The Multiple Regulator Model: A Case of Too Many Cooks?

1 Introduction

The growing prominence of nonprofit organisations that operate outside the boundaries of the public and private sectors has ignited the interest in methods and outcomes of their regulation (Breen, Dunn, and Sidel 2017; Cordery 2013; DeMattee 2019; Sidel 2003). The role third sector organisations (TSO) play in the provision of social and welfare services requires them to be closely monitored to safeguard stakeholders’ interests, and to build trust in the sector. Regulation governing the sector, its organisations and activities, determines what is permitted and prohibited through a combination of laws and constitutional protections. In the pursuit of public interest, regulation guards against market failures, externalities and moral hazards; protecting stakeholders from actuarial, sociocultural and political risks (Haines 2017). Supervision also includes self-regulation through the implementation of codes of good practise (Breen 2017), and closer integration of self and state regulation leads to stronger accountability systems (Phillips 2019). Stigler’s (1971) public interest theory asserts that regulation is necessary to protect the public from risks arising from information asymmetry. Imposing minimum reporting standards would enable third sector data to be publicly available, facilitating scrutiny by stakeholders (Cordery 2013). Such availability of reliable data and stakeholder scrutiny would also make identification of anomalies easier and avert major scandals like the ones involving OXFAM and Kids Company.

Despite the strong case for regulation, Zulkhibri (2014) argues that regulating the third sector constrains its existence, operations and activities by creating barriers to operational activities, independent speech and resources. He found that most legal frameworks in developing countries to be counterproductive and burdensome. Regulations are also identified as a barrier to TSOs’ participation in advocacy, political and economic activities (Bloodgood, Tremblay-Boire, and Prakash 2014). Regulation does not achieve its objectives when regulators’ priorities are misplaced, slow to react or not given adequate resources and support from the state (Phillips 2019). Similarly, a light touch regulatory environment is not sufficient to improve accountability and build public trust (Cordery 2013).

Malaysian TSOs and charities are governed by different regulators and laws based on their chosen legal form. They can choose to register as societies with the Registrar of Societies, or as non-profit companies limited by guarantee with the Companies Commission of Malaysia, or foundations with the Legal Affairs Division of the Prime Minister’s Department. Youth societies are registered with the Registrar of Youth Societies while the Sports Commissioner’s Office registers sports associations. Charitable trusts and foundations can also be registered at the Labuan International Business and Financial Centre. While different legal forms may be required for different activities or functions (Anheier and Toepler 2019), different and possibly duplicate regulations governing organisations with similar objectives is inefficient and may not effectively address important issues affecting the sector (Lyons 2003).

There have been no in-depth studies on the multiple regulator model of the Malaysian third sector. Previous studies mainly centred around the description of laws and legal frameworks, without detailed examination of the impact of multiple regulators or the regulatory challenges faced by third sector organisations (Ali and Hassan 2017; Arshad et al. 2011; George 2001). Other recent studies focus on financial reporting (Ali et al. 2012; Arshad et al. 2013; Atan, Zainon, and Wah 2013; Hasnan et al. 2012; Zainon et al. 2011; Zainon, Atan, and Wah 2014) and terrorist financing (Ali et al. 2011; Hamin 2018; Omar 2016).

This study aims to uncover the impact of multiple regulators on the sector, thus enhancing understandings of Malaysia’s complex legal and regulatory framework for the third sector. This paper asks: what is the preferred legal form for Malaysian TSOs? Does the duplicate regulatory environment protect the interests of stakeholders? Can different regulations governing organisations with similar objectives effectively and efficiently address pressing issues faced by the sector? The challenges faced by Malaysian TSOs are explored, detailing how they cope with the current legal and regulatory environment.

This paper begins with an overview of the legal and regulatory framework governing Malaysian and selected South East Asian third sectors. This is followed by an analysis of key themes from interviews with TSO leaders and regulators, to uncover their insights on the issues faced by the sector vis-à-vis how the sector is regulated. The paper concludes with suggestions to enhance third sector regulation in Malaysia.

2 Malaysian Third Sector Regulation

Malaysia is comprised of 11 states in the Malay Peninsula, two states on the island of Borneo and three federal territories, two in the peninsular and one in Borneo. British influence in Malaysia began in 1786 and ended in 1963, hence many regulations in place today had their origins in laws passed by colonial administrators.

