Labuan IBFC: Well-Regulated And Robust

IFC: What have been the biggest achievements of Labuan FSA since its establishment over 25 years ago?

LFSA: The progressive and robust guidance of Labuan FSA had been instrumental in charting the strong growth and development of Labuan IBFC in respect of socio-economic development of the nation and Labuan island, which has been in the context of several momentous accomplishments:

i) Double digit growth in new licences - trust companies, fund managers, commodity trading companies, leasing, digital players (90 entities) and Islamic finance assets, while some years registered slower growth impacted by the global crisis.

ii) Tax revenue collection tripled to more than RM900 million in 2021 compared to RM300 million in 2020.

iii) Contributed more than 60 per cent towards the GDP of Labuan island. Labuan IBFC is one of the largest employment providers on the island, with more than 6,000 people employed in the IBFC.

iv) About 5,000 companies and investors from 125 countries across six regions are domiciled here and many are well-known brands around the world.

v) Labuan IBFC currently has more than 900 licensed entities covering banks (66), insurance & insurance-related (228), trust companies (71), leasing (263), commodity trading (LITC - 42), fund managers (37), securities licensee (20), money brokers (105) etc. (as at September 2022)

vi) International recognition - Labuan IBFC won the Best International Captive Domicile at the European Captive Review Awards in 2021 and best Asian Domicile award at the APAC Captive Review Awards 2021, for the third year running.

Regulatory Achievements

Labuan FSA is a strong advocate for greater transparency and has embraced international compliance as compared with some of its peer regulators.  Labuan FSA’s interlinkages are key for Labuan to be globally recognised and align its regulations on par with international standards, and for Labuan IBFC to continue to be visible within the international regulatory community.

i) Labuan IBFC’s good international standing / assessments -

- IMF/WB (Prudential regulations) - Strong legal and regulatory framework

- APG & FATF (AMLA) - Low risk jurisdiction

- OECD (Tax transparency & EOI) - Largely compliant

- OECD (Harmful Tax Practices) - Not Harmful

- Comply to Economic Substance Requirements

ii) Labuan FSA is a member of the fraternity of regulators in several international organisations, i.e. Group of International Finance Centre Supervisors (GIFCS), International Association of Insurance Supervisors (IAIS), Global International Insurance Centre Supervisors (GIICS), Asia/Pacific Group on Money Laundering (APG), International Organisation of Securities Commission (IOSCO), Financial Action Task Force (FATF) and International Islamic Financial Market (IIFM).

iii) We have signed 24 bilateral MOUs with international and domestic counterparties in Europe, the Middle Eastern region and our Asian-Pacific neighbours to strengthen supervisory cooperation.

The notable achievements are attributed to forward-looking strategies, innovative measures and impactful action plans undertaken by Labuan FSA, leading to the evolution of Labuan IBFC into the internationally renowned, award-winning pillar of growth as we see it today.

IFC: How important is Labuan’s regulatory regime to the success of its financial services sector?

LFSA: Labuan IBFC was built on a strong foundation comprising a set of comprehensive modern legislations coupled with internationally conforming regulations that preserve market orderliness and stability. The strong adherence to high international standards of regulation promote a sound and stable financial services sector that has boosted investors’ confidence in the centre. It also strengthens the resilience of industry players to better weather any business adversities and crisis.

Regulatory requirements are continuously being reviewed to ensure sufficiency, practicality and proportionality to preserve a market environment that is business facilitative and well-regulated – a prerequisite for international business. This balancing strategy is a key feature that has appealed and attracted numerous internationally renowned financial institutions and multinational groups to establish in Labuan IBFC.

For global investors that are searching for credible and well-regulated financial centres supported by a network of professionals and intermediaries, Labuan IBFC offers this exceptional combination.

IFC: A memorandum of understanding (MoU) was recently signed between the FSA and the Securities Commission Malaysia (SC) to achieve greater regulatory, enforcement and supervisory cooperation. What benefits does the FSA envisage will come from this agreement?

