IFSP organized a seminar for its members to discuss and give their views on the challenges facing the industry. The meeting was well attended and a number of practitioners felt that the industry is facing severe pressure for renewal and pragmatic change. The challenges are numerous and one cannot ignore the added scrutiny of potential inspections here in the future by Moneyval - a EU mechanism with powers to conduct ad hoc inspections even on the private sector. This represents a Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (Moneyval) which was established in 1997, and now serves as an independent monitoring mechanism within the Council of Europe.
It is an FATF Style Regional Body (FSRB) whose main aim is to ensure that its member states have effective systems to counter money laundering and the funding of terrorism in place, and that they comply with the relevant international standards. As an institution, it assesses member states' compliance in the legal, financial and law enforcement sectors through a peer review process of mutual evaluations. The peer review system that has been adopted is based on the FATF model, though the process is undertaken against a more extensive set of anti-money laundering standards, including the FATF Recommendations, the EU's Third Money Laundering Directive, as well as the 1998 UN and 1990 Council of Europe conventions. Malta fared well in the latest inspection in 2012, but following the PANA reports one expects a more inquisitive approach and the feeling at the IFSP meeting was that inevitably, there will be a tightening of the current practice of joint inspections carried out by MFSA and FIAU.
Moneyval reported that the number of on-site visits was observed to be low. In addition, the absence of a national risk assessment to identify risky areas for ML/FT gave rise to concerns with regard to the effective implementation of risk-based supervisory activity. Due to such pressure and other factors led to reform at the MFSA such that a consultation exercise among practitioners and the industry was carried out last year. This was followed by Prime Minister Muscat saying that the "succession process" to replace the chairman at MFSA was agreed to start next month. The spotlight on alleged anti-money laundering transactions at Pilatus Bank has added an impetus to speed up the reform process given that a number of leaked FIAU reports on the bank have triggered an inquiry by the European Banking Authority (EBA) based on a request by the European Commission and a report from the European Parliament.
This puts MFSA in the spotlight since the EBA asked to see whether it is fully equipped and free from conflicts of interest to perform its supervisory duties. It was also asked to establish whether the MFSA had fulfilled its obligations as a national supervisory authority in extending the licence to Pilatus bank. Therefore, a recent announcement by the parliamentary secretary responsible for financial services noting that the MFSA is to undergo a legislative revamp is welcome. This revamp is built on a public consultation process launched last year. In brief, this article will present a case for splitting the MFSA into two authorities - one harnessing the prudential regulatory function and another entity having separate management to oversee the financial conduct of regulated bodies.
Putting all the eggs in one basket invariably comes at a price. Just consider the onerous responsibility the MFSA has for the direct supervision of all regulated firms (including banks, insurance and SICAVs). These include both prudential and conduct of business purposes and, at the same time, the duty to take remedial and timely enforcement action against firms wherein regulatory failures are identified. One of the main drivers which push the way for this revamp is that it exacerbates its powers to make judgments over whether banks' or listed funds' business models or financial products pose a risk to financial stability or are likely to cause consumer detriment. For example, the UK had until recently boasted a single regulator - the so-called FSA. The monolithic structure was unceremoniously split into two entities: the Prudential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility.
The first is conduct of business supervision of banks, insurers and major investment firms. This is followed by prudential and conduct of business and markets supervision of all regulated firms not falling within the remit of the PRA and finally, the enforcement (although it is important to note that the PRA will have the same powers as the FCA to impose penalties and fines for regulatory breaches). It will subject banks, insurers and major investment firms to separate regulation for prudential and conduct purposes. The so-called "twin peaks" model creates two new supervisors for regulated firms.
Perhaps MFSA can emulate the success of the UK regulator now that the EBA is conducting an inquiry on its activities. It certainly suffers from a lack of human resources, especially experienced ones. Experienced staff often resign to take up jobs that are more lucrative with top law/audit firms and are difficult to replace in the short term. It must continue to invest in resources to better internationalise itself possibly by recruiting foreign experts and this not only at regulator level but also within IT and Fintech. It must foster the growth of the funds and insurance sectors, which have faced challenges regarding new registrations when compared to established EU centres which are gaining ground in terms of UK business relocating due to Brexit.
However, not everything is doom and gloom. It is good to note that with the advent of new technologies hitting the financial scene such as Fintech, blockchain and cryptocurrencies will be part of the Bill the government is currently debating in Parliament. The regulatory pressures arising from a number of heightened directives such as the fourth and fifth AML directives and others have placed responsibility on the MFSA to equip itself to be able to maintain the island's competitive edge as a leading financial services centre. It is with the combined use of pragmatic regulation, creative innovation and service diversification that can lead us to face competition in the market place. They are our hallmarks for success.
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Mr Mangion is a partner in PKF, an audit and business advisory firm.