Effective Dispute Resolution in Takaful-Related Cases: A Case Study of the
Financial Mediation Bureau in Malaysia
Umar A. Oseni
Assistant Professor of Law,
Ahmad Ibrahim Kulliyyah (Faculty) of Laws,
International Islamic University Malaysia
Email: umaroseni@iium.edu.my
Phone No: +60173059248
Abstract
Until recently, discussions of issues relating to dispute resolution in the Islamic finance industry
have remained well in the background, as the stakeholders in the industry strived to promote this
hitherto niche industry for a global recognition. Interest in studies relating to dispute resolution
in Islamic banking and finance has mushroomed over the past few years, while the takaful
component of the industry has been neglected even though insurance-related issues are more
amenable to disputes than others particularly when there are differences regarding claims,
limitation of usage of insured property, variations in insurance agreement, and disputes between
the Sharī‘ah Supervisory Board and the takaful operator. As a result, the DOME International
Takaful Report 2012-2013 briefly examines the relevance of arbitration and dispute resolution in
takaful and Retakaful cases. Against this backdrop, this paper examines the need for effective
dispute resolution in takaful-related cases with special reference to the model of the Financial
Mediation Bureau (FMB) in Malaysia. With an in-depth analysis of the 2011 and 2012 takafulrelated cases mediated by FMB, this paper finds that parties do prefer fast and cost-efficient
processes for dispute resolution, as takaful schemes also require efficient dispute resolution
processes like other commercial transactions. Such successes recorded in Malaysia could be
replicated in other jurisdictions offering Islamic financial services. This is important in the drive
towards enhancing the legal and regulatory landscape for Islamic financial markets.
Keywords: Islamic insurance, takaful, dispute resolution, Financial Mediation Bureau, Malaysia
Introduction
For over forty years, stakeholders and policy makers in the Islamic finance industry have focused
on the development of Islamic finance products and consolidation of the industry by
mainstreaming it within the global economy. There was little or no need to venture into the

LL.B. (Common Law & Sharī‘ah), University of Ilorin; B.L. (Barrister-at-Law); MCL (IIUM), Ph.D. (IIUM); and
Postdoctoral Program at the Islamic Legal Studies Program, Harvard Law School. The author is currently an
Assistant Professor of Law, Ahmad Ibrahim Kulliyyah (Faculty) of Laws, International Islamic University Malaysia.
1
aspect of dispute resolution. However, in recent times, there has been significant interest in the
dispute resolution paradigm in the Islamic finance industry. Malaysia, being one of the most
progressive jurisdictions in the modern practice of Islamic finance, introduced a form of Islamic
finance mediation through the establishment of the Financial Mediation Bureau (“FMB”) in
2005. This was meant to address small claims relating to Islamic finance transactions to avoid
overflowing the courts with cases that can be effectively resolved through mediation. This paper
provides an in-depth study of the dispute resolution process of FMB and reviews a number of
mediated cases handled by the bureau. While utilizing the longitudinal examination of the
procedure, processes and effectiveness of FMB, this study proposes the expansion of the scope
and jurisdiction of the bureau to cater for other similar cases with larger claims to avoid
overflowing the court’s dockets in Malaysia. Binding arbitration may also be introduced as part
of the dispute resolution continuum a last resort. The AAOIFI Sharī'ah Standard on Arbitration
No. 32 provides a good direction towards achieving such a model. Having said this, the paper
concludes that the FMB model can be replicated in some other countries to further strengthen the
legal architecture of the Islamic finance industry.
With the coming into force of the Islamic Financial Services Act 2013 (Act 759) of Malaysia
(“IFSA”), the takaful industry has been taken to another enviable level.1 While the financial
mediation bureau has been performing very well with the available statistics, recent changes in
the enabling legal framework ushers in a new regime of legal and regulatory issues in the Islamic
finance industry in the country. There are some preliminary palpable feelings that the newly
introduced financial ombudsman scheme (“FOS”) under Section 138 of the new Act will
1
The hitherto Islamic Banking Act 1983 and the Takaful Act 1984 of Malaysia have now been repealed. The two
legislations have been merged and scaled up culminating into the new Islamic Financial Services Act 2013.
2
establish a sustainable mechanism for dispute resolution in the Islamic financial services
industry, particularly in the takaful component of the industry. Given the fact that takaful
transactions are more amenable to disputes, the new framework would usher in a new phase in
the way and manner takaful disputes are being handled.
Against the above backdrop, this paper is organised into six major sections. While section 1
gives the introduction, section two focuses on the nature of takaful disputes with some relevant
references to the IFSA 2013 that provide for the nature of takaful business. Section three
provides an empirical legal analysis of the takaful disputes heard and determined by the FMB
over the years with a view to assessing the effectiveness or otherwise of the framework which is
expected to metamorphose into the new FOS introduced in the new Act. Furthermore, section 4
critically examines the relevant provisions on FOS in the IFSA 2013 and its implications for
takaful disputes. Section five proposes a new framework for resolving takaful disputes – a
further transformation of the FMB model which is still the extant mechanism. Finally, section six
gives the conclusion and some recommendations for regulatory and policy reforms with specific
reference to takaful dispute resolution.
