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PETALING JAYA: In the wake of lapses in controls in some banks, Bank Negara has introduced guidelines that effectively compel banks to enhance their governance and put in place an effective whistle-blowing policy.

As part of the measures, the central bank said that the boards of banks should comprise of a majority of independent directors.

“The independent directors should not be sitting in the post for more than nine years,” it said in a statement yesterday.

A check on the boards of the eight local banks indicated that only one bank had a majority of non-independent directors. Another two comprised an even number of independent and non-independent directors.

Bank Negara said that the standards would take effect immediately, subject to a transition period for certain requirements.

“Banks have to ensure that there are an equal number of independent and non-independent members in two years’ time. They are given up to five years to ensure that the board comprises a majority of independent directors,” said a banking executive.

On the whistle-blowing policy, the central bank outlined several measures that banks must establish a whistle-blowing policy that sets out avenues for legitimate concerns to be objectively investigated and addressed.

“Individuals must be able to raise concerns about illegal, unethical or questionable practices in confidence and without the risk of reprisal,” the central bank said in a press release yesterday.

According to the guidelines, a bank or financial institution must:

> clearly indicate the parties to whom concerns can be escalated within the financial institution;

> ensure that individuals are made aware of other avenues for whistle-blowing to regulators or law-enforcement agencies;

> communicate the whistle-blowing policy to third parties such as contractors, consultants and interns and allow them to report their concerns; and

> designate a non-executive director to be responsible for the effective implementation of the policy.

The whistle-blowing policy must also include evaluating periodic reports that monitor and assess how concerns are escalated and dealt with, and overseeing periodic reviews of the effectiveness of the whistle-blowing policy.

“Good governance is a critical component of sound financial institutions and plays a key role in maintaining public confidence in the financial system,” the central bank said.

The central bank added that the raised bar for the banks would strengthen the conditions for strong and effective boards, with greater emphasis on a sound risk culture and remuneration system in promoting prudent risk-taking.

In addition, the revised standards also address issues arising from more complex organisational structures and business models of financial institutions that have expanded in size and across borders.

“Collectively, this aims to set the gold standard for corporate governance in Malaysia, in line with the important role of financial institutions in the financial system and wider economy,” it said.

Bank Negara’s rules come following lapses in controls in at least two banks in recent times.

In November last year, Bank Negara fined the Ambank Group RM53.7mil for breaching the Financial Services Act.

The bank has said that it would improve its processes and invest more in the systems to overcome its shortcomings.

In April this year, the CIMB Group had to initiate an independent review of its processes to investigate the transfer of funds amounting to US$7mil that involved its chairman Datuk Seri Nazir Razak.

Nazir went on leave for a month and the investigations gave him a clean bill of health.

On the board composition of banks, the bank with the most number of independent directors is Alliance Bank, where seven out of nine directors are independent. None of the independent directors have served for more than nine years.

Five other banks – Malayan Banking Bhd, CIMB Group Holdings Bhd, Public Bank Bhd, RHB Banking Group and Hong Leong Bank Bhd – have a majority of independent directors on their boards.

And all the independent directors, except for one, have served less than nine years on the boards.

Affin Bank has an even number of independent and non-independent directors, with only one who has served more than nine years.

The Ambank Group has five out of 11 who are independent. However, an industry official said that the group is well-placed to comply with the latest Bank Negara ruling.