Malaysia: Labuan Financial Services Authority Annual Report 2015

IN 2015, THE GLOBAL ECONOMIC RECOVERY REMAINED MODEST. THE UNFOLDING DEVELOPMENTS GOING INTO 2016 INDICATE A CHALLENGING FINANCIAL AND ECONOMIC ENVIRONMENT. THE SLOWER ECONOMIC GROWTH PROSPECTS IN SEVERAL LARGE EMERGING MARKET ECONOMIES AND THE SUSTAINED LOW ENERGY AND COMMODITY PRICES ARE EXPECTED TO WEIGH ON THE GLOBAL GROWTH PROSPECTS IN 2016.

Confronted with these developments, the Asian economies have , however, demonstrated their abilities to weather the challenges, having benefitted from the earlier efforts to strengthen the economic foundations that were further reinforced with long term financial reforms, capacity building initiatives and the forging of greater regional economic and financial integration.

The year 2015 marked a key milestone in the ASEAN integration agenda with the establishment of the ASEAN Economic Community (AEC). ASEAN has emerged as an important growth centre in the global economy and has been recognised as one of the most dynamic regions in the world. The ASEAN economies have achieved significant progress during this challenging time, sustaining their long term average GDP growth of 5.3%, higher than the global growth average of 3.6%. ASEAN's combined GDP has nearly doubled since 2007, when the AEC Blueprint was first adopted to the current prevailing value of USD2.5 trillion. Additionally, the average GDP per capita has increased by almost 20% to more than USD10,000 in the same period.

The rapid progress of regional economic integration in ASEAN has unlocked the further potential of the region to have a greater role in the greater Asia and the global economy, with widening access to the regional and international markets. While the environment of low commodity prices combined with volatility in the international financial markets have brought pressures to the regional currencies, the strengthening of cross-border trade and investments, the greater public spending and increased consumption power of the rising middle class from the 630 million population of the ASEAN region has sustained an economic growth estimated at 4.7% in 2015. This is expected to be sustained going forward into 2020. Leveraging on such growth prospects and the continued efforts to implement economic integration initiatives encapsulated under the AEC, this is expected to have significant positive influence on intra-regional trade and foreign direct investment, promoting overall economic growth in the region. The Labuan IBFC, which has a strong foot print in providing the interconnectivity to conduct business in the region, is well positioned to capitalise on and contribute to these exciting future prospects.

The year 2015 holds special significance for the Labuan IBFC as the centre celebrated its silver jubilee anniversary. During our 25-year journey, underpinned by its ASEAN strategy, the centre has not only persevered through many challenges, but remained steadfast in staying the course towards becoming a financial business centre. The centre now hosts more than 700 licensed institutions, an increase of more than thirteen fold, an average growth of about 10% annually. Importantly, this growth has not only been in terms of number of companies, but also in terms of its diversity. This includes banks, insurance and insurance-related companies, trust and leasing companies, with a special focus on niche wealth management vehicles such as foundations and trusts, that are beginning to make an increasingly significant imprint. The progress of the centre amidst Asia's growing prominence has also been reinforced by the extensive efforts to develop Labuan through the provision of extensive physical infrastructure and amenities, as well as incentive structures within the Labuan IBFC. Positive assessments by international regulatory bodies such as the IMF/World Bank, FATF, APG, OECD Peer Review Group have also served to further elevate the international confidence and recognition of the Labuan IBFC in meeting international standards and practices.

Key to the success of the Labuan IBFC lies in its agility. The increasingly liberalised marketplace combined with forces of globalisation and the international regulatory reforms have altered the business and financial landscape that the Labuan IBFC operates today. An important strategic shift was undertaken in 2008 with the repositioning of the Labuan IBFC, a bold step towards transforming the centre's position from a traditional offshore financial centre to become a vibrant international business and financial centre. To complement this, a holistic review of the legislation and the tax framework was undertaken during the same year to ensure that it could remain facilitative and flexible for business to be conducted out of the Labuan IBFC. New business services and products were also identified, with a focus on wealth management and financial solutions.

The 25-year journey for the Labuan IBFC also saw the review of the regulatory costs for Labuan entities to maintain competitiveness of the centre. An enhanced online company incorporation system was implemented to improve the efficiency for companies to incorporate and operate in Labuan. To maintain independence and clarity of roles, a separate marketing arm was established to undertake the promotion of the Labuan IBFC, while the Labuan FSA focuses on the regulatory and supervisory oversight of the Labuan financial institutions. Many enhancements were also made to the operational framework for the Labuan entities, including in the area of co-location, which have enabled entities to further maximise their presence in Labuan. These developments have strengthened the distinct value propositions and comparative advantages for the Labuan IBFC, enabling the centre to contribute more effectively in facilitating regional trade and investment activities.

