STRENGTHENING REGULATORY COMPLIANCE: UPDATES ON THE REVISED GUIDELINES ON LABUAN MONEY BROKER BUSINESS

STRENGTHENING REGULATORY COMPLIANCE: UPDATES ON THE REVISED GUIDELINES ON LABUAN MONEY BROKER BUSINESS

Introduction

On 9 September 2024, the Labuan Financial Services Authority (LFSA) unveiled the revised Guidelines on the Establishment of Money Broking Business in Labuan IBFC, replacing the previous Guidelines from 24 November 2017. These updated Guidelines introduce several significant revisions aimed at both new and existing Labuan money-broking businesses. The LFSA’s enhancements focus on reinforcing regulatory compliance, ensuring financial stability, and promoting transparency and accountability within the industry. In this article, we will delve into the fundamental changes and new requirements set forth by the LFSA, providing a comprehensive overview of how these updates impact money-broking licensees operating in Labuan.

Additional Requirements for New Applicant:

Under the revised Guidelines, there are new requirements for new applicants to comply with, which are:-

  • Adequate Financial Resources:

The applicants are required to provide adequate financial resources, including capital resources, to meet and maintain minimum paid-up capital requirements, taking into account the nature, scale, complexity and diversity of the business and the risks and

  • Credible and Viable Business Plan

The applicants are required to provide a credible and viable business plan that sets out the approach to implementing the proposed business objectives or operations, and the management and operational structure should be adequate for the intended business plan.

The new requirements above were not previously required under the Guidelines. However, taking into account the significant financial transactions and risks involved in money broking, it is essential to ensure that brokers can absorb the potential loss and continue operations without jeopardising client funds. The business plan requirement, on the other hand, allows applicants to demonstrate that it has a clear strategy and objectives, which are essential for sustainable operations. Hence, the above additional requirements for new applicants are designed to promote excellent governance, transparency and accountability in the money-broking industry, ultimately safeguarding the interests of all stakeholders involved.

Clarification on Permissible Money Broking Activities

  • Clarification and Specification of Financial Products

The revised Guidelines now specifies that only financial products within the money or foreign exchange market are permitted, explicitly excluding contract for difference (CFD) with certain underlying assets that are other than products trade in the money and foreign exchange market, which was not stated previously.

  • Introduction to Activities Related to Digital Assets

Under the revised Guidelines, Digital Assets have been introduced, allowing money brokers to facilitate trading and exchanges of Digital Assets and to provide systems for such activities.

Revised Operational Requirements

Under the revised Guidelines, the operational requirements of a money-broking business have received significant revisions and updates. Below are the revised requirements in relation to the operations of a money-broking licensee:-

  • Increase in paid-up capital requirement

The previous paid-up capital requirements to be unimpaired by losses at all times of at least RM500,000.00 have been revised to RM1,000,000.00 or its equivalent in any foreign currency for Labuan money brokers. In addition, any money broker who is also undertaking activities relating to the trading and exchange of Digital Assets is required to maintain a paid-up capital of RM1,500,000.00 instead.

LFSA has also requested that its licensee provide certified evidence that the paid-up capital has been deposited with a regulated bank in Labuan or Malaysia for the money-broking operation under the revised Guidelines.

  • Comprehensive Internal Policies and Controls

Under the revised Guidelines, LFSA has provided a comprehensive requirement for licensees to establish and maintain adequate and effective internal policies and controls for the operations of the business. The internal policies and controls must also be regularly reviewed to ensure that they remain appropriate, relevant and prudent. Among the internal functions and controls that are required to be established by the licensee are:-

  • business planning that is according to the strategy and policies approved and established by the board and senior management;
  • safeguard assets and liabilities, ensuring minimal risk of loss from irregularities, error, fraud, physical damage and identification of such occurrences;
  • accounting and other records, including transactions and list of counterparties to be in line with the licensee’s regulatory and AML/CFT obligations; and
  • internal controls on addressing risks from outsourced functions.
  • Stringent Compliance in relation to Counterparties/Outsourcing Functions

Labuan money broking licensee now is required to ensure that the counterparties (including but not limited to the principal broker, custodian of client assets, payment system provider, e-wallet service provider and liquidity provider) are regulated by a recognised supervisory or regulatory authority and have a good track record, where applicable. The licensee must ensure that due diligence is conducted prior to engagement and provide a written declaration that the counterparties engaged are in full compliance with its regulatory and other relevant obligations from the home supervisory authority. Any changes and new arrangements made to the counterparties of the business operations must be notified to LFSA within seven (7) days prior to the commencement of the new arrangement or changes.