Nature of Takaful disputes: a preliminary analysis
In recent times, researches on the nature of disputes in the Islamic finance industry has increased
significantly, as there is a growing awareness on the need to come up with sustainable processes
for dispute management in Sharī'ah-compliant transactions (Yaacob, 2009). There has not been
much focus on takaful disputes, which is arguably amenable to disagreements that gradually
3
cascade into litigated battles in the increasingly overcrowded courtrooms (Oseni, 2012a). It is
therefore important to appreciate the fact that takaful sector is an essential component of the
Islamic financial system and must not be left in isolation while formulating policies that are
targeted at enhancing best practices in the Islamic finance industry (Thanasegaran, 2008: 164).
Generally, the nature of disputes depends on the types of takaful products available in the
country. Section 5 of IFSA 2013 divides takaful business into two major classes. These are
family takaful and general takaful. While family takaful business is defined as any of such
business concerned with family policies, it is said to also include “any type of takaful business
carried on as incidental only to the family takaful operator’s business.” On the other hand, any
other takaful business that does not fall under the category of “family takaful business” is
deemed to be general takaful business. This wide classification entails numerous takaful products
designed, developed and traded under the two classes. Such products have triggered a number of
disputes. Table 1 below gives a glimpse of the summary of major takaful cases mediated in
2011.
Though few examples have been given above, the nature of takaful disputes is not so different
from the conventional insurance policies. But there is an additional dimension in such takaful
which is not present in conventional insurance disputes.
The benign element of Sharī'ah
compliance in the takaful industry has also triggered Sharī'ah-related risks.
Such disputes
emerge in different ways, one of which emanates from operational risk –disputes between the
Sharī'ah Supervisory Board and the takaful operator. Other takaful related disputes include
takaful claims, limitation of usage of insured property and violation of such terms, variations in
takaful agreement, and distribution of surpluses.
4
Table 1
Some Major Takaful Claims in FMB in 2011
Type of Dispute
Type of Mishap
Fire
Disputed Amount
/Claim (RM)
92,580
Loss of car
37,000
TO to settle with
RM33,500
Loss Not Within Ambit of
Perils for Houseowner /
Householder Certificate
Collapse of wall
Undisclosed claim
Claim disallowed
Damage to third party property
due to uprooted tree
Tree falling on a
house
12,500
Liability on the
claim repudiated
Whether there was a flood –
whether covered under the
Private Motor Certificate
Flood
Undisclosed claim
Liability on the
claim repudiated
Damages to perimeter fence of
third party and the Public
Liability Certificate
Collapse of fence
Undisclosed claim
Liability on the
claim repudiated
Hospitalisation claim - Whether
‘implant’ to treat osteoarthritis
falls under exclusion
Surgery involving
osteoarthritis
Undisclosed claim
TO to review its
decision and pay
the bills
No original bills submitted to
Takaful Operator at the time of
claim
Hospitalization claim
Undisclosed claim
TO settled
Participant’s
claim
Claim under Houseowner /
Householder
Dissatisfaction
paid
with
amount
Decision /
Settlement
Mediated
settlement
undisclosed
the
Source: Author
* TO means Takaful Operator
In the field of conventional insurance, the two broad categories of dispute soften litigated in the
courts are: coverage disputes and third party disputes. These two broad categories are not
necessarily exhaustive as there are other varieties of disputes which may crop up in any
insurance relationship. Mills & Furlan (2002) have identified such other categories which are
based on the prevailing insurance litigation trends. According to them such disputes include
5
“disputes over the meaning of certain words and phrases in an insurance policy (although these
are, in effect, coverage disputes); disputes as to the legal rules that should govern the operation
of an insurance policy (choice of law disputes); subrogation disputes; and, in some cases,
disputes over reinsurance arrangements” (Mills & Furlan, 2002: p.7). These trends, and of
course, the categories of disputes are also evident in the takaful industry which is not so different
from the conventional insurance models except for its Shariah compliance requirements and the
structures of such models that are fundamentally premised on a number of Islamic finance
instruments.
Considering the monetary and compensational issues that often arise in insurance litigation or
insurance-related disputes, one may conclude that the preferred method for the resolution of such
disputes is mediation. This is also true of takaful-related disputes which are expected to be better
handled by a panel of mediators or arbitrators which is composed of experts in insurance, law
and Shariah. The reasons for this assertion have been excellently articulated by Plumer (2008):
Insurance disputes are prime candidates for mediation for a number of reasons. It
allows the parties to gain the insight of an agreed-upon, truly neutral expert
in insurance law and practice, a characteristic not shared by all judges. It allows
the parties to more candidly identify (through the mediator) their true obstacles to
settlement and to address complex scientific and economic issues that are often
not well-suited for litigation, such as the allocation of loss among potentially
liable insurers. Finally, it allows the parties to settle issues in a more
comprehensive – and often creative – fashion than may be possible in litigation,
with the assistance of someone who likely has a better understanding of what the
market will bear in similar circumstances (Plumer 2008).
This makes a case for the need for alternative mechanisms for takaful dispute resolution. The
nature of takaful disputes include claims by a takaful holder, limitation of usage of inusred
property, variations in insurance agreement, disputes between the Shariah Supervisory Board and
6
the takaful operator, and distribution of surpluses. One of the most common disputes in the
global insurance industry relates to claims made by the insurance holder. This often presents
itself in two major ways: delays in the payment of claims, and dissatisfaction with the amount of
claims paid. With the emergence of the takaful niche of the global insurance industry, the
dominant effect of the conventional disputes is now being felt in most jurisdictions having a
legal and regulatory framework for takaful business. The same issues that have caught the
attention of the courts as a result of disputes over insurance coverage have also been seen in the
takaful industry.
