MFSA – a good time for change

Last week the IFSP organized a seminar for its members to discuss and give their views on the consultation document issued by the MFSA. The meeting was well attended yet for some unknown reason there was nobody present from the regulator body. IFSP council members presiding at the meeting felt emboldened by the issue of this consultation document, gently remarking that in the past the MFSA did not consult enough with the industry before issuing guidelines to the market.

This is regretted as some products and services could be improved/fine-tuned through such consultation processes. Practitioners who invest hard-earned cash to promote the financial services sector in many international fora complain that a much desired bottom-up approach hardly ever happened in the past, even though IFSP council members interact regularly on an informal level with Joe Bannister, the chairman.

This creates an aura of upstairs, downstairs and of course practitioners could only acquiesce since in a desire to protect the best interest of clients one is mindful that the MFSA is the only door leading to licensing. Members attending the consultative meeting observed inter alia that there is a skills gap at the Authority and a lack of expertise around the table when it comes to more sophisticated business. The MFSA has a lack of human resources, especially experienced ones.  Experienced staff often resign to take on more lucrative jobs with top law/audit firms and are temporarily replaced by juniors. Its board of governors (all political appointees) needs to focus on its strengths and enhance them, not try to offer everything to everyone. It must invest in resources to better internationalise itself by recruiting foreign experts and this not only at a regulator level but in IT and Fintech.

Progress in funds and insurance sectors has fallen backwards regarding new registrations when compared to established EU centres which are gaining ground in terms of UK business relocating due to Brexit.  A 2015 report reveals that the investment services sector received the highest number of on-site compliance visits at 18% over the year but only two insurance companies were visited, equating to a market coverage of just 3%.

We have to stop seeing the Authority as a cash-cow, i.e. mentality of creating jobs, and the need to open ourselves to new technologies in Fintech, such as Blockchain and cryptocurrencies. The aspiration to split the Authority into two mirroring a Twin Peaks structure was recommended on many occasions by practitioners but unfortunately since 2008, the administration was adamant to maintain the status quo.

Readers may ask what is the “twin peak” system. This system has evolved spontaneously over a period of time and is a recognisable feature in most parts of the world.  In this regard, the two peaks refer to the two faces of regulation. The first is on prudential regulation – the financial sustainability of financial institutions.  The second, the more recent, started emerging in the mid-1980s and is market conduct regulatory.  Market conduct is characterised by phrases such as “Treating Customers Fairly (TCF)”.

So, from this, market conduct has something to do with the relationship between financial institutions and the customers. The MFSA, restructured as a twin peak, will be better suited to use its supervisory powers to intervene earlier rather than later, as experience has shown in certain cases. One may question why, with all the regular monitoring of banks by MFSA, there was a sudden collapse of La Vallette Multi Manager Property Fund and Nemea Internet bank (among others).  Practitioners suggest borrowing a leaf from the FSA’s successful reform carried out in the UK following the collapse of British banks such as HBOS and Northern Rock in 2008.

In the UK, there has been a divorce of the regulatory aspects – that is one part to focus on regulated business and another as a separate independent entity responsible for consumer protection. Many commentators have written in the past about the La Valette Multi Manager Property fund collapse and the money lost by account holders at Nemea Bank (PWC-appointed administrators of Nemea by the MFSA). Really and truly, the La Valette scheme was a subsidiary of Bank of Valletta (BOV) which invested part of its funds in high-risk sub property that went mysteriously up the creek leaving a black hole of about €50 million.

At the time BOV acted as its custodian and issued a clean bill of health over its four-year tenure. The saga was defused four years ago when Bank of Valetta (without assuming responsibility for any wrongs) accepted to pay aggrieved unit holders a percentage of their investment on a take-it-or-leave-it final settlement offer.  Probably, the benevolent change of heart by BOV resulted mainly after court action was instigated by investors in a class action.

In another case, the MFSA supervisory body stated that despite its efforts, the chances that licensed entities fail “cannot be eliminated” when quizzed about the €6.2 million alleged misappropriation at the Maltese Cross Financial Services firm, whose books it did not inspect for six years.  All this begs the question – is the consumer adequately protected?  It is perplexing to know that Malta, as a small island, where everyone in the business community knows each other – it is very easy to check whether abuse of mis-selling takes place.

Yet, with hindsight it had to be the legal protest by unit holders that alerted the regulator, following a barrage of criticism in the media, the MFSA then appointed Mazars (a local audit firm) by direct order to examine the list of applicants and classify those who were inexperienced and any such applicants were to be further compensated capping the total refund at €1 each unit.

Back to the Twin Peak model: once implemented it will result in reallocation of staff at the MFSA into financial regulation and market control. The latter introduces a muscled consumer protection unit ideally headed by a specialist to fend off potential future mis-selling and other scandals.  In conclusion, it is clear that keeping the status quo is not an option, but of course while any reform needs to be carried out expeditiously it is commendable not to ignore suggestions by practitioners and members of the IFSP. Together we can recreate a regulatory model that reflects the exigencies of the post Brexit era.

George Mangion is a partner in PKF, an audit and business advisory firm.