Part 2
Below is the second instalment of Wong & Partners’ article on interest offerings, continued from the March issue.
The Competition Commission of Malaysia (CCM) also considers gym memberships of year or more as being subject to the scheme of regulation of interests under the Companies Act, as the result of the 1992 amendment to the definition of investment contracts. This provides that “any contract, scheme or arrangement which in substance and irrespective of the form thereof entitles the investor to a right to use or enjoy any sport, recreational, holiday or other related facilities for a consideration and for a duration of not less than twelve months whether or not on a recurring basis” amounts to an “interest”.
The CCM has recently proposed guidelines governing the offerings of gym memberships, but the point may be made that the scheme of regulation under Division 5 of Part IV — which, among others, requires the appointment of a trustee — is an overkill in the context of offerings of gym memberships, in particular where the business model is more akin to the provision of services rather than membership of an association.
It is clear, however, that regulatory intervention is required to protect consumer, as shown by the much publicised failure of The Yoga Zone Group, which left subscribers to its yoga club — many of whom had paid significant sums for life memberships — high and dry. The challenge faced by the CCM is to ensure that its regulation does not introduce unacceptable costs of compliance for legitimate operators, and to this end, it may be argued that a one-size fits all approach may not be appropriate.
Interests V collective investment schemes
A more fundamental structural issue lies with the distinction between interests and unit trust schemes. Following the establishment of the Malaysian Securities Commission in 1993, interests in unit trust schemes have been regulated as securities in a separate regulatory regime administered by the Securities Commission.
From a policy perspective, there is little to justify the differing treatment of investment products by the CCM under the Companies Act and the Securities Commission under its Capital Markets and Services Act, in particular when promoters can structure products with similar economic features under either regime. Parallel schemes of regulation create opportunities for regulatory arbitrage, when market participants see an incentive to structure products under a particular scheme of regulation that they perceive as being more favourable to their interests.
There is also a definitional and conceptual difficulty to overcome in the interaction between an interest under the Companies Act and a unit trust scheme under the Capital Markets and Services Act. The definition of interest specifically excludes any participatory interests in a unit trust scheme under the Capital Markets and Services Act.
Once a product is considered an interest, the scheme of regulation under Division 5 of Part V imposes the requirement for the establishment of a trust. However, under the Capital Markets and Services Act, “an arrangement having the effect of providing facilities for the participation of persons as beneficiaries under a trust in profits or income arising from the acquisition, holding, management or disposal of securities, futures contracts or any other property” is to be regarded as a unit trust scheme. This leaves us with the paradoxical situation where the act of complying with the requirement of Division 5 of Part IV in connection with a particular product offering will result in that product being regarded as a unit trust scheme and therefore outside the scope of regulation of the Companies Act.
Regulatory oversight of offerings of interest is necessary and essential, and the recent regulatory action taken by the CCM is certainly timely, in the light of the failures of UK Land International and The Yoga Zone. However, there are key policy and structural issues that should be addressed:
- The breadth of the definition of interest makes it essential, in the interests of certainty, for the CCM to provide guidance to market participants on product offerings that it would consider as being subject to Division 5 of Part IV of the Companies Act.
- The scheme of regulation should be flexible enough to accommodate a wide range of product offerings, and there should be regulatory authority and discretion to exempt compliance with particular rules where the costs of compliance outweigh the regulatory benefit.
- Legislative reform is necessary not just to reconcile the distinction between interests and unit trust scheme but also in the interests of functional regulation, to ensure that products with similar economics are treated in like fashion.
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Azizul Azmi Adnan
Wong & Partners
Tel: (603) 2298 7886
Fax: (603) 2282 2669
Email: azizul.azmi.adnan@wongpartners.com
Website: www.wongpartners.com |