The right to associational life is guaranteed by the Malaysian constitution under article 10(1)(b): all citizens have the right to assemble peaceably and without arms, and 10(1)(c): all citizens have the right to form associations. Regulation of non-governmental and non-commercial organisations in Malaysia began in 1869 with the enactment of Ordinance XIX: An ordinance for the Suppression of Dangerous Societies. This legislation was a response to the frequent riots between Chinese clan organisations, known as “secret societies”. The 1869 ordinance however, only served as a means of registering the secret societies and did very little to control their activities (Cheng 1972). Amendments were made in 1913 to introduce the “Registrar of Society”, responsible for registration and regulation of societies. A much-revised Societies Ordinance was passed in 1949, which compels all societies in the Federation of Malaya to register or to apply for exemption from registration. In 1966 the Societies Ordinance was replaced with the Societies Act, itself a merger of three ordinances: the 1949 Ordinance for the Federation of Malaya, the 1957 Ordinance for the State of Sarawak and the 1961 Societies Ordinance of the State of Sabah.

The Societies Act however, only governs associations; there are many other Acts and Enactments that govern charities and charitable activities (Ali and Hassan 2017; Arshad et al. 2011; George 2001). Other laws governing TSOs include the Trustee (Incorporation) Act (1952) which governs trusts and foundations, and the Labuan Foundation Act (2010) which regulates charitable foundations registered in the Labuan midshore financial centre. Besides the charitable and voluntary organisations listed above, each state in Malaysia manages its own waqf (Islamic trust), and Hindu endowment bodies which are governed by separate state level legislation.

The laws and regulations governing the Malaysian third sector are thus fragmented and in need of rationalisation (Ali and Hassan 2017; George 2001), with some laws seen to be restrictive and repressive (Arshad et al. 2011). Such claims are, however, not unusual as efforts to monitor and regulate the activities of non-governmental and civil society organisations have been present since the colonial period (Douglas 1972).

Multiple agencies regulating third sector organisations are not unique to Malaysia. TSOs in the Philippines come in three different forms, and are regulated by two different regulators depending on their activities. Philippine mutual benefit associations, however, are not classified as charitable or benevolent organisations as they are defined as insurance companies under Chapter VII of the Philippine Insurance Code. Indonesia has two types of TSOs with legal status and also allows “societal organisations” to operate without legal entity status. In Vietnam, four different ministries oversee five types of TSOs. Singapore, despite having a central regulator that oversees third sector organisations and their activities, allows charities to choose their preferred legal form. The only exception is Thailand where the Interior Ministry oversees all locally registered foundations.

South East Asian countries have a similar regulatory pattern to Malaysia with multiple registration and supervision agencies (Hasan 2008). Appendix 1 presents a snapshot of the legal forms and regulators for the selected countries.

3 Malaysian Third Sector Regulators

Other than trade unions, youth and sports organisations which are required by law to register with the Department of Trade Unions (JHEKS), Registrar of Youth Societies (ROY) and the Sports Commissioner’s Office (SCO) respectively, other TSOs, are free to choose their preferred platforms from amongst the other regulators. A Malaysian third sector organisation can only be registered with one regulator; dual or multiple registrations is not allowed. Appendix 2 shows the distribution of Malaysian TSOs according to regulator. This, however, does not present the complete picture of the Malaysian third sector. A number of TSOs are not registered with the above-mentioned statutory bodies but are governed by individual Acts of Parliament. Appendix 3 lists these TSOs and their governing Acts of Parliament.

The seven regulatory bodies are themselves governed by different Acts of Parliament. They generally have differing treatments of most aspects of governance, but they all have a common task – monitor TSOs that choose to or are required to be registered with them. Appendix 4 lists the ministry overseeing each regulator and its governing law. Apart from ROY and SCO all other regulators report to different ministries. Appendix 5 lists the types of organisations regulated by each regulator. The Legal Affairs Division only regulates trusts and foundations domiciled in Peninsular Malaysia; all other regulators oversee TSOs registered anywhere in Malaysia.

