The challenges to our regulatory authorities are numerous and one cannot ignore the added scrutiny of the local scene by potential inspection in the near future