It is however pertinent to state that while some of these disputes are very
common in the industry others occur once in a blue moon. For instance, disputes between the
Shariah Supervisory Board and the takaful operator rarely occur, and it such occur, they are not
brought to the public glare and are not often the subject of litigation. However, disputes relating
to takaful claims and amount of coverage have mushroomed in the industry over the years.
An empirical legal analysis of Takaful disputes in the Financial Mediation
Bureau
The Financial Mediation Bureau (FMB) was established under the general purview of BNM, and
it is considered an integrated dispute resolution centre specifically meant for small claims,
disputes, and complaints involving financial services providers and their customers. Before
examining the core issues, it is important to begin with a general overview of the Malaysian
Islamic finance industry vis-à-vis its dispute resolution developments over the past three decades
since the enactment of the first Islamic banking legislation in 1983.
7
Dispute resolution patterns in the Islamic finance industry
The dispute resolution patterns in the Islamic finance industry in Malaysia can be divided into
five major stages since the enactment of the first legislation on Islamic banking in 1983. These
stages are: adaptation stage, formative stage, capacity-building stage, consolidation stage, and
the benchmarking stage. During the adaptation stage (1983 – 1993) of the Islamic finance
industry in Malaysia, there was no urgent need to introduce sustainable mechanisms for dispute
resolution. The existing legal structure was embraced and court litigation was the only means of
resolving related disputes that emanate from the normal banker-customer relationship.2
Subsequently, the formative stage (1994 – 2003) set in when experts began to moot some
alternative ideas for sustainable dispute resolution in the industry. Ever since then, there have
been different experiments to determine the most appropriate mechanism for dispute resolution
in the industry.
The above backdrop culminated into the capacity-building stage (2004 – 2010) where more
human capacity development became germane to provide the much-needed expertise for the
Islamic finance industry, with particular reference to experts in dispute resolution, such as
judges, mediators, and arbitrators who specialise in Islamic finance dispute resolution. Also
included in the reforms during this period is the development of a variety of mechanisms for
2
Litigation has not been so favoured as a sustainable dispute resolution framework as a result of its protracted
proceedings, excessive cost, time-consumption, and unnecessary hatred it ultimately cause after a judgment is given.
This probably struck Charles Dickens mind which made him make the following remarks about the English Court of
Chancery. “This is the Court of Chancery, which has its decaying houses and its blighted lands in every shire,
which has its worn-out lunatic in every madhouse and its dead in every churchyard, which has its ruined suitor with
his slipshod heels and threadbare dress borrowing and begging through the round of every man’s acquaintance,
which gives to monied might the means abundantly of wearying out the right, which so exhausts finances, patience,
courage, hope, so overthrows the brain and breaks the heart, that there is not an honourable man among its
practitioners who would not give — who does not often give — the warning, ‘Suffer any wrong that can be done
you rather than come here!” (Dickens, 1996).
8
dispute resolution in the Islamic finance industry. For instance, the Kuala Lumpur Centre for
Arbitration (KLRCA) introduced the Arbitration Rules for Islamic Financial Services in 2007
(which has now been replaced with the i-Arbitration Rules of 2012), Bank Negara Malaysia
introduced the Financial Mediation Bureau in 2005, and the High Court of Malaya established a
dedicated bench for disputes relating to Islamic financial services, called the Muamalat Bench
under the Commercial Division of the court. During this period, there was an aggressive but
progressive training of mediators for all kinds of disputes by the Malaysian Mediation Centre.
At the moment, the dispute resolution continuum in the Malaysian Islamic finance industry has
reached the consolidation stage (2011 – 2020), which is a prelude to the benchmarking stage.
Successes recorded in mediating Islamic finance disputes under the purview of FMB are now
being consolidated with the provision of more options for disputing parties to choose from.
Some of those options were developed during the capacity-building phase, and they have the
potential in positively impacting the benchmarking stage. It is expected that the benchmarking
stage will be ushered in after the new legislation for Islamic financial services in Malaysia,
Islamic Financial Services Act 2013 has stood the test of time after 7 years of successful
operation; hence, it is envisaged that the benchmarking stage will commence in 2020 and
beyond. This coincides with the aim and aspiration of Malaysia to become a developed country
in the year 2020. From the economic sense, Malaysia can achieve this objective when its
economic policies, financial sector and legal and regulatory framework are taken as models for
emerging economies, particularly those in the Organisation of Islamic Cooperation (OIC)
countries. This is when it can confidently say it has reached the benchmarking stage.
9
At the very beginning of the above continuum of process is litigation which, as a matter of fact,
is the preferred process for resolving contractual issues involving most financial institutions
across the world, including the Sharī‘ah-compliant financial institutions. At the middle of the
continuum of processes are a number of Alternative Dispute Resolution (ADR) processes which
are applied uniquely to the nature of individual case. Furthermore, at the end of the continuum is
the modern paradigm shift towards dispute avoidance which represents more of dispute
management than dispute resolution (Oseni, et al, 2012). In this respect, we are shifting focus to
the takaful industry which has witnessed a stunted growth in its dispute resolution framework
when compared to the Islamic banking industry.
