‘Just-in-case’ protection systems for financial consumers

Formula One (F1), the world's premier motorsport competition, never fails to thrill and excite fans, and this year's championship is no exception. As we anticipate the upcoming race in Azerbaijan from 28 to 30 April, it's important to remember the lifesaving impact of the ‘halo’ device and the crucial role it played in saving Romain Grosjean’s life at the 2020 Bahrain F1 Grand Prix. Grosjean’s story is a testament to the importance of having effective protection mechanisms in place. Prior to the turn of the millennium, such a dramatic escape would not have been possible had it not been for the halo, a driver crash-protection system.

The halo was poorly received by F1 drivers upon its 2018 debut. Aesthetics aside, the rarity of severe accidents for which the halo was designed to withstand, again became a fundamental criticism for many years.

The same went for the V-type three-point safety belt invented in 1959 by Volvo engineer, Nils Bohlin. Eventually, its life-saving advantage won out and they are now widely accepted safety features for vehicles.

These analogies can be applied to Malaysia’s financial system, where the Asian Financial Crisis in 1997/98 prompted institutional reforms that have created a strong and stable financial system today. One such reform was the establishment of the Perbadanan Insurans Deposit Malaysia (PIDM) in 2005, which provides financial consumers ‘just-in-case’ protection through its Deposit Insurance System (DIS) and Takaful and Insurance Benefits Protection System (TIPS).

PIDM also holds a risk minimiser mandate to protect the financial system by assessing and managing risks and by having comprehensive early intervention and resolution powers to deal with troubled member institutions at the least cost to the financial system.

Similar to how the halo provides a sense of safety and reassurance to F1 drivers, PIDM’s role and functions are intended to provide financial consumers with a sense of security and confidence in the Malaysian financial system, even during challenging times.

Why we need ‘just-in-case’ protection systems

In F1, there are both ‘just-in-time’ measures, like pit stops for repairs, and ‘just-in-case’ safety measures that anticipate and mitigate risks ahead of time for safe racing conditions.

PIDM's protection systems have three just-in-case features.

First, PIDM's risk-based differential premium and levy systems collect funds from member institutions before a potential crisis occurs. The collection rates are determined by the member institutions’ individual risks, promoting sound risk management in the financial system.

Second, PIDM acts as a resolution authority for its member institutions, intervening early and resolving any troubled member institution with legislative powers and tools that minimise costs to the financial system.

Third, the financial safety net structure, comprising BNM, PIDM, and the Ministry of Finance, seeks to prevent and deal with failures of member institutions, promoting policy coordination and joint efforts to improve crisis preparedness.

A failure of a bank or insurer, undoubtedly, is seen as a low likelihood event, especially in a financial system that is strong and resilient like Malaysia’s. However, through the experience of others, we have seen that such failures come with a high impact that can completely derail financial systems and economies if we are not well-prepared to handle them when they happen. It is for this reason that PIDM remains ready to activate its protection systems to maintain public confidence in the Malaysian financial system during potential crises. As seen in other jurisdictions, the just-in-case protection systems like PIDM’s have proven their worth during times of financial crisis.

Foresight is better than hindsight

William Blake, the famous English poet, once said, “hindsight is a wonderful thing but foresight is better, especially when it comes to saving life, or some pain”. In Grosjean’s case, it was the foresight of the engineers, campaigners and regulators who believed in the halo that saved his life. The same goes for those indebted to Bohlin’s three-point seatbelt.

As for the millions of financial consumers in Malaysia, PIDM’s resilient protection systems born out of foresight will ensure that in case the unexpected happens, life can go on for them and their loved ones. 

By Rafiz Azuan Abdullah

This is Part 1 of the ‘Insights into PIDM’ series. Watch out for Part 2 on April 21 with the title “Re-enforcing ‘Just-in-case’ with ‘What if’: Navigating financial crises for a better tomorrow”.
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