Labuan FSA: Three key policy initiatives in 2017

PHOTO: Muhammad (second right), Chin (second left) are seen with the industry players during the dinner.

October 28, 2016

LABUAN – Global operating environment had significantly changed where Labuan like any other international financial centre had to adapt to the new reality said Bank Negara Malaysia (BNM) Governor, Datuk Muhammad Ibrahim.

In his speech during Labuan Industry Annual Dinner 2016 on yesterday, he told that although modeled and adapted after other international financial centres, Labuan IBFC was always envisioned to benefit from overall growth and economic development in the region.

“Today it has become a centre for players in niche financial services such as aircraft and oil and gas leasing services, reinsurance and captive insurance.

“It is never intended to make domestic based business a focal point. And yet, at present, almost half of the insurance business here originates from Malaysian risks.

“Similarly, for the banking sector, over half of bank deposits here are derived from Malaysian residents. In fact, loans to Malaysian residents have more than doubled the last five years from USD5.9 billion in 2010 to USD12.9 billion in 2015,” he said.

He said further that such loans today accounted for 40 percent of Labuan’s total loans outstanding.

“This increases reliance on domestic business runs contrary to the central theme of Labuan IBFC’s global ambition. The reinvention of Labuan going forward should not lose sight of its original vision,” he said.

Meanwhile, Muhammad spoke on the strategies to reposition Labuan IBFC where the centre had already embarked on the journey by repositioning itself from an ‘offshore centre’ to a ‘midshore centre’ over the past few years.

“As a midshore centre, it offers both the ease of doing business found typically in offshore centres, combined with high international standards of regulation and supervision found onshore.

“We now need to further refine the midshore centre concept by moving away from broad-based financial services already widely offered and available onshore to focus on niche areas with high growth potential.

“These include leasing, captives, commodity trading and wealth management. These areas have continued to show an upward trend in driving the centre’s growth in recent years,” he said.

While, he said that the wealth management offered a unique value proposition given that it was the only international financial centre in Asia to offer private foundations and special purpose trusts, including Islamic foundations or waqf.

In the insurance space, the increasing interest among corporates to establish captives as a risk management strategy presents immense opportunities to offer risk solutions that complement the onshore activities.

The strategy of developing specialized areas would minimize overlaps and maximize complementarities between financial services offered by the onshore market and in Labuan IBFC.

Muhammad confident that with proper planning and execution, the midshore centre concept could very well be a game changer.

“Rates of retention for Malaysian risks in Labuan have been steadily declining from 66.2 percent in 2011 to 57 percent in 2015. Retention for offshore risks also reduced from 76.9 percent to 72.7 percent during the same period,” he said.

He did also highlight the tax review exercise that is currently in the works to harmonise the tax regime of Labuan IBFC with the national tax system.

Besides that, he pointed out that there was a need to elevate the level of connectivity between Labuan, the rest of this country and the region to better facilitate economic and financial linkages.

Regarding with initiatives undertaken by Labuan Financial Services Authority (Labuan FSA), Muhammad told that as the regulator of the centre, Labuan FSA had a critical role where it continued to strive towards ensuring that Labuan IBFC remained a vibrant and progressive business destination.

He also announced the three key policy initiatives that would be embarked upon in 2017.

The first one, the legal framework that was being reviewed to better reflect regulatory and supervisory policy intentions, as well as to ensure the legal requirements remain relevant and current.

Secondly, Labuan FSA would deploy more efficient systems for regulatory reporting and leveraging on technology.

Thirdly, Labuan IBFC would implement the Inter-Governmental Agreement of Model 1B. This would facilitate compliance by financial institutions here to the Foreign Account Tax Compliance Act (FATCA) and exchange information with the US.

Muhammad said that collaboration of various stakeholders was essential.

“Labuan FSA is collaborating with BNM, Labuan Corporation and the Finance Ministry to undertake a comprehensive positional review of the centre and the Labuan Island as whole.

“The outcome of the review, once finalized will ensure that Labuan IBFC emerges not only as a stronger international financial centre, but one with an enlarged role in the Malaysian financial system and economy,” he said.

The dinner was hosted by the Association of Labuan Trust Companies Malaysia at the Convention Hall of Financial Park.

Also present were the director general of Labuan FSA, Datuk Ahmad Hizzad Baharuddin and the chairman of the Association of Labuan Trust Companies Malaysia, Datuk Chin Chee Kee.

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