LFSA: Through the enhanced collaborative arrangement with the SC, we look forward to building a more robust, innovative and stable regulatory environment to further spur the growth of the Labuan capital market segment to benefit our markets, participants and investors.

We also hope the MOU will also pave the way for a continued long-standing collaboration between both regulators, ensuring the steady development of the capital market industry in Labuan IBFC and Malaysia’s capital market landscape.

IFC: What strategies does the FSA employ to combat money laundering and the financing of terrorism?

LFSA: Labuan IBFC has been classified as a “low risk” jurisdiction in terms of money laundering or terrorism financing threats in two AML/CFT risk assessments, namely, the Sectorial Risk Assessment and Labuan Risk Assessment undertaken on Labuan IBFC and coordinated by the National Coordination Committee to Counter Money Laundering (NCC).

This is attributed to Labuan FSA which has been consciously driving the fight against money laundering and terrorism financing through subscribing, implementing and enforcing internationally accepted standards.

On the international front, Labuan FSA continues to strengthen our cross-border collaboration with regional and international regulatory bodies through signing of more MOUs and home-host arrangements to share and exchange information and foster cooperation in the supervision and enforcement of cross-border financial institutions.

At national level, Labuan FSA is a member of the National Coordination Committee to Counter Money Laundering (NCC) - a body responsible for coordinating, implementing and monitoring Malaysia’s AML/CFT initiatives. As a NCC member, we commit to carry on initiatives for any specific focus area such as the targeted financial sanctions on terrorism financing and proliferation financing.

At the Authority level, Labuan FSA continues to increase awareness of the industry’s compliance with AML/CFT regulatory requirements. This includes greater identification of emerging risk and trends, intensified monitoring institutions through on-site, off-site supervision and enforcement action. Labuan FSA cooperates closely with other enforcement agencies including statistical collation for monitoring purposes to strengthen the macro-assessment of money laundering risks in Labuan IBFC.

IFC: How do you balance the demands for regulatory measures with ensuring that the jurisdiction remains sufficiently innovative to meet client expectations?

LFSA: Labuan FSA has adopted a pragmatic approach to effect proportionality in regulations where the right-sized regulatory approach reflects Labuan IBFC as an agile centre dealing with sufficient market conduct and prudential safeguards while pacing business development and innovations.

To achieve and maintain this balancing act, Labuan FSA subscribes to three key principles-

i) Adaptability – to mould international standards to suit Labuan’s own context, as it would be highly impractical to adopt a “lock-stock-and-barrel” worth of international rules and expect these to be a perfect fit to the local market.

ii) Comparability – to benchmark and pick on commonalities of different jurisdictions’ regulatory approach vis-à-vis Labuan’s own features and circumstances.

iii) Proportionality – to distinguish the differing characteristics of the various business segments within the Centre so as to ensure regulations are fit-for-purpose and commensurate with their risk profiles.

We are constantly assessing the approach to ensure appropriateness vis-à-vis growth development and maturity of the overall market in Labuan IBFC.  To us, what is paramount is not the volume and speed of regulations issued, but rather that the right rules are rolled out to the right market segments at the right time.  

IFC: The FSA recently signed a Corruption-Free Pledge with the Malaysian Anti-Corruption Commission – what is hoped to be achieved with this agreement?

LFSA: We hope the Corruption-Free Pledge will reinforce the corruption-free stance of Labuan FSA and set a clear leadership tone in developing a culture built upon ethics, accountability and trust, so that we can deliver quality and sustainable work in global standards.

It is also hoped that the pledge would promote greater integrity and good governance as we value transparency and ethical corporate governance in all our businesses and procedures.

IFC: Labuan’s digital industry has shown continued growth in recent years, with the establishment of a wide range of digital banking and insurtech businesses. What is the FSA’s regulatory approach for creating a successful digital jurisdiction?

LFSA: Labuan IBFC has used existing licences such as money brokers and credit token licences to provide the regulatory umbrella for digital business to be carried out.  One could say that is innovation itself.  