Takaful and the extant jurisdiction of FMB
Since its establishment in 2005, FMB has successfully handled tens of thousands of cases as the
main dispute resolution framework for financial services providers. This initiative of BNM has
gone a long way in diverting cases that would have found their ways into the courtroom to a
more friendly process that is less formal are more effective in reducing the often heightened
tensions in financial contracts. The jurisdiction of FMB with particular reference to takaful
disputes relates to all family takaful claims and general takaful claims. There is a mandatory
ceiling on claims, complaints, or disputes relating to financial loss. For motor and fire takaful,
the amount must not exceed RM200,000 (circa USD66,666), while for third party property
damage, the ceiling is put at RM5,000 (circa USD1,666). For any other disputed claim, the
amount should not exceed RM100,000 (circa USD33,333). Time barred claims, complaints or
disputes as a result of the operation of an extant law are excluded from the jurisdiction of FMB.
10
These are expected to be referred to the court or arbitration for hearing and determination
(Segara, 2009).
Role of a mediator in Takaful disputes in FMB3
The role of the mediator or the jurisdiction conferred on him or her are subject to the laws of
Malaysia. So, parties cannot reach a mediated settlement under the guidance of the mediator
which is contrary to public policy or any extant law. The specific functions of an FMB mediator
who handles a takaful case are:
1. Plays the role of a counselor and conciliator to facilitate a amicable settlement which may
include an outright settlement or a withdrawal of a complaint. This represents the
traditional role of a muhtasib in Islamic law which has worn a new cloak of the modern
ombudsman.
2. Investigates and adjudicates a compliant with the aim of giving the right decision. Such a
role is similar to that of the traditional Islamic judge who adopts the inquisitorial process
in resolving a case.
3. Makes a monetary award against the financial services provider (takaful operator) in case
the complaint is genuine and has been upheld either wholly or partially. Such an award
made is binding on the takaful operator up to the maximum limits provided for under the
jurisdiction of FMB (Financial Mediation Bureau, 2012).
3
See Appendix I for the full text of the Terms of Reference of the Mediator in FMB.
11
It is however important to empahsise that any award made against the complainant – in this case,
the takaful participant or a third party – or the complaint filed was struck out on the grounds of
lack of merit, the participant or complainant can choose to accept or reject such a decision. If the
complainant chooses to reject the award made by FMB, he or she can explore other options such
as arbitration or litigation. But if the complainant accepts the award of the FMB mediator, he or
she is deemed to have waived his or her right to proceed with a fresh legal action against the
takaful operator. It must be added that the mediation proceedings under FMB are without
prejudice (Financial Mediation Bureau, n.d.).
Statistical analysis of Takaful cases handled since inception
Since inception, FMB has successfully handled both banking and insurance disputes, and it
appears with the increasing awareness on the part of the customers as well as the financial
services providers, there is a remarkable surge in the number of cases registered in FMB since
2005. Table 2 below shows a summary of the complaints registered in FMB from its inception in
2005 to 2011.
Table 2
Summary of Complaints Registered in FMB (2005 – 2011)
Source: (Financial Mediation Bureau, 2012: p. 12)
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It is clearly shown that the number of cases disposed in 2011 is more than that disposed in 2010.
This success has been attributed to the increasing number of mediators at FMB. According to a
recent report submitted to the Government of Malaysia by the BNM Governor, there is gradual
improvement in the internal complaints management systems of financial services providers.
In its role as the integrated dispute resolution centre for FSPs under the purview
of the Bank, FMB handled 4,459 cases during the year, of which 1,919 were
new cases. The number of new cases received by FMB declined by 13.6%,
suggesting gradual improvements in the internal complaints handling processes
of FSPs [Financial Services Providers] in resolving customer complaints.
Consistent with previous years, insurance-related cases accounted for the largest
proportion of complaints at 68.7%, with motor own damage claims contributing
the highest number at 25.3% of the total number of disputes referred to FMB
during the year (Bank Negara Malaysia 2012: p. 128).
This makes a good case for the need to begin the continuum of dispute management within the
financial services provider through mechanisms that provides for complaints handling processes.
Such is similar to the ombudsman institution which is a major mechanism for dispute avoidance
and resolution in Islamic law. This should be the first point of call for any complaint. When such
a dispute cannot be reasonably handled by the financial services provider, it can then be referred
to FMB. But there are other instances where complainants decide to adopt a walk-in method.
The number of walk-in complainants have been increasing gradually, so the FMB decided to
establish a Complaint Management Unit (CMU) to handle such walk-in complaints, telephone
calls or email communications.
In 2011, the new cases registered at FMB involving insurance-related issues that fall within the
Terms of Reference of the Mediator were 1,270. Out of this number 48 were related to general
takaful while 79 were related to family takaful. Table 3 below shows the relevant statistics.
13
Table 3
Summary of Insurance and Takaful Cases Registered in 2011
Source: (Financial Mediation Bureau 2012: 22)
The number of takaful cases registered is far lower than the insurance cases. The reason for this
is not because the internal dispute handling system of the takaful operators in handling
customers’ complaints has improved. But it is due to the years of neglect the takaful industry has
experienced which makes potential customers prefer the conventional insurance to takaful
regardless of their religious conviction or the so called “faith premium”.
Nevertheless, the FMB has successfully mediated variety of complaints in the year 2011. For
instance, cases completed or resolved in 2011 are 56 and this generally includes cases involving
burglary, fire, group personal accident, house owner, public liability and motor. Table 4 gives the
summary of cases that fall under the remit of general takaful business.
