The real test of the proposed rules is whether financial institutions can identify unsuitable advice, correct it and show that their incentives do not undermine customer interests.
A financial institution can meet a sales target, issue a policy on schedule and retain a complete transaction file while still failing the customer who bought the product. The decisive question is whether the recommendation was appropriate for that person’s circumstances, and whether the institution can demonstrate that its sales system was designed to reach that conclusion rather than simply complete a transaction.
Bank Negara Malaysia’s proposed framework for insurance and takaful advice creates an opportunity to make that distinction more consequential. The exposure draft, issued on 30 September 2026, is open for feedback until 31 January 2027. Its eventual value will depend on how effectively the final requirements translate the principle of customer suitability into institutional practice.
Sales incentives are a legitimate feature of distribution. Institutions need commercial objectives, and intermediaries need workable remuneration arrangements. The regulatory concern arises when the way performance is measured rewards the volume or value of sales without adequately accounting for whether the resulting policies remain appropriate for customers.
A system that rewards immediate sales but pays insufficient attention to cancellations, early lapses, repeated replacements or persistent complaints can produce misleading signals about performance. High sales figures may reflect successful distribution, but they do not, by themselves, demonstrate the quality of advice. Equally, an early lapse or complaint does not automatically prove misconduct. The evidence must be examined in context, with recurring patterns treated as a reason to investigate rather than as a verdict.
For boards and senior management, the implication is practical. Sales performance should be assessed alongside measures capable of revealing poor customer outcomes. Remuneration structures, promotion criteria and intermediary oversight should be reviewed for incentives that may encourage unsuitable recommendations. Where a pattern of concern emerges, management should be able to explain what it investigated, what it found and what changed as a result.
The quality of advice is difficult to assess if a customer file contains only a completed application, standard disclosures and a signature. Those records may establish that a transaction took place. They may not adequately explain why a particular product was recommended over available alternatives, how affordability was assessed or whether material limitations were considered.
A stronger evidential standard would connect the customer’s circumstances to the recommendation. The record should make it possible for an independent reviewer to understand the needs identified, the constraints considered, the reasons the product was judged suitable and the material risks communicated to the customer. Where a policy replaces an existing arrangement, the rationale should also explain why the change was justified and what consequences the customer was expected to face.
This is not an argument for paperwork without limit. Excessive documentation can become a box-ticking exercise, especially if staff are measured by the speed with which they complete it. The objective should be a clear, proportionate record that supports a substantive decision and allows that decision to be tested later.
Complaints, claims experience and policy persistency can provide useful signals about distribution quality, but none should be treated as a standalone measure of misconduct. A customer may discontinue a policy because of changing circumstances; a complaint may be unfounded; and claims experience may reflect factors unrelated to the original recommendation. The value lies in examining these indicators together, identifying clusters or recurring patterns, and investigating whether the same weakness may have affected other customers.
When a problem is confirmed, the response should go beyond correcting an individual file. The institution should consider whether its product selection, training, sales targets, supervision or distribution arrangements contributed to the failure. Where customers have suffered detriment, remedial action should be timely and proportionate, including redress where warranted. The institution should also be able to demonstrate that corrective measures were implemented and that their effectiveness was checked.
This approach would make sales-quality monitoring a source of governance intelligence rather than a compliance exercise performed after the event. It would also give senior management a clearer basis for deciding whether an isolated incident requires individual action or reveals a broader weakness in the business.
The proposed framework covers a range of financial service providers and intermediaries, including banks, insurers, takaful operators, advisers and brokers. Their distribution models, technology systems and customer bases differ. A workable final policy should recognise those differences while preserving a consistent expectation that advice is suitable, evidence-based and subject to effective oversight.
BNM is considering a six-month transition period from the issuance of the final policy document. That period should be used to test whether revised controls work in actual sales settings, whether staff understand their responsibilities and whether management information can identify emerging risks. The consultation should also help clarify how institutions are expected to evidence compliance without encouraging unnecessary administrative burdens that add little protection for customers.
Reform should be assessed against a straightforward standard: Can a provider explain why a product was recommended to a particular customer, identify who was accountable for that recommendation, detect when its sales system produces poor outcomes and demonstrate that it corrected the underlying problem? Those questions go to the substance of responsible distribution.
Regulatory compliance matters, but it is not the final measure of a well-functioning advice system. The enduring test is whether commercial incentives, professional judgement and institutional oversight work together to protect customers from unsuitable products and avoidable financial harm. That is the outcome the final framework should be designed to deliver.