While this may not change dramatically in the very short term, we cannot preclude a significant share of bank revenues being eroded by new entrants into the financial sector. We are already seeing this in the retail lending and payment segments of the market. FinTech will most likely change our banking landscape as the public at large becomes more predisposed to the use of technology. The intermediation role of banks may totally change, and may no longer be the sole domain of the banking industry. So it is in the banks’ interest that any public disillusionment with banks be addressed preemptively. The role of compliance is very much a part of this conversation. It has to be, since the compliance function exists not only to ensure that rules are followed by banks. It can be used to 3/5  BIS central bankers' speeches  maintain public trust and to shape the cultural norms and values for an organisation. The compliance function complements enforcement and supervisory actions in upholding the sanctity of rules that safeguard public interests. Bank Negara Malaysia will continue to take strong enforcement actions against institutions with significant lapses in controls that might lead to risks in the financial system. We recognise that compliance is not an easy task. It is not possible to police every minute detail of a bank’s operations. Hence, a key priority should be to foster a culture of compliance within the inherent norms and values of an organisation.
The degree of intrusiveness in regulatory requirements will swing from one end of the pendulum to the other, before settling somewhere in the between. This process can often be disruptive and unproductive, not only to financial institutions, but also to the wider economy. This leads me to my next point on the broader social and economic consequences of weak compliance. In most banks, the compliance function has mainly served to ensure that a bank is operating within permitted legal and regulatory boundaries. In such cases, the compliance function effectively does little more than constrain a bank from activities that increase compliance risks. So rather than work with business units and customers to close gaps that contribute to heightened risks, compliance officers are seen as gatekeepers rather than partners. This is an important distinction with potentially significant consequences for a bank’s risk-taking activities. I can give you at least three examples of this. When we issued revised standards on loan provisioning, one of the requirements was for banks to classify loans as “impaired” if the loans were restructured or rescheduled following an increase in credit risk. Rather than focus on how banks might strengthen internal assessments to better identify and measure changes in credit risk, many banks simply withdrew altogether 2/5  BIS central bankers' speeches  from entertaining requests from borrowers to restructure and reschedule their loans. SMEs were hit the hardest, requiring Bank Negara Malaysia to intervene.