14
Table 4
Summary of General Takaful Cases Resolved/Completed in 2011
Source: (Financial Mediation Bureau 2012: 30)
For the second category of takaful – family takaful – cases successfully resolved or completed in
2011 are 74; while 28 were revised, 46 were confirmed. The family takaful complaints generally
include death, death disease, group personal accident, hospital surgical benefit claim, mortgage
benefit claim, mortgage reducing term assistance, temporary disability, and total and permanent
disability benefit claim. Table 5 below gives the summary of cases that fall under the remit of
family takaful complaints.
Table 5
Summary of Family Takaful Cases Resolved/Completed in 2011
15
Source: (Financial Mediation Bureau 2012: 30)
Even though there is a gradual momentum in the rate at which takaful complaints are being
registered and disposed off, it cannot still merge the increasing number of cases relating to
conventional finance. This calls for some form of introspection to develop the takaful industry
as a whole by making it not only Shariah compliant but also commercial viable. Such efforts
will require a robust legal and regulatory framework. In essence, Malaysia has taken another
giant step towards revitalising its Islamic financial services industry with the enactment of the
new IFSA 2013. This has far reaching implications on the takaful sector as well as dispute
management of takaful-related complaints.
The new Islamic Financial Services Act 2013 and its implications for Takaful
disputes
The new IFSA 2013 introduces the financial ombudsman scheme, which is expected to operate
based on the underlying principles of the modern muhtasib. The relevance of classical muhtasib
as an ombudsman in the modern Islamic finance industry has been previously emphasized in a
number of studies (Oseni, 2011; Oseni and Hassan, 2011; Rashid, 2004). Apart from Pakistan,
which provides for the Banking Mohtasib in its Banking Companies Ordinance 1962, Malaysia
has now become the first Islamic finance jurisdiction to incorporate such suggestions in enabling
16
legislations which ushers in a new phase in the dispute resolution framework for the global
Islamic finance industry. Such initiatives are required for best practices in business conduct and
more importantly for the imperative role of consumer protection.
The “financial ombudsman scheme” is defined in Section 133 of IFSA 2013 as “a scheme for the
resolution of disputes between an eligible complainant and a financial service provider in respect
of financial services or products.”4 In the present study, the eligible complainant would be the
takaful participant while the financial service provider is the takaful operator. More so, specific
provisions on the financial ombudsman scheme are clearly outlined in Section 138 of the new
Act. These provisions are in pari material with Section 126 of the Financial Services Act 2013
(FSA) of Malaysia. The implication of this is that since the dual Islamic finance and banking
system in the country is centrally regulated under the Central Bank of Malaysia, a uniform
financial ombudsman scheme is provided for both conventional and Islamic financial services.
While it is not so clear the type of scheme that would be provided by the apex bank to
specifically cater for related disputes, the first impression one may have is that the existing
framework may be used. The FMB has been the major financial ombudsman scheme in the
Islamic finance industry in Malaysia even though the name suggests that it is a mediation body.
However, in the Explanatory Statement that accompanies the Islamic Financial Services Bill
2012 (which was later passed into law as IFSA 2013), it is clearly stated that among other things,
the law seeks “to set out among others, functions, duties of, or other requirements to be complied
with by an operator of the approved financial ombudsman scheme” (Islamic Financial Services
Bill, 2012: p. 293). This is further reinforced by the provisions in Section 138(3) of IFSA 2013,
4
Section 133 is the Interpretation section of Division 1 of Part IX of IFSA 2013.
17
which gives the idea of multiple operators of the scheme. Therefore, the initial impression of the
exclusiveness of FMB might not hold water.
Nevertheless, the Financial Stability and Payment Systems Report 2012 of the Central Bank of
Malaysia has given a clear indication as to what financial ombudsman scheme” means within the
context of IFSA 2013.
To further enhance the oversight framework and effectiveness of the
arrangements for consumer redress, work is in progress to transform the
FMB
into a financial ombudsman scheme (FOS) approved under the FSA and IFSA. In
ensuring the FOS is fair, accessible and effective, the Bank may prescribe the
functions, duties and scope of the scheme including the appointment of directors
to strengthen the governance and oversight of the FOS. The scheme will be
governed by rules which ensure adherence by members to the terms of
membership of the scheme and compliance with the awards granted by the FOS.
As part of the transformation, the scope of disputes that can be referred to the
FMB will be expanded, along with the ability to determine a range of remedies or
awards to consumers that have been treated unfairly. The proposed transformation
will also involve a review of the existing membership fee structure to better
reflect the utilisation of services of the financial ombudsman scheme by FSPs
[Financial Services Providers] (Bank Negara Malaysia 2012: p. 128).
With this clarification on the nature of the statutory FOS, the coast seems to be clear for the
stakeholders industry regarding the new directions proposed by the apex bank. The new system
will transform the FMB in a holistic manner and provide for an expanded jurisdiction to allow
for all sorts of financial complaints, disputes and claims which were limited to certain amount
under the previous regime. It will be interesting to see the new expanded jurisdiction as well as
its impact on the overall industry. Needless to say that the introduction of the financial
ombudsman scheme does not portend to oust the jurisdiction of the court to hear and determine
related takaful disputes. However, in accordance to the provisions of Section 138(5), where an
18
eligible complainant has referred a dispute to a financial ombudsman scheme, he can no longer
lodge any claim relating to such dispute with the Tribunal for Consumer Claims.5
There are other avenues where a complainant or takaful participant could lodge his complain or
institute an action for redress. The recently issued i-Arbitration Rules of the Kuala Lumpur
Regional Centre for arbitration (KLRCA) is purposely meant to cater for all forms of disputes
emanating from Islamic financial services contracts, which ordinarily includes takaful matters.
