THERE is a strong correlation between capital markets and economic growth.

The capital market can help channel private funding to key strategic sectors of the economy, from corporates to infrastructure, housing, small and medium enterprises, and climate change.

Weak institutional and legal frameworks, lack of sound corporate governance at the issuer, timely and accurate disclosure of relevant corporate information, professional, qualified and accountable management, and adequate identification, measurement and control of risks, related-party transactions, disclosure failures, corruption scandals as well as undue political interference in the regulatory process or the lack of effective regulation all act as a disincentive for foreign funds that wish to invest in any of the country’s capital market.

Any concern about market oversight can act as a disincentive to foreign funds, too.

Over the past decade, institutional investors have played an increasingly important role in the development of our capital market as these funds searched for yields given the low interest rate environment in their own and other developed jurisdictions.

The integrity of the marketplace and the protection provided to the foreign funds and other investors alike are of paramount importance.

Trust and confidence in capital markets are also the main drivers of cross-border retail and institutional flows.

These qualities can be achieved by encouraging an efficient and effective supervisory and regulatory framework.

All these were set out in the 38 principles in the Objectives and Principles of the International Organisation of Securities Commissions (IOSCO), which represents the foundation for the securities regulation in any jurisdiction based on three objectives, namely protecting investors; ensuring that markets are fair, efficient and transparent; and reducing systemic risk.

The principles consider the enforcement and market oversight work of the regulator and close cooperation between regulators as essential to the achievement of the regulatory function.

The regulator is held accountable under the country’s legal and governing structure and at the same time, it appears to be operating independent of external political or commercial interference.

Based on the efforts disclosed publicly to date, Malaysia’s Securities Commission has been doggedly pursuing its objective of upholding the quality of financial reporting domestically while encouraging convergence towards a high-quality global financial reporting framework internationally to provide investors with information that is comparable, transparent and reliable.

It even adopted that International Disclosure Standards developed by IOSCO as this provides information comparable to the amount and quality of information that foreign funds from developed countries receive today.

Financial markets and investors depend on high-quality information to function effectively.

With increasing cross-border capital flows, investors look for high-quality and comprehensive information in the companies they planned to invest in.

Capital markets operate most efficiently when investors have access to such information.

However, ensuring that such information is provided to capital markets does not depend solely on the body of accounting standards used. An effective financial reporting structure begins with a reporting company’s management, which is responsible for implementing and properly applying generally accepted accounting standards.

Auditors then have the responsibility to test and opine on whether the financial statements are fairly presented in accordance with those accounting standards.

While the accounting standards used must be high quality, they also must be supported by an infrastructure that ensures that the standards are rigorously interpreted and applied, and that issues and problematic practices are identified and resolved in a timely manner.

High-quality accounting standards are essential because decisions on the allocation of capital rely heavily on credible financial information.

Active regulatory oversight is also essential to the success of a high-quality financial reporting framework. It reinforces the application of accounting standards by companies and their auditors in a rigorous and consistent manner and assists in ensuring a high-quality audit function.

The recent spate of resignations at the Securities Commission has created a gap that needs to be addressed to strengthen the capital markets for foreign funds to continue to invest in the country.

With the finance minister’s background as an investment banker, the above issue should be very clear to him.

Or does he care how the capital markets function and develop during his watch as the finance minister? – April 30, 2022.

* FLK reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.