Other government bodies that oversee third sector organisations include the Inland Revenue Board which approves and regulates organisations with tax exempt status, and Bank Negara Malaysia (the central bank) which monitors TSOs to prevent them from being used for money laundering or terrorist financing. Consequently, different TSOs are governed by different regulations and laws. This multiple and duplicate regulator environment could lead to inconsistencies in regulation especially when similar issues are treated differently by different regulators. This could result in what Phillips (2019) terms as “gaps in regulation”. Despite the multiple regulators, a few studies found that Malaysian TSOs face minimum regulatory requirements with no financial reporting and governance framework (Arshad et al. 2013; Atan et al. 2012; Hasnan et al. 2012; Othman and Ali 2014).

4 Methods and Scope

This paper gathers the experiences of Malaysian third sector actors and regulators through interviews, to understand the sector’s regulatory regime. It attempts to “understand the world from the subjects’ points of view and to unfold the meaning of their lived world” (Kvale 2006:481). Interview participants were selected through purposive sampling based on a researcher-defined criterion. This non-random sampling technique depends upon the researcher’s judgement without an underlying theory or fixed number of respondents (Tongco 2007). Despite having the objective of a sample that represents the diversity of a population, purposive sampling does not involve proportionality (Battaglia 2008; Palys 2008). Purposive sampling is deemed to be appropriate where a limited number of reliable primary data sources are accessible (Teddlie and Yu 2007).

All interviews were conducted in April 2017 in Malaysia. Potential participants from the sector were contacted via email and those who did not reply within 10 working days were replaced by another candidate.

Twelve individuals representing 11 third sector organisations were interviewed. Selection was crucial to ensure data quality and for this reason only senior officers with decision making powers were selected. They are considered accurate and reliable witnesses as they have experience and in-depth knowledge of the sector, its organisations and activities, and hence, are able to provide greater insights (Welch et al. 2002). Details of the respondents are presented in Appendix 6. In addition to the third sector actors, senior officials from three regulators were also interviewed, giving a total of 14 interviews in the study

This research employs an abductive research strategy (Timmermans and Tavory 2012) as it addresses both “what” and “why” research questions from a limited sample. An abductive design aims to describe and understand the social phenomena from the perspective and worldview of its actors.

The interviews were tape recorded and transcribed verbatim but omitted non-relevant conversations such as icebreakers, fillers, and unnecessary repetitions. Grammar was not corrected but non-English lexical items, including those considered dialectal and slang words, were converted into Standard English. Transcribed conversations are explained in the paragraph following the quote to clarify its context.

The findings focus primarily on reporting and interpreting interviewee responses to ensure credibility, and to minimise researcher bias. Open coding or line-by-line coding was used to unlock the contents of the transcripts, and was undertaken manually due to the relatively small number of interviews, each not lasting more than 60 min. Examining transcripts line-by-line keeps the researcher focussed on the data and reduces the potential of forcing them into preconceived ideas (Charmaz 2004). The coding process identifies keywords and phrases used by interviewees to represent the respondents’ view of a given theme in the interview questions. Each theme is explained based on the collective responses from the interviewees. This process is an “inverted” model of thematic analysis as themes did not emerge from the interview transcripts but were instead embedded in the interview questions and were guided by the research questions.

5 Findings

Three major themes emerged from the analysis of interview data: choice of legal form, fundraising regulations and inconsistencies in application of laws.

6 Discussion

Depending on the circumstances, a nongovernmental organisation, society, foundation or a charitable organisation established in Malaysia may choose to register with most of the earlier listed regulatory bodies.

Obstacles to registration, bureaucratic hurdles and not having the means to legitimise the organisations are the main issues when discussing legal status of Malaysian TSOs. Considerations influencing the choice of platform are: ease of registration, conditions attached to registration, permissible activities and the financial cost of fulfilling statutory requirements. Registration as private limited companies or remaining unregistered are common options taken to overcome these issues. Unregistered organisations are not allowed under Malaysian law and any person organising or participating in any activity of an unregistered society may face legal action (Arshad et al. 2011). Strict controls forced some segments, especially those involved in rights and advocacy, to seek alternative registration options to obtain legitimacy. Organisations who feel they could fall under the “sensitive” or “controversial” categories, and those short of resources tend to register as companies. While these types of TSOs can move faster without being hindered by bureaucracy, there is very little remedy if anything untoward happens when providing social or welfare services as they are not regulated by any laws protecting stakeholders.