The Muamalat Bench also complements these initiatives through a specialized bench for Islamic
financial matters. According to Thanasegaran (2008), consumer protection seems to be more
important in the takaful industry, which is generally indicative of the robustness of a particular
legal and regulatory framework.
To cater for mainstream resolution of takaful disputes, the Regional Centre for
Arbitration in Kuala Lumpur was chosen to arbitrate cases concerning Islamic
banking and takaful. This Centre complements the specialised High Court
assigned in 2003 to adjudicate such cases, and the Financial Mediation Bureau.
This, along with the enlarged and reinforced scope of the Syariah Advisory
Council in 2003 and the issuance of the Guidelines on the Governance of Syariah
Committees for Islamic financial institutions, is reflective of the strengthening of
the consumer redress infrastructure within the industry (Thanasegaran 2008: p.
163).
It is therefore expected that the new legal regime would further strengthen the consumer redress
infrastructure in the takaful industry. Expanding the avenues for consumer redress is more
important in takaful issues considering the amenability of such contracts to disagreements and
unsubstantiated claims. Through a process of total overhauling and streamlining of the existing
FMB mechanism, the regulatory authority of Islamic financial services in Malaysia seeks to
create an enviable industry worth emulating by emerging economies across the world. Table 6
5
The Tribunal for consumer Claims is established under the consumer Protection Act 1999 (Act 599) of Malaysia.
19
below presents the key features of the new legal framework relating to takaful as summarized
and published by the apex bank.
Table 6
Key Features of the New Legal Framework Relating to Takaful
Source: Bank Negara Malaysia (2012: 117)
Furthermore, there is a clear indication in IFSA 2013 and FSA that suggests the settlement of
both takaful and insurance disputes using the same mechanism. This has been the practice under
the FMB and the mediators (or ombudsman) have been very careful in arriving at mediated
settlements or assertive decisions, particularly when handling takaful disputes. From all the
cases closely analyzed, there is no known instance of violation of the sacred rule of Sharī'ah
compliance in both the contract and the execution stage. To this end, even though similar
20
provisions are contained in the two laws regulating two different components of the Malaysian
financial industry, the dispute resolution mechanism specified in them is a unified mechanism
that will cater for both Sharī'ah-complaint and conventional insurance policies.
Towards a new framework for resolving Takaful disputes
At the conceptual level, one may wonder whether any dispute involving claims or complaints
relating to a takaful policy by a participant may involve other participants. From the epistemic
basis of the takaful concept and its core elements, the relationship between a takaful participant
and other participants is that of partners who have pooled together their funds for the purpose of
mutual indemnification. So, in a situation where a participant has a claim against the takaful
operator who is a mere agent to the joint pool of the participants, what would be the appropriate
dispute resolution procedure?
This study proposes a multi-tier process for the operationalisation of the FOS recently introduced
in IFSA 2013. While not discarding the existing FMB, the existing framework may be merged
with other mechanisms to create a cost-efficient process for dispute resolution. The proposed
process contains a four-stage process which commences with a mandatory internal ombudsman
procedure. This first step should compel all takaful operators to appoint a full-time internal
ombudsman whose duty is to investigate, hear and determine complaints made by customers
against the financial services provider. In the event of a deadlock, the complainant may proceed
to the second stage which will involve registering the case at FMB for necessary action. While
FMB is expected to strengthen its mechanism under the new framework, the complaint
21
undergoes proper mediation in accordance with the terms of reference of mediators. If the
complainant is dissatisfied with the award of the FMB mediator, he or she may proceed to the
third stage which involves filing the case in the appropriate court or proceed to arbitration. Since
the High Court of Malaya has recently established the Kuala Lumpur Court Mediation Centre
(KLCMC), the case will have to undergo another mediation proceeding which is also free of
charge. The significance of the KLCMC is that sitting judges are invited to mediate the case, and
in most cases, parties accept the advice of the judge-mediator because of the personality factor.
However, in the event of failure of the third step, the complainant may proceed with arbitration
or litigation in the same court. Figure 1 below described the proposed multi-tier process for
takaful dispute resolution in Malaysia which is expected to guide the regulators in implementing
the provisions of section 138 of IFSA 2013.
A sustainable framework for dispute resolution in the takaful industry requires
a multi-tier process
1. All takaful operators must have
a mandatory internal
ombudsman
3. Dissatisfied complainant
proceeds to the court and the case
is first mediated at KLCMC
2. Complaints not successfully
resolved should be registered at
FMB
4. Complainant may proceed for
arbitration outside the court or
litigation
A cost-efficient multi-tiered framework will delay the jurisdiction of the court
Fig. 1. A Proposed Multi-tier Process for takaful dispute resolution in Malaysia
It goes without saying that the Islamic finance industry should stand tall to introduce Shariahbased systems rather than falling prey of the conventional standards which are later ‘Islamised’
and called Shariah-compliant products. It is high time the stakeholders in the takaful industry
22
became proactive in their drive towards establishing a competitive global Shariah-based
alternative for the global insurance system. The recent development in China in the insurance in
insurance dispute resolution is an example of such proactive moves which does not necessarily
imitate other jurisdictions. The beginning of 2013 saw land sliding reforms in insurance dispute
resolution in China. The China Insurance Regulatory Commission and the Supreme Court have
jointly established an integrated system for sustainable dispute resolution of insurance disputes.