  • Maximum Leverage Limit for Trading of Digital Assets

Under the revised Guidelines, LFSA has included the expected imposition of a maximum leverage limit of 1:1 on its client trading transactions involving Digital Assets. Thus, under the 1:1 leverage limit, assuming a trader has $10,000.00 in his account, the trader may only trade using the amount he actually has, which is $10,000.00.

  • AML/CFT and TFS for Labuan KRIs Compliance

Licensee is also expected to ensure compliance with the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 and the Guidelines on Anti-Money Laundering, Countering Financing of Terrorism and Targeted Financial Sanctions for Labuan Key Reporting Institutions (AML/CFT and TFS for Labuan KRIs) including any AML/CFT policy documents applicable to Labuan money broker issued by Labuan FSA.

  • Approval and Notification on Changes from LFSA

In addition to the already in place approval requirements from LFSA, under the revised Guidelines, LFSA has added the requirement for the licensee to seek approval from LFSA for the reduction of paid-up capital, which shall not be lower than the minimum paid-up capital requirement for Labuan money broking.

Additionally, LFSA has added the requirements to notify LFSA within seven (7) days for the following matters:-

  • change of bank account where the paid-up capital has been deposited;
  • resignation of its directors or principal officer
  • change of place of business or office in or outside of Labuan;
  • change to its constituent documents
  • a significant event that affects its going concern or reputation, and
  • change of its financial year-end.

 

  • Roles and Responsibilities of the Board and Senior Management.

Under the revised Guidelines, LFSA has added the roles and responsibilities of the board and senior management of the licensee. These responsibilities ensure that the Board not only oversees the company’s financial health and regulatory compliance but also safeguards against potential risks and maintains operational integrity. Below is a summary of the key responsibilities and requirements for the Board of a licensee, focusing on various aspects such as capital sufficiency, risk management, financial crime prevention, business continuity, and control measures:-

  • Minimum Board Members: At least two Board members are required.
  • Capital and Risk Monitoring: The Board must assess and monitor capital sufficiency, risk profiles, and asset quality.
  • Liquidity Risk Oversight: The Board must effectively oversee and be informed about liquidity risk
  • Risk Identification and Assessment: The Board must regularly identify, measure, monitor, and control business risks and ensure proper provisions for bad debts and other exposures.
  • Financial Crime Prevention: The Board must guard against financial crime and ensure compliance with regulatory and AML/CFT obligations through due diligence on customers.
  • Business Continuity: The Board must ensure adequate business resumption, disaster recovery, and contingency plans are in place and tested.
  • Control Measures: The Board must ensure controls for valid system changes, protection of electronic assets, and regular cross-checking and reconciliations are in place.
  • Digital Reporting

Under the revised Guidelines, LFSA has abolished the requirement for licensees to submit physical and softcopy of the audited financial statements. Instead, the licensee is now required to submit the audited financial statements via COR@L through its respective appointed resident secretary or trust company within six (6) months after the closure of each financial year.

Conclusion

In conclusion, the revised Guidelines issued by the Labuan Financial Services Authority on the establishment of money broking businesses in Labuan IBFC represent a significant step towards enhancing the regulatory framework governing this sector. By introducing new requirements for financial resources and business planning, specifying permissible activities, updating operational requirements, and emphasising stringent compliance with AML/CFT regulations, the LFSA aims to promote more excellent governance, transparency, and accountability among money broking licensees. These revisions not only ensure the stability and integrity of the money-broking industry but also safeguard the interests of all stakeholders, including clients and regulatory authorities. Overall, these updates are crucial for fostering a robust and resilient financial ecosystem in Labuan.

If you have any questions or queries, please contact our Financial Services Senior Associate, Mr. Aryn Rozali (aryn@nzchambers.com).

Author: Aryn Rozali