APPLICABLE LAW IN

MALAYSIA
WORDS OF WISDOM

Orang baik menjadi baik kerana mereka menemui kebijaksanaan

melalui kegagalan. Amat sedikit kebijaksanaan yang diperoleh
daripada kejayaan.

-William Saroyan-
LEARNING OUTCOME
Explain the Insurance Act 1963
Explain the Takaful Act 1984
Explain the Financial Services Act 2013 in relating to
Insurance
Explain the Islamic Financial Services Act 2013 in relating to
Takaful
 INSURANCE ACT 1963

Preamble

An Act to provide for the regulajtion of insurance business in the Federation, and
for other purposes relating to or connected with insurance.
[21st January, 1963.]

BE IT ENACTED by the Duli Yang Maha Mulia Seri Paduka Baginda Yang di-Pertuan
Agong with the advice and consent of the Dewan Negara and Dewan Ra'ayat in
Parliament assembled, and by the authority of the same,

https://www.ssm.com.my/acts/fscommand/act1y1963.htm
PART I – PRELIMINARY
Section 1. Short title.
Section 2. Classification of insurance business, and construction of references to matters connected with
insurance.
PART II - CONDUCT OF INSURANCE BUSINESS
General restriction on insurers
Section 3. Requirements for carrying on business as insurer.
Registration of Federation insurers
Section 4. Registration by Commissioner.
Section 5. Appeal against refusal of registration.
Section 6. Cancellation of registration.

Deposits, registers of policies and insurance funds

Section 7. Deposits.
Section 8. Bank covenants in lieu of deposits.
Section 9. Register of policies.
Section 10. Establishment and maintenance of insurance funds, and allocation of surplus.
Section 11. Requirements as to assets of insurance funds.
Section 12. Requirements as to documents evidencing title to assets of insurance funds.
Section 13. Enforcement of requirements as to registers of policies and insurance funds.

Miscellaneous requirements as to conduct of business

Section 14. Payment in Federation currency of policy moneys under life policies.
Section 15. Regulation of premiums under life policies.
Section 16. Control of form of proposals, policies, and brochures.
Section 17. Requirements as to prospectuses and statements of capital.
Section 18. General obligation to furnish information.

Subsidiary
Section 19. Insurance agents and brokers.
Section 20. Provision for members of associations of underwriters to carry on general business.
Section 21. Saving for validity of policies.
PART III - RETURNS, INVESTIGATIONS, WINDING UP AND TRANSFERS OF BUSINESS
Returns
Section 22. Annual accounts and audit.
Section 23. Actuarial investigations and reports as to life business.
Section 24. Power to require returns under sections 22 andd 23 to be rectified.
Section 25. Additional provisions as to returns under sections 22 and 23.
Section 26. Returns of changes in registration particulars.
Investigations
Section 27. Investigation of affairs of insurer.
Section 28. Proceedings after investigation.
Winding up
Section 29. General provisions as to winding up.
Section 30. Special provision for insurers directed to cease insurance business.
Section 31. Co-operative societies doing insurance business.
Transfers of business
Section 32. Schemes for transfer of business.
Section 33. Confirmation of schemes.
Section 34. Documents to be filed when scheme confirmed.
PART IV - MISCELLANEOUS AND GENERAL
Administration and enforcement
Section 35. The Commissioner.
Section 36. Annual reports.
Section 37. Statistics.
Section 38. Service of notices.
Section 39. General provisions as to offences.
Miscellaneous amendments of law
Section 40. Insurable interest required for life insurances.
Section 41. Capacity of infant to insure.
Section 42. Life policy moneys to be paid without deduction.
Section 43. Life policies (surrenders: non-payment of premiums: paid-up policies).
Section 44. Payment of life policy claims without probate, etc.
Supplementary
Section 45. Regulations.
Section 46. Accounting periods of insurers.
Section 47. Miscellaneous definitions.
Section 48. Repeals and consequential amendments.
First Schedule.
Second Schedule.
Third Schedule.
Fourth Schedule.
Fifth Schedule.
TAKAFUL ACT 1984
http://www.bnm.gov.my/documents/act/en takaful_act.pdf
FINANCIAL SERVICES
ACT 2013
http://www.bnm.gov.my/documents/act/en_fsa.pdf

is a Malaysian laws which enacted to provide for the regulation and supervision of
financial institutions, payment systems and other relevant entities and the oversight of
the money market and foreign exchange market to promote financial stability and for
related, consequential or incidental matters.