The notice issued to that effect mandates local courts to advise parties to proceed for mediation
of insurance disputes once such disputes are instituted in the courts. As such, the courts are to
keep a list of qualified mediators who will be closely trained, accredited and evaluated for
efficiency of the process. The notice was issued for the following reasons:
First, with the remarkable development of the Chinese insurance market in
recent times, insurance disputes now occur at a frenetic pace. Only 20 years ago,
the Chinese insurance market was in its infancy and monopolised by one insurer.
In the past 10 years, the market has grown faster than any other worldwide; since
2002 the average rate of growth in premiums has reached 18.7% a
year. Now there are 162 insurers in fierce competition on the Chinese market,
and the total value of insurance assets has reached more than Rmb6.9 trillion –
10 times the value in 2002. Despite such fast development in the
insurance industry, Chinese society is still far from well prepared for such
growth.
Second, parties to insurance contracts do not always operate in good faith. To
ensure profits, the upper-level management at some insurance companies impose
ridiculous requirements on subordinates to limit compensation ratios.
Meanwhile, from the viewpoint of insureds and beneficiaries, insurance fraud
can be an easy and relatively low-risk way to make money – if the
insured or beneficiary succeeds, it can profit handsomely; if not, it almost need
not worry about criminal penalties or damage to its reputation.
Third,
judges
and
lawyers
with
adequate
experience
to
handle insurance disputes are rare, making insurance litigation more difficult.
Even after a decision has been issued, parties usually ask for judicial review
until all legal resources have been exhausted(Hao, et al. 2013).
23
The three reasons adduced are also true for the takaful industry. One does not need to be told
that the contemporary Islamic finance industry has tremendously crystallised but despite the
cheering developments, the takaful component of the industry has not attained similar
proliferation in different markets across the world. The same is true of its dispute resolution
framework. The takaful dispute resolution framework has not been developed, as cases are still
being handled by the courts. Secondly, whether takaful contracts operate in good faith is a major
issue for further research. But one thing is certain – most of the takaful operators, and the
contract forms and processes they adopt, are clear imitations of the conventional insurance
practice. In fact, a large percentage of the takaful operators had (or still have) conventional
windows. So, the usual dichotomy between a profit-driven and values-driven industry reemerges
here; hence, the prevalence of ridiculous requirements which are deliberately put in place to limit
compensation rations. Thirdly, the most important reason why expert mediations and arbitrations
may be more appropriate for takaful disputes is the dearth of lawyers and judges who have
adequate expertise to handle cases involving takaful. From the following reasons, it is crystal
clear that a sustainable framework is required for takaful dispute resolution.
Conclusion
It has been established that takaful transactions are more amenable to disputes chiefly due to
nature of related claims which is the very essence of takaful. While many researchers have
previously focused on Islamic banking and finance disputes, little attention was paid to the
takaful component of the Islamic finance industry, broadly defined. With the recent
24
developments in Malaysia and Bahrain in relation to dispute resolution in Islamic finance,
particularly with the i-Arbitration Rules of KLRCA, the use of ADR is becoming more
pronounced in the industry. Such paradigm shift should reflect in the takaful component of the
industry. It is expected that many more takaful operators and the stakeholders will show more
commitment to greater use of Shariah-compliant processes that are less formal than litigation
even though they possess similar binding effect. The stakeholders, particularly the takaful
operators and their regulatory bodies, should take the advantage of ADR since it “is more
conducive to the continuation of the commercial relationship between the parties, and in some
instances the enhancement of that relationship” (Mills & Furlan, 2002: p. 10).
There is no doubt that the legal and regulatory framework for the Islamic financial markets
requires sound and robust mechanisms. Rather than focusing on the Islamic banking sector, the
Islamic finance industry must emerge from its comfort zone and adopt proactive measures to
establish a competitive industry.
It is needless to add that the takaful sector has been in
competition with the conventional insurance in most jurisdictions. Apart from the Shariah
compliance requirement which is always fundamental in Islamic financial services, a good
dispute management framework will project the takaful component of the Islamic finance
industry and this may spur some sort of global penetration into perceived hostile jurisdiction.
Future research in this new minefield should focus on the need to replicate some emerging
frameworks such as what is obtainable in Malaysia in some other promising jurisdictions.
Further empirical studies may be required to assess the effectiveness of the FOS introduced in
25
Malaysia after five years of operation, apart from the need to conduct a postmortem of the
existing FMB and its effective handling of takaful-related cases.
26
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APPENDIX 1
TERMS OF REFERENCE OF THE MEDIATOR
Financial Mediation Bureau
A. JURISDICTION
Disputes on financial matters include:
(a) Insurance/Takaful claims; and
(b) Conventional banking/Islamic banking matters including credit/charge card claims.
The Mediator has jurisdiction:
To consider any complaint (including a dispute or claim) referred to him in connection with or
arising out of a policy (or proposed policy) of insurance or takaful certificate and/or the
transaction/facility of a conventional banking, Islamic banking, credit/charge card with a
Member of the Bureau and governed by the law of Malaysia but subject to these conditions:
(i) The policy/certificate on insurance and takaful must be taken out by or on behalf of or for an
individual or body corporate and underwritten within Malaysia.
(ii) The facility on conventional banking, Islamic banking and credit/charge card must be taken
or utilised by an individual or body corporate.