Interview data reaffirms the assertions of Harding (1992), Weiss (2003) and Arshad et al. (2011) that registration as private limited companies is a common option taken by TSOs due to its relative ease of incorporation, and to bypass the stringent requirements set by the regulators when evaluating applications. However, interview data showed that for some this may be a temporary measure. Once the organisation is financially and operationally stable, they would convert their registration to the ROS. Nevertheless, identifying such TSOs could be difficult as there is currently no way to differentiate between commercial enterprises and “TSO companies”.

While it is technically possible to register a TSO as a limited liability partnership (LLP), the Limited Liability Partnership Act (2012) does not allow LLPs to be set up for charitable purposes. In addition, registration as private enterprises will result in many TSOs being outside the regulators’ purview. This could expose the sector to abuse as it enables TSOs to offer social and welfare services without having to go through any quality checks by the authorities. Fundraising TSOs registered as companies are in breach of Section 137(1) of the Financial Services Act (FSA 2013) for using commercial entities to conduct private fund raising. It is an offence for any person to accept monetary deposits without a licence. With regards to fundraising, TSOs often find themselves on the wrong side of the law due to the rules regulating fundraising are not spelled out in the laws governing TSOs, but instead are from other Acts of Parliament. They added that some authorities governing TSO fundraising are not fully aware of their authority, while some laws are not clear on TSO fund raising.

The picture of the third sector painted by the respondents shows a political environment where the state is seen to have a firm hand in regulating and controlling which activities can or cannot be undertaken. Pockets of the sector, in particular civil society advocacy organisations, are critical of how laws are interpreted and enforced. Such state control over the third sector especially civil society is unusual as Malaysia is not seen as an authoritarian regime, unlike China or Vietnam, where controls over third sector activities are evident (Li, Lo, and Tang 2017; Sidel 2009). Despite some respondents highlighting state interference in third sector affairs, they did not indicate any decrease in the “social entrepreneurial” spirit, suggesting that intensity of third sector activities is not affected by political pressures. This, in addition to their efforts to provide social services even when not legally registered, or registered as a non-TSO, suggests the sector provides what Young (2000) terms as a “supplementary model” of government-non-profit relationship. The sector is seen a means to fill gaps in the provision of social and welfare services, to make up for the shortcomings of the state.

The view on enforcement is different depending on whose views are expressed. Apart from the civil society groups who feel that the regulators are too strict, others report that enforcement is lacking. Nevertheless, inconsistent interpretation of the laws and selective enforcement are the main complaints. The many criticisms and adverse opinions of the regulatory regime point towards regulatory weakness in the Malaysian third sector concerning the interpretation and enforcement of laws. This also suggests a trust deficit between the sector and the state, especially among TSOs working in areas deemed by the authorities to be sensitive or controversial. The mistrust is due to inconsistent interpretation and application of laws and not seen as a consequence of the multiple regulator environment.

The duplicate regulators overseeing TSOs in Malaysia could lead to administrative difficulties especially if there is no uniformity in the sector’s supervision and regulation. Problems would arise if the different laws provide different treatments or penalties for identical issues or offences. For example, the penalty for managing a society whose registration has been revoked under Section 42 of the Societies Act (1966) is a fine not exceeding RM15,000 but the penalty for a similar offence under Section 81 of the Youth Societies and Youth Development Act (2007) is RM5000. Inconsistencies could also happen in policy development, for example when the Minister changes, as the governing laws accord significant powers to the Minister.

Analysis for policy development and policy improvements may be difficult if different agencies have differing record keeping, reporting standards and requirements, leading to a lack of transparency and inconsistent databases. During a seminar on NPO Compliance in 2014, the Companies Commission’s Compliance Director admitted that multiple regulators of TSOs in Malaysia resulted in the sector not having a standard reporting requirement as well as lacking in transparency. In addition, current accounting standards do not cater to the nature of TSO activities such as value creation and other elements within the organisation that should be reported beyond its financial performance (Bakar et al. 2014; Othman et al. 2012).