Passed by Malaysian Parliament at end 2012

Came into effect on 30th June, 2013
Repeals the Insurance Act 1996

Applies to
Banks
Development banks
Insurance companies
STRUCTURE
The Financial Services Act 2013, in its current form (22 March 2013), consists of 18 Parts containing 281 sections and 16 schedules
(including no amendment).
Part I: Preliminary
Part II: Regulatory Objectives and Powers and Functions of Bank
Part III: Authorization and Registration
Part IV: Payment Systems
Part V: Prudential Requirements
Part VI: Ownership, Control and Transfer of Business
Part VII: Financial Groups
Part VIII: Business Conduct and Consumer Protection
Part IX: Money Market and Foreign Exchange Market
Part X: Submission of Document or Information
Part XI: Examination
Part XII: Directions of Compliance
Part XIII: Intervention and Remedial Action
Part XIV: Other Powers of Bank
Part XV: Enforcement and Penalties
Part XVI: General Provisions
Part XVIII: Repeal, Savings and Transitional
Schedules
ISLAMIC FINANCIAL
SERVICES ACT 2013
http://www.bnm.gov.my/documents/act/en_ifsa.pdf

is a Malaysian laws which enacted to provide for the regulation and supervision
of Islamic financial institutions, payment systems and other relevant entities and
the oversight of the Islamic money market and Islamic foreign exchange market
to promote financial stability and compliance with Shariah and for related,
consequential or incidental matters.

Its main objectives are to promote financial stability and compliance to Shariah
and further strengthen the regulation of Islamic financial institutions. By this, the
IFSA 2013 aims to strengthen consumer protection and further increase the
confidence of the public in Takaful.

Ref article: IMPORTANCE OF ISLAMIC FINANCIAL SERVICES ACT 2013 IN

TAKAFUL INDUSTRY AFTER THE REPELLED TAKAFUL ACT 1984. Siti Norshila
Jamil & Jasri Jamal. Faculty of Law, National University of Malaysia, Malaysia.
The Islamic Financial Services Act 2013, in its current form (22 March 2013), consists of 18 Parts containing 291 sections and 16
schedules (including no amendment).

Part I: Preliminary
Part II: Regulatory Objectives and Powers and Functions of Bank
Part III: Authorization
Part IV: Shariah Requirements
Part V: Payment Systems
Part VI: Prudential Requirements
Part VII: Ownership, Control and Transfer of Business
Part VIII: Financial Groups
Part IX: Business Conduct and Consumer Protection
Part X: Islamic Money Market and Islamic Foreign Exchange Market
Part XI: Submission of Document or Information
Part XII: Examination
Part XIII: Directions of Compliance
Part XIV: Intervention and Remedial Action
Part XV: Other Powers of Bank
Part XVI: Enforcement and Penalties
Part XVII: General Provisions
Part XVIII: Repeal, Savings and Transitional
Schedules
IMPACT OF IFSA 2013 ON TAKAFUL AND
RETAKAFUL

Single Licensed Takaful Business

The IFSA requires a Takaful operator (other than a professional Re-Takaful
operator) with a composite license to separate its Family business from its
General Takaful business. The firm is given a grace period of 5 years to split its
business into separate entities.

The intention of the regulator is to expand the growth of General Takaful

business. Most of the composite Takaful operators are currently focusing on
Family Takaful and the growth on the General side is lagging behind. As a
result of this, several existing composite operators may consider giving up their
General license and new players will enter the market. However, the question
arise whether this will really lead to an increase growth on the General side?
Takaful operators currently write little commercial and industrial risks, and it is
expected that some of the new players may focus on such business.
 Establishment as public company
The IFSA 2013 requires Takaful operators to be established as public
companies. However, given the nature of mutual assistance in Takaful, it will be
more appropriate for the firm to be set up as cooperatives or mutuals. By being
a public company, Takaful firms will become a wholly commercial venture.
Whilst this is not prohibited under Shariah, it will be better if the Takaful
companies have also the option to set themselves up as co-operatives or
mutuals.

