MFSA - let the virtuous throw the first stone

It does not rain, it pours when it concerns Paradise Papers leaks revealing alarming news that the chairman of MFSA is personally named in the management of a Russian mining venture poised to attract funds from European Bank for Reconstruction and Development funds under the auspices of Fort Knox type regulations EBRD projects. 

This comes as a bolt from the blue. MFSA’s chief regulator was the Supremo who for more than a decade stood like a Colossus micro-managing the growth of the financial centre and rigorously overseeing that the name of Malta is above reproach - a truly prim and proper domicile. The industry grew from a modest size in 1998 to give birth to a reputable centre of international business.  

The new leak oozing out of Paradise Papers reveals how the Supremo had links to a Russian mining firm. This news was denied by the incumbent.

He played down his role in the venture saying he was a non-executive director of one of its shareholders namely ACP Special Situations No. 2 Limited. Quoting “The Times of Malta” it stated inter alia that it has seen evidence showing how the Russian mining company IMHL claims Prof. Bannister as part of its “management”. 

This is conveniently domiciled in the British Virgin Islands.

Prof. Bannister stood firm against such accusations - he says his position was cleared by the prime ministers he has served under. Can the storm be a bad dream - will it pass away when we wake up or are we braced for severe casualties that may eventually tarnish our name in the international markets.

Practitioners who invest hard-earned cash to promote the financial services sector fear that such revelations (unless rebutted) scare away investment.  

Prof Bannister was always close to the financial services practitioners but not in a much-desired bottom-up approach even though he has kept his inner circle of Illuminati whom he is alleged to have regularly consulted. This creates an aura of upstairs, downstairs but of course practitioners in the outer circle could only grin and bear it. 

It stands to reason that in a desire to protect the best interest of clients one is mindful that one cannot muddy the waters with MFSA.  It is the quintessential Pearl gate leading to licensing.  But one cannot say it is all doom and gloom.

The root of the problem can be partly attributed to the fast rate of economic growth which inevitably rendered MFSA facing a shortage of human resources, especially experienced ones. Prof. Bannister has navigated the ship through the stormy waters of the greatest world recession since 1930. 

His rich experience bequeaths a formidable legacy to his successor and one hopes that the Prime Minister does not yield to temptation to appoint a political acolyte with doubtful credentials as the post merits an experienced professional person with zero political baggage in his or her stable. 

MFSA needs a complete branch and root overhaul to face new challenges. Post -Paradise Papers, in particular, it needs young blood to harness the challenges of cutting edge legislation concerning Fintech, Blockchain, Cybercrime and Cryptocurrencies. 

Banks need direction to face the Tsunami that is expected to hit them when such technologies become mainstream.  

Needless to say, MFSA’s board of Governors (all political appointees) need to focus on its strengths and strive to enhance them, not try to offer everything to everyone. They must invest sufficient resources to internationalise the Authority by recruiting foreign experts. 

Progress in funds, asset management, pensions, banking and insurance sectors has slowed albeit Brexit has created new opportunities which are gaining ground in terms of UK business relocations.  

We have to stop seeing the Authority as a cash-cow, i.e. mentality of creating jobs.  Perhaps now is the ideal time to seriously try to reform the single regulator model and split the Authority into two mirroring a Twin Peaks structure.

Readers may ask what is a “twin peak” system. This model 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 with the first part comprising prudential regulation – the financial sustainability of financial institutions. The second would be a more recent development that started emerging in the mid-1980s, which is market conduct regulation.

Market conduct is characterised by phrases such as “Treating Customers Fairly (TCF)”.  So, from this angle, market conduct regulates the relationship between financial institutions and the customers.  

Once MFSA is restructured as a twin peak model it will be better suited to use its supervisory powers to intervene earlier rather than later, as past experience has shown in certain cases.

One may question why, with all the regular monitoring of banks/funds by MFSA, there was a sudden collapse of La Vallette Multi Manager Property Fund, Malta Cross Financial Services firm, Swedish Pension fund debacle, Nemea Internet bank and Setanta insurance, 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.  

UK reforms gravitated into 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 savings lost by account holders at Nemea bank.  In hindsight some may recall 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 during its four-year tenure.  The saga was diffused when directors at 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. 

In another instance, 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 in Malta, a small island, where everyone in the business community knows each other - it is very easy to monitor whether abuses occur. Yet, in hindsight it had to be the legal protest fielded by unit holders that alerted the regulator. 

Following a barrage of criticism in the media, MFSA appointed Mazars (a local audit firm) by direct order to examine the list of applicants and decide how to classify those who were inexperienced. 

The latter were to be further compensated capping the total refund at €1 each unit.  

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 other stakeholders.

Together we can recreate a regulatory model that reflects the exigencies of the post Brexit era.

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