Duplicate regulators and legal frameworks could hinder efforts to understand the sector’s dimensions. Varying reporting structures, data management and disclosure requirements make research on the sector challenging. This in turn could lead to difficulties in developing appropriate policies and strategies to address the needs of the sector and its stakeholders. The situation is further aggravated as many organisations which are considered to be part of the third sector are not under the purview of any statutory bodies or government department and thus may not be included in the sector’s future planning.

7 Conclusions

This paper uncovered the registration patterns of Malaysian TSOs, vague fundraising rules and varying regulatory enforcement. This study highlights the shortcomings of a multiple regulator environment, and found systemic inconsistencies in the regulation of the Malaysian third sector. These issues should be addressed to ensure the welfare and rights of stakeholders are protected, and to minimise, if not eliminate, the risk of fraud or unethical practises within the sector.

While the state does not interfere in activities they consider to be non-controversial, their definition of what is “controversial” is vague and changeable. Without it being clearly and officially defined, inconsistencies in regulation will continue and the losers will be the third sector beneficiaries. This is especially the case if regulatory uncertainties prevent them from reaping the benefits of the sector’s work, or from being heard.

Regulators could look at ways to make it easier for organisations to obtain legal status such as simplifying documentation or aiding those who are less familiar with the regulatory processes. Registration would enable their activities, including fundraising exercises, to be monitored and safeguard against unethical or fraudulent practises. The concern however, is not only about registration or the legal form, but also the duplicate and inconsistent regulation of TSOs. While different legal forms and regulations may be necessary to regulate different types of organisations (Anheier and Toepler 2019), efforts should be made to ensure uniformity of at least the basic governing rules to ensure adequate monitoring, standardised treatment, transparency and accountability. This could close legal or regulatory loopholes, minimising the possibility of TSOs being misused for unlawful purposes.

Many organisations registered and administered by ROY and SCO were formerly registered with ROS. The Sports Development Act 1997 and the Youth Societies and Youth Development Act 2007 compelled sports bodies and youth associations to migrate to the newly established regulators. The creation of additional regulators to oversee the registration and activities of these organisations reduced ROS’ regulatory and administrative burden but at the same time led to duplications in operational and supervisory activities. In this instance, (re)centralising supervision of these three types of TSOs may be a way to increase efficiency and reduce inconsistencies in regulation. Many have proposed a central regulatory body to oversee the sector (Ali and Hassan 2017; Bernama 2020, Institute for Democracy and Economic Affairs 2016; George 2001; Othman and Ali 2014), but its establishment may not be sufficient if the root causes – the interpretation and enforcement of laws, are not addressed. Nevertheless, a central body such as the charities commission would go a long way towards harmonising the regulatory processes.

Interview data suggest that fundraising laws should highlight the “dos and don’ts” in soliciting donations, clearly identifying who can fundraise, permissible methods of raising funds and locations where TSOs can or cannot solicit for donations. The regulatory inconsistency especially on interpretation of laws and treatment of certain offences leads to uncertainty amongst third sector practitioners and donors especially when they are unsure of the governing laws and their status and rights (Lyons 2003). Lack of clarity and consistency in the application of laws leads to gaps in regulation (Phillips 2019) and policy neglect (Anheier and Toepler 2019), causing the interests and rights of all stakeholders to be compromised. Therefore, the third sector regulatory regime in Malaysia appears to correspond with DeMattee’s (2019) bureaucratically-illiberal regime, where red tape and regulations increase the costs and obstacles to registration and operations.

This paper identified interpretation and application of laws as the main shortcomings of the present multiple regulator model. The study is limited by the small sample, findings are restricted to the respondents’ experiences and knowledge, and in particular, the accuracy and honesty of their stories. Another shortcoming of this study is the inability to obtain views from TSOs registered with BHEUU, JHEKS and those governed by individual Acts of Parliament. Conclusions therefore present a glimpse of the regulatory challenges faced by the sector. Nevertheless, these exploratory findings highlight the sector’s concerns and serve as a starting point to further examine the pros and cons of a multiple regulator environment in the effort to further strengthen the sector’s integrity and efficiency.