As a regulatory body, it is incumbent on us to ensure digital financial businesses are sound and have proper market conduct practices. Towards this, Labuan FSA has rolled out two policies namely, Guiding Principles on Business Continuity Management and Digital Governance Framework to the market to embrace digital transformation. These measures are aimed at -

i) enhancing business contingency planning to minimise material consequences arising from any major operational disruptions; and

ii) strengthening cyber resilience for digital operations to ensure operational agility and efficiency.

We will also be formulating a digital asset regulatory framework, including tokenisation of non-securities via digital platform and to enhance existing requirements for dealing with digital assets and on digital exchange platforms. This is to provide requirements to govern digital assets business to ensure compliance with international standards, as well as to comply with FATF’s Recommendation, especially dealing with virtual assets and virtual asset service providers.

IFC: Labuan is well-known for its extensive suite of Islamic financial structures and solutions.  Can you tell us your plans to further develop Islamic Finance in Labuan IBFC? 

LFSA: Labuan IBFC has a comprehensive Islamic infrastructure with dedicated legislations, regulations and guidelines as well as fiscal incentives which provide facilitation and flexibility for innovation in structuring Shariah compliant solutions. The Shariah governance supports and accords certainty as well as integrity for Shariah-based structures.    

We will be elevating the Labuan Islamic ecosystem through embracing financial technology inclusive, where we will be proactive in developing new regulations that integrate Islamic finance, the ESG agenda and financial innovations together.

i) One of our commitments is to develop the Islamic Digital Asset initiative which is embedded in the Labuan IBFC Roadmap 2022-2026 to make Labuan IBFC a digital gateway with Islamic finance capabilities for all types of global investors and players.

ii) To that effect, Labuan FSA has recently unveiled Labuan IBFC as an Islamic Digital Asset Centre (IDAC) in Asia which comprises Islamic digital solutions and infrastructure such as the Islamic digital tokens or RAMZ, Islamic digital exchanges, Islamic digital banks, liquidity platforms etc.

iii) Labuan IBFC also launched Labuan’s first Islamic/ESG Digital Exchange - potentially the first in the world. The exchange enables corporates and small and medium enterprises to raise funds and tap ESG and Islamic investors globally by digitally securitising or tokenising their assets or commodities such as gold, property real estate or even carbon credit, via securities token offering (STO) to back their fund-raising exercise.

iv) Tokenisation will allow retail investors to participate in this digital asset investment that is seen as a new asset class.

v) In pursuing the IDAC agenda, the Shariah Supervisory Council of Labuan FSA issued a pronouncement in February this year on the minimum compliance criteria for the offering of Labuan Islamic digital-based solutions, to highlight the Shariah permissibility for such offerings. We will continue to support the sector development with enabling policies, including enhancing capital adequacy requirements, modernising corporate governance and improving internal controls, with Shariah focus.  

IFC: In August 2022, the FSA issued the Insurance Capital Adequacy Framework (ICAF), a set of risk-based capital regulations for Labuan’s insurance industry. How will the ICAF enhance the jurisdiction’s insurance market?

LFSA: The ICAF requires Labuan insurers to maintain a sufficient capital adequacy ratio above the minimum regulatory stipulated threshold. The capital buffer created serves as a shock absorber for insurers to withstand any risk exposures from market uncertainties. ICAF also modernises the Labuan market’s risk management practices as it disciplines insurers to maintain sufficient capital that is commensurate with their business risk appetite. This ensures key risk exposures to insurers are actuarially quantified and managed prudently as part of their ongoing financial management.

The new regulatory framework also complements the Risk-based Supervisory Framework by enabling our supervisors to identify, monitor and address the risks early in a systematic manner, thus improving supervisory decision making via the comprehensive financial risk information of individual insurers.