(iii)The complaint must:
(a) concern a claim under the policy/certificate or the marketing or administration, but not
the underwriting of the policy/certificate; and
(b) have been considered by the senior management of the Member and his offer or
observations (which contain the mediation clause for insurance and takaful claims) not
accepted by the complainant; and
(c) be referred by the original policyholder/participant (or a successor in title otherwise than
for value) in insurance and takaful claims, the person(s) involved with the conventional
banking facility, Islamic banking facility; credit/charge card holder (or a successor in title)
who must be ordinarily resident in Malaysia or have been when the the policy/certificate was
effected and/or conventional banking facility, Islamic banking facility, credit/charge card
was taken and utilised by the complainant; and
(d) be referred to the Mediator within six months after such offer or observations (or later if
the Member agrees); and
(e) not concern fraud cases involving insurance policies or takaful certificates or third party
claim for personal injury; and
(f) not concern fraud cases other than fraud cases involving payment instruments,
credit/charge cards, ATM cards and cheques of value RM25,000 and below; and
(g) not concern complaints against staff of the Members; and
(h) not concern complaints by the staff of a Member against his employer or by insurance
agents or takaful agents against their principals; and
(i) not be brought after the expiration of six (6) years from the date on which the cause of
action accrued; and
(j) not concern the actuarial standards, tables and principles which the Member applies to its
long term insurance business (including the method of calculation of surrender values and
paid up policy values and the bonus system and bonus rate applicable to the
policy/certificate in question) for insurance and takaful claims; and
(k) not concern general pricing, product policies, services of members, credit decisions
(approval, rejection and rescheduling of loans) for conventional banking, Islamic banking
and credit/charge cards matters; and
(l) not be the subject of proceedings in or decision of any court of law (or arbitration); and
(m) not have been previously referred to the Mediator unless new evidence is available.
(iv) A complaint may also be made by a third party provided:(a) the insured party has notified in writing to his insurer/takaful operator with full details as
soon as possible after an event which may become the subject of the claim;
(b) the claim does not exceed RM5,000; and
(c) the claim is for damage or loss to property arising from motor insurance policy or takaful
certificate issued by a member.
(v) The Mediator may investigate any complaint to see whether it is within his jurisdiction.
B. DUTIES
The Mediator’s duties are:
(i) To have regard to and act in conformity with
(a) the terms of any contract
(b) any applicable rule of law, judicial authority or statutory provision; and
(c) the general principles of good insurance, investment or marketing practice, the Bank
Negara Malaysia’s Guidelines on Claims Settlement Practices for Insurance/Takaful
matters; but with (c) prevailing over (b) in favour of the complainant.
(d) the general accepted principles of good banking practice for conventional banking and
Islamic banking matters including credit/charge cards.
(ii) To have regard to (without being bound by) any previous decision of any Mediator.
(iii)In the light of (i) and (ii) to assess what solution would be fair and reasonable in all the
circumstances.
(iv) To attend as required any meeting (or part) of Board to provide reports, information and
assistance.
(v) To provide each Board Member a copy of his report for the period coextensive with the
accounting financial year of the Bureau and for the Members.
(vi) In the event that any question concerning a Syariah matter arises in the mediation process, to
refer such question to the Syariah Advisory Council established under subsection 16B(1) of
the Central Bank of Malaysia Act 1958.
(vii) Not to disclose any confidential information (except to persons properly entitled to such
disclosure).
2
C. FUNCTIONS
The Mediator’s functions are:
(i) To act as a counselor or conciliator in order to facilitate the satisfaction, settlement or
withdrawal of the complaint.
(ii) To act as an investigator and adjudicator in order to determine the complaint by upholding
or rejecting it wholly or in part.
(iii)Where the complaint is upheld, wholly or partially, to make a monetary award against the
Member binding up to a maximum of RM200,000 in relation to motor and fire insurance
policies and takaful certificates, RM100,000 in relation to other types of insurance policies
or takaful certificates, and RM5,000 in relation to third party claims.
(iv) Where the complaint is upheld, wholly or partially, to make a monetary award against the
Member binding up to a maximum of RM100,000 (except for fraud cases involving payment
instruments, credit cards, charge cards, ATM cards and cheques for which the limit is not
more than RM25,000) in relation to conventional banking and Islamic banking matters
including credit/charge cards.
D. POWERS
The Mediator’s powers are:
(i) On giving reasonable notice to attend any meeting (or part) of Board to address
(ii) Board on any matter specified in the notice.
(iii)Subject to the approval of the Board:
(a) to determine the methods and procedures to be adopted as expedient for considering and
determining complaints impartially and fairly.
(b) to appoint (on such terms as to remuneration or otherwise as he shall think fit) any
person who seems to him to be suitably qualified (whether as a professional adviser or as an
expert) to act in conjunction with him.
(c) to delegate such of his functions, duties and powers to an Assistant or such other staff of
the Bureau as he shall think appropriate.
(iv) To encourage research in and to carry out or commission such investigation or research as
may seem necessary in connection with any of the objects of the Bureau.
(v) To decline to entertain or proceed with any complaint which he considers frivolous or
vexatious or more appropriately dealt with by a court of law, by arbitration or by another
independent complaints procedure.
(vi) To require the complainant or the Member concerned (and request any other person) to
provide any information relevant to a complaint within such time as he considers reasonable.
(vii) To consult within the insurance/takaful/conventional & Islamic banking industry and
with other experts where he considers it appropriate about current
insurance/takaful/conventional & Islamic banking matters, investment or marketing practice
or about any other matter relevant to any complaint.
(Source: Financial Mediation Bureau, 2012: 52-54)
3