oversight body that is a part of an existing regulatory institution, it must have a clear mandate with a separate reporting structure to maintain credibility and to avoid conflicts of interest (Rutledge, 2010: p. 18). are not able to make rational finance decisions without having access to adequate and relevant information. To ensure the optimal amount of information, regulations should aim to cover two features: the first is mandatory disclosure to protect the welfare of customers and the second is to control the supply of false or misleading information (Ogus, 1994: p. 121).
A key component of international standards is requiring information disclosure and transparency to reduce information asymmetry and assist consumers to make informed financial decisions. OECD 2011 emphasizes disclosure and transparency and requires providing relevant and accurate information to consumers on the one hand and the protection of consumer data and privacy on the other hand. Similarly, WB 2012 includes issues related to clear and objective information on products and prohibits providing any misleading information. Furthermore, FSPs are required to ascertain the customer's practical understanding of products and the associated risks and whether the product meets the customer's investment objectives and risk appetite.

Fair Treatment of Financial Consumer:
In pursuing commercial goals, financial institutions should strive to act honestly and fairly when engaging consumers to ensure that fraudulent practices are not employed in the course of business. Other than ensuring that financial consumers are treated fairly in the course of dealings, there should be a clear prohibition of fraudulent practices as FSPs tend to abuse loopholes in the regulatory regime (Mayer et al., 2014 :p529). A regulatory framework should explicitly prohibit unfair and deceptive practices by FSPs (Rutledge, 2010: p.21) and FSPs should face criminal consequences when acting contrary to the economic interests of consumers (Cartwright, 2001: p. 157). Both OECD 2011 and World Bank 2012 have guidelines that emphasize the equitable and fair treatment of consumers and the protection of consumer assets against fraud and misuse.

Complaints and Redress:
There should be efficient and effective mechanisms in place to redress complaints and disputes. Although consumers have the option of going to court in case of mal-practice, engaging in litigation with large corporations is not a viable option for consumers as it is troublesome, costly and burdens are vastly disproportionate (Harvey, 1992: p.14). Since consumers are reluctant to seek justice if redress is complicated and expensive to obtain, complaints and redress avenues must be affordable, convenient and effective (Rutledge, 2010: p27-31). Therefore, alternative dispute resolution institutions such as tribunals and financial ombudsman schemes are highly encouraged as they are efficient, affordable, and less formal (Thomas and Frizon, 2012: p10).
There are the two avenues for effective dispute settlement concerning financial consumer claims: the first is internal at the institution level and the second is redress obtained from an external independent body (Cartwright, 2004: p72).
Both OECD 2011 and WB 2012 require having an affordable and efficient dispute resolution mechanism with effective enforcement powers. WB 2012 requires financial institutions to have clear procedures for handling customer complaints and to provide access to affordable and efficient public dispute resolution mechanisms that include a financial ombudsman.

Financial Literacy:
The consumer protection framework must entail a demand side element of educating the consumers through financial literacy programs. The financial literacy and awareness aspect of financial consumer protection is vital as, even if information was supplied, it would be worthless if the consumer is not able to understand and take advantage of such information. Behavioural finance literature shows that consumers can be lazy, ignorant, uninterested or incapable of utilising the information available to them (Micklitz et. al., 2010: p372). As such, there must be adequate financial literacy and awareness initiatives conducted through convenient channels in a simple and comprehensible manner to educate the consumers so that they are able to understand and utilise information provided to achieve the best financial outcome (Huston, 2010: p. 296-361). OECD 2011 requires the provision of broad-based financial education and information to consumers.
Similarly, WB 2012 identifies good practices under the heading of financial 8 literacy and consumer empowerment, which includes the development of programs that provide financial education and enhance the literacy of the broader population using different delivery mechanisms.

Assessment of the FCP Regime in Malaysia: Methodological Framework
Assessment of the financial consumer protection regime in any jurisdiction would require evaluating the legal and regulatory framework in light of the guidelines provided by international multilateral institutions. One way to evaluate the legal and regulatory framework is to use leximetrics which is a "systematic quantitative methodology" (Cooter and Ginsburg, 2003: 2) and includes a "quantitative measurement of law" (Buchanan et. al, 2014: 5;Lele and Siems, 2007: 18).
Leximetrics involves deriving indices by first selecting relevant variables that serve as the benchmark and then coding the laws and regulations and evaluating them in light of the former. A simple way to quantify the laws would be to use a binary coding method in terms of the presence or absence of the variables in the relevant laws and assigning a score of "1" for the former and "0" for the latter. 5 The index is estimated by adding the scores, and it provides an estimate of the overall status of legal institutions relative to the benchmark.
While pioneering work on legal and regulatory institutions using leximetrics was initiated by economists working in the law and finance field, legal scholars found their approaches to be partial and lacking in objectivity. Armour et al (2009) (2007) and Siems (2008) also suggest using non-binary (fractional) coding. within the regulatory body, BNM, which has a mandate to oversee market practices and ensure that it does not threaten consumer interests. As a department within BNM, it is able to gain intelligence and use shared resources to better identify the market trends that pose a risk to consumers (AFI, 2011). In a restructuring that took place in 2013, the surveillance and supervisory functions of the CMC department were strengthened to address issues such as scams and the inappropriate selling of products and also to increase financial awareness more effectively (BNM, 2014a: 89).

B. Information Disclosure and Protection
Information and transparency in the financial sector can be discussed under two broad categories: first, information disseminated to consumers, and second, information 13 obtained from consumers. Whereas B1 and B2 below deal with the former, B3 and B4 relate to the latter.

B.1. Product/Service Information
Several items in WB 2012 deal with product and service information which include providing the following: a short statement clearly stating key terms and conditions in plain language (Item 8); a written copy of general and specific terms of conditions regarding the product (Item 9); and adequate training on the complexity of products to staff directly dealing with customers (Item 14). Principle 4 of the OECD states that vital information such as risks, benefits and terms of the products must be provided to the consumer. It also requires all promotional materials to be accurate, understandable and not misleading, and all material information that enables the ease of comparison between products should be provided.
In Malaysia, Section 10, Part II of CPA 1999 provides for the disclosure of truthful information and prohibits making false or misleading representation with regards to goods or services. Contravention of any provisions of Part II by an individual is an offence that is punishable by fines or imprisonment. 7 Article 123 of FSA 2013 stipulates that BNM should specify standards relating to transparency and disclosure requirements to ensure that information provided to financial consumers is accurate, clear, timely and not misleading. Article 128 refers to disclosure. In 2010, BNM issued Guidelines on Product Transparency and Disclosure (BNM, 2010a) that mandates every product to have a product disclosure sheet providing a concise summary of the terms of the product, the risks associated and the consumers' obligations. BNM (2010a) requires all documents to be in plain language and to be translated into the national language, Bahasa Malaysia. Additional consumer related information such as avenues for complaint and consumer education agencies are also highlighted in the product disclosure sheet to ensure that consumers are aware of their rights and options and are aware of where they may seek guidance if required.

B.4. Know Your Customer
Customer service can be enhanced by gathering information from consumers on their preferences and ability to understand risks and thus ascertain what product best suits their needs and financial capabilities. Principle 6 of OECD 2011 specifies that FSPs should train staff to enable them to gather information and understand the consumers' needs and capabilities to avoid selling unsuitable products. Similarly, item 7 of WB 2012 requires financial institutions to gather sufficient information on the needs and capacity of customers before recommending a specific financial product or service.
There is no reference on using information to better serve the customers in both the CPA 1999 and the FSA 2013. BNM issued guidelines entitled Introduction of New Products (BNM, 2014b) and Introduction of New Products for Insurance Companies and Takaful Operators (BNM, 2014c) which require FSPs to develop and implement internal customer suitability assessment mechanisms to ensure that products are marketed to customers according to their suitabilities. Article 11.4 of BNM (2014b) requires that FSPs institute suitability procedures to gather sufficient knowledge about customers to ascertain that they have a sound understanding of the features and risks of the products, meet their financial objectives, and have a product consistent with their risk appetite. Similarly, BNM (2014c) has a section on "Consumer suitability assessments" under Business Conduct Requirements that require insurance companies to seek sufficient knowledge about consumers to judge their understanding of a product and the associated risks and appropriateness of the product in meeting their investment objectives and risk appetites.

C.1. Prohibition of Fraudulent Conduct
The international standards affirm that FSPs should not engage in fraudulent activities and uphold the concept of the equitable and fair treatment of consumers. Principle 7 of OECD 2011, entitled "protection of consumer assets against fraud and misuse", maintains that there must be relevant information, control and protection mechanisms to protect consumer assets against fraud and misuse. Similarly, WB 2012 has clear indications on the fair treatment of consumers such as the prohibition of fraudulent sales practices (Item 10), informing the customers of any changes in the fees and charges (Item 16), and prohibiting financial institutions from employing abusive debt recovery and collection practices (Item 19).
Section 9 of CPA 1999 prohibits misleading or deceptive conduct in relation to goods or services, with noncompliance resulting in a fine not exceeding MYR 100,000 or imprisonment for a term not exceeding three years, or both. In 2010, the unfair contract term provision was included as Part IIIA of the CPA 1999 to protect consumers in situations of inequality of bargaining power and to prevent the imposition of unfair contract terms in standard contracts that are detrimental to consumers (Singh, 2012: pcxxvi). Section 124 (1) of FSA 2013 stipulates that FSPs shall not engage in prohibited business conduct as identified in Schedule 7, which includes the misleading and deception of consumers; exerting undue pressure or influence; or threatening to use harassment, coercion or physical force in relation to financial products or services. Failure to comply with the prohibition is punishable with imprisonment up to five years and a fine not exceeding MYR 10 million (Section 124 [4]). Furthermore, BNM has issued an updated concept paper "Prohibited Business Conduct" dated 15 July 2016 that identifies activities that are forbidden for financial institutions (BNM 2016).

C.2. Responsible Business Conduct
As ensuring the fair treatment of consumers should be adopted at all stages of Requirements. Among others, the guidelines require that due regard should be given to "the interests of consumers in the development, marketing and sale of new products" and that the board must approve "policies and procedures that describe appropriate parameters and guidance for fair treatment of consumers" (BNM 2014c, p. 23).

D.1. Internal Mechanisms
Since most complaints are in relation to products, having an internal complaints unit is the most convenient and fastest platform for a solution as it is directly handled by  (BNM, 2002). BNM (2014c, p.24) requires financial institutions to have an "effective system for resolving and monitoring consumers' complaints, and ensuring that consumers are provided with information on where and how to lodge a complaint".

D.2. External Mechanisms
Principle 9 of OECD 2011 specifies that an affordable, accessible, effective and efficient dispute resolution system dealing with consumer protection must be in place.

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WB 2012 (Principles 26 and 27) requires having access to an affordable and efficient mechanism for dispute resolution by establishing an independent and impartial institution such as a financial ombudsman. The authoritative institution would resolve minor disputes and its decisions would be binding. CPA 1999 under Section 85 establishes the Tribunal for Consumer Claims where consumers can refer cases for a fee of MYR 5 (USD 1.13). 9 The awards from the tribunal are final, binding and have the same status as an order of the Magistrate Court (Singh, 2011, p. pcix)

FCP Regime in Malaysia: Analysis and Summary
The architectural components of the FCP regime of Malaysia can be assessed in terms of the typology of laws and the legal infrastructure. Table 1   conduct. Both laws together, however, do not cover all the elements of good practices identified in the international guidelines. Specifically, the laws do not address knowing your customer, internal mechanisms to resolve complaints, and financial literacy and awareness issues. These gaps highlight the incompleteness of laws identified by Pistor and Xu (2013). While the gaps in the laws are filled by the regulatory guidelines of BNM, the regulations fulfil only nine elements of the international best practices on their own, leaving out a number of elements that are legal in nature.
[Insert Table 1 here] The analysis also sheds light on the legal infrastructure of the FCP regime in Malaysia. Other than completing the gaps that are absent in the consumer protection laws, the regulator performs a proactive role of enforcing laws through the Consumer and Market Conduct department. Furthermore, different types of dispute resolution institutions exist to protect the consumers and ensure ex-post enforcement of FCP laws. While a Tribunal for Consumer Claims exists to resolve disputes for all consumers, the Ombudsman for Financial Services deals with specific cases related to the financial sector. There are other initiatives such as POWER! (managed by AKPK) and TELELINK and several webpages developed by BNM to promote financial education and literacy among the consumers. The results show that while each of the laws and regulations do not address all elements of international good practices, they play different roles and together they provide a comprehensive consumer protection legal regime in Malaysia.

Conclusion
Recognizing the importance of protecting consumers in the aftermath of the GFC, initiatives have been taken at the international and national levels to introduce better  9 11 a-While CPA 1994 does not have any specific data protection stipulations, Personal Data Protection Act 2010 (PDPA) covers data protection issues that apply to financial consumers also.