IFC: Labuan IBFC recently published a white paper in collaboration with Z/Yen Group, which explores the 'recalibrated' role that IFCs play in the delivery of Sustainable Development Goals (SDGs). What new strategies are being employed to enhance Labuan’s position as a sustainable finance hub?

LFSA: Labuan IBFC’s ESG agenda will be guided by the national agenda.  As a global shift towards a greener and more inclusive economy is gathering pace, Labuan FSA is also speeding up efforts in driving transformation to support the sustainable finance agenda.  

ESG efforts that Labuan wants to look more towards are –

i) To focus on business solutions that support ESG and sustainability thrusts i.e. digital innovation and Islamic finance solutions.

ii) To champion the sustainability agenda among Labuan financial institutions as part of governance enhancements.

iii) To deepen climate risk management and resilience by promulgating good risk management practices in respect of impact of climate changes to financial institutions.

As an organisation, Labuan FSA is also undertaking efforts to incorporate sustainability into our organisational governance.  In fact, we have in the past undertaken various ESG initiatives including social and environmental areas and we will continue over the next five years to build our own internal sustainability team to drive climate change and ESG initiatives that we going to undertake.

IFC: What challenges and opportunities lie ahead for Labuan’s financial services industry; and where can we expect the FSA to focus its efforts in the immediate future?

LFSA: The Labuan financial industry continues to face various challenges due to a combination of factors such as escalating geopolitical tensions, persistent global inflationary pressures and supply chains constraints.  The regulatory landscape is also expected to experience further changes. 

In this regard, we will ensure that the thrust of initiatives and development for Labuan IBFC will continue to be focused on ensuring that the well-regulated and robust IBFC is preserved. This will be achieved through several developmental and policy initiatives including the effective adoption of international standards and enhancing disclosure and transparency standards in line with international best practices. Regional cooperation in the areas of cross-border surveillance and supervision will also be strengthened.

At the same time, significant focus will also be accorded to developmental strategies to enable the centre to reap the benefits presented by the new landscape, particularly by looking at three business sectors growing in Labuan IBFC –

i) Islamic Finance – There is continued expansion of the global Islamic finance industry with double-digit asset growth to US$3.4 trillion in 2020, which is projected to rise to almost US$5 trillion by 2025. This certainly reinforces Labuan IBFC’s position to investors seeking Shariah-compliant investment instruments.

ii) Digital-based solution – Labuan IBFC has a comprehensive digital ecosystem comprising security token issuers, digital trading platforms, digital custodians and mobile wallets, complemented by other digital intermediaries such as digital banks, insurtech and digital assessment management.

There is a demand for tokenisation, with the market expected to grow 50 times from US$310 billion this year to over US$16 trillion by 2030. This provides impetus for Labuan IBFC to play a significant role as a fund raising and investment hub in the global digital space, with a niche in ESG and Shariah compliant activities.

iii) Captive Insurance – The global ESG agenda in climate change and the rising cost of cyber risks present an opportunity for Labuan captives as an alternative risk transfer at reducing cost. By self-insuring contemporary risks which are uninsured or under-insured in the market, this would enable corporations with extensive risk portfolios to better bundle and diversify them, and to have direct access to global insurance and reinsurance markets.

Nik Mohamed Din Nik Musa
Nik Mohamed Din Nik Musa is Director General of Labuan FSA. He specialises in the regulation, supervision, enforcement and market development of international finance of the Labuan IBFC; as well as domestic banking regulations; money services business regulation and supervision; regulation and promotion of Islamic banking and finance. He is Vice Chairman of International Islamic Financial Market (IIFM) in Bahrain - a global standard-setting body of the Islamic Financial Services Industry (IFSI) focusing on standardisation of Shariah-compliant financial contracts and product confirmations. He is also Chairman of the Financial Stability Committee of Labuan FSA, preserving the financial stability and integrity of the Labuan International Business and Financial Centre (IBFC). The committee’s deliberations cover regulatory and relevant developmental policies, market supervision and surveillance, including risk assessment in respect of key financial services and capital markets of Labuan IBFC.