Shariah’s governance
IFSA 2013 has incorporated stricter Shariah requirements as they are the
foundation of Takaful. At the same time, these requirements will add more
strain on Takaful and reTakaful operators. All the efforts in ensuring Shariah
compliance increase the firm’s operational costs. Thus, in principle, Takaful and
reTakaful firm should be able to charge higher prices than their conventional
counterparts. However, in reality this is often not possible, and by this, it makes
it more difficult for the firms to achieve the same returns as conventional
insurers.
 New prudential requirements
The IFSA has also implemented additional prudential requirements on
Takaful operators with regards to maintenance of various funds, assets
and risk management among others. It also makes the provision of
Qard (interest-free loan) compulsory in case of a deficit in the risk fund.
This is important to Takaful and Re-Takaful operators because it has an
effect on their reserves requirements.

In principle, Takaful is meant to be a program of mutual assistance

between participants. With the requirement of a compulsory Qard,
Takaful becomes a risk transfer mechanism between participants and
operators just like conventional insurance
HIGHLIGHTS FSA VS IFSA
Scope and ambit
The Acts have broadened some scope and ambit mainly in the definitions of
“authorised person” and “registered person”. These Acts further outline another
category, which is “financial intermediation”. The activities of financial
intermediation are listed under Section 211 of the FSA and Section 222 of the
IFSA.

Licensing
All persons undertaking banking business, investment banking or insurance
business are required to hold valid licenses granted by Minister of Finance
(“Minister”). Businesses such as financial advisory, money-broking and
insurance broking will only need to obtain approvals from BNM.
Every authorized person is required to maintain at all times a minimum capital
of funds or a surplus of assets over liabilities during the course of carrying on
its authorized business.
 Share interest
The Acts allow a person holding existing interest in a licensed person to
increase its shareholding in that licensed person without having to seek prior
approval if such increase does not exceed a multiple of 5% and together not
exceeding the aggregate of 10%.
As for disposing of shares, the requirement to seek approval of the Minister or
BNM no longer applies, except in cases where the shareholder proposes to
dispose shares which results in the shareholder ceasing to have control over
the licensed person.

Financial holding company

Any company must first obtain a written approval of the Minister and require an
approval by BNM if the company intends to become a Financial Holding
Company (“FHC”) which holds more than 50% shares in a licensed person.
FHC of a licensed person is not allowed to operate any business except
financial services or other services relating to financial services and must abide
by all Prudential Requirements set out under Part V of the FSA and Part VI of
the IFSA.
 Corporate governance
A licensed person is required to obtain the approval of BNM for the
appointment, election, reappointment and re-election of the chairman, director,
chief executive officer or a senior officer, and a notification to BNM of the
appointment, election, reappointment and re-election of the chairman, director,
chief executive officer or a senior officer is sufficient in the case of an approved
person or an operator of a designated payment systems.
The Acts enhance the duties of directors and place more stringent
requirements on transparency on the part of directors of licensed persons and
the holding companies.

Insurance/Takaful
Under the FSA, insurers who hold composite licenses are prohibited from
operating both general and life insurance businesses. Similarly under the IFSA,
the takaful operators who hold composite licenses are prohibited from
operating both general and family takaful business. However, licensed
professional reinsurers/retakaful operators are exempted from this prohibition.
BNM has granted a grace period (of up to 5 years or as will be specified by the
Minister, on recommendation by BNM) for composite insurers/takaful operators
to de-merge into separate entities.
 Shariah governance
A key difference between the FSA and the IFSA is the introduction of a
new Part IV of the IFSA to strengthen Shariah governance whereby
Islamic financial institutions shall ensure end to end sharia compliance
with regards their policies, procedures and operations.

Exchange control
According to the Acts, no person shall undertake or engage in any
transaction set out in Schedule 14, unless he has obtained a written
approval from BNM. This will include any proposed transaction falling
within borrowing or lending of Ringgit Malaysia between non-residents,
retaining or using Ringgit Malaysia by a non-resident, giving or
obtaining any guarantee in respect of any debt or liability, importing into
or exporting from Malaysia in Ringgit Malaysia, foreign currency, gold
or other precious metals.
 Payment systems
The Acts streamline the regulations and supervisions of licensed and
approved persons, thus the criteria by which any application to carry on
payment systems business would be assessed similarly as an
application to carry on licensed business. An applicant would be
assessed upon the factors listed in Schedule 5 in the Acts.

Powers of Bank Negara Malaysia

Under the Acts, BNM is empowered to assume control over the whole
or part of business, affairs or property of the financial institution, to
manage it or appoint any person to manage it on behalf of BNM and to
designate a bridge institution when certain circumstances arise.

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