For the year 2015, the Labuan FSA focused on the implementation of the strategic priorities outlined in its Corporate Action Plan (CAP) 2015-2017. The formulation of broad strategies and key initiatives under the CAP, which takes into account the evolving international financial landscape and greater cross-border flows, is to position the Labuan IBFC as a thriving midshore business and financial centre in the Asian region. The key focus areas for the Labuan IBFC are: (i) strengthening regional and international financial linkages; (ii) the continued internationalisation of Islamic finance; and (iii) building a strong regulatory and supervisory regime. The CAP also accords emphasis towards strengthening the capability and quality of service providers in the Labuan IBFC to support the growing demand of the various and differentiated investors. The implementation of initiatives under the CAP will further enhance the Labuan IBFC's contribution towards Malaysia's efforts in creating a strong, comprehensive and stable financial system with well-functioning financial institutions.

The Labuan FSA remains vigilant in ensuring that its regulatory and supervisory regime is consistent with international standards and best practices. The Authority has taken significant steps towards strengthening anti-money laundering and counter terrorism (AML/CFT) standards to uphold the integrity of the Labuan IBFC. During the year under review, Malaysia, including the Labuan IBFC, was assessed favourably by the Asia Pacific Group on Money Laundering (APG). The Mutual Evaluation Exercise Report on Malaysia (including the Labuan IBFC), published in 2015, acknowledged Malaysia's well-developed legal and regulatory arrangements, as well as a high degree of technical compliance to Financial Action Task Force (FATF) standards. Based on our commitment towards strengthening the AML/CFT regime, Malaysia was granted full membership in the FATF in February 2016.

To further strengthen cross-border cooperation with other regulatory authorities, the Labuan FSA has also signed a further Memorandum of Understanding (MoU) on Co-operation and Mutual Assistance with the Cayman Islands Monetary Authority. The MoU covers important areas in the regulation and mutual exchange of information, enforcement, research and development, capacity building as well as cooperation on supervisory work. The Authority will continue to engage with more regulatory bodies to foster an enhanced relationship and cooperation in the area of supervision and enforcement.

As the businesses of the Labuan IBFC evolves to become more complex and diversified over the years, the Authority will continue to develop both the organisational and industry technical capabilities to ensure there are no mismatches in competencies and expertise in the Labuan financial industry. Towards this, the Authority will collaborate closely with the industry associations and professional training institutions to provide professional certification programmes to raise the competency level of the industry workforce in the Labuan IBFC.

The Authority will also continue in its corporate social responsibility programme for the Labuan community, particularly in relation to the progressive development of the Labuan International School (LIS). The completion of the new school building, which is equipped with state-of-the art educational facilities now provides the full spectrum of education system and learning experience for its students.

Looking ahead, 2016 will be a challenging year for the financial centre. The volatile and uncertain economic climate may result in moderating demand for financial products and services, particularly as individuals and corporates become more cautious in investments and business activities. Notwithstanding these challenges, the year will also see new opportunities, particularly with the development and advancement of the AEC, which will catalyse greater regional trade and investment activities in the region. In addition, the Trans-Pacific Partnership (TPP) will generate more economic activity among its participating markets that will, in turn, support more business activities and longer term demand for financial services.

The Labuan FSA is confident that the Labuan IBFC will continue to sustain its growth momentum. The Authority remains committed in providing a conducive and stable business environment and shall continue to adopt policies that are in the best interest to the Labuan IBFC. In this regard, the Labuan FSA will therefore focus on building and deepening the Labuan IBFC's business propositions, aimed at creating greater value for businesses.

Pivotal to the success of the Labuan IBFC is closer cooperation and the collective efforts of all stakeholders of the centre. The responsibility of achieving the ambitions of the Labuan IBFC is a shared responsibility between the regulators, government, industry players, and the market professionals and participants. With greater collaboration and engagement, we can look forward with confidence to a stronger performance of the Labuan IBFC.

On behalf of the Members of the Authority, I would like to acknowledge all stakeholders who have contributed significantly to the success and direction of the Labuan IBFC, including the present and previous Authority members of the Labuan FSA. The Labuan IBFC has benefited considerably from their wisdom and advice. I also wish to express my appreciation to Dato' Siti Halimah Ismail, whose term of appointment concluded in 2015 and welcome Dato' Zahrah Abd Wahab Fenner and Mrs. Khodijah Abdullah as new members of the Authority. In addition, my gratitude goes to the members of the International Advisory Panel, the Syariah Supervisory Council, the Financial Stability Committee and other government departments and agencies as well as the industry, for the invaluable support extended and contributions. I also extend my sincere appreciation to the management and staff of the Labuan FSA for the commitment and dedication towards the continued success of the Labuan IBFC. With continued support and commitment from all stakeholders, I am confident that the Labuan IBFC will continue to solidify its advancement as a financial and commercial gateway, serving the growing trade and investment needs of ASEAN, the greater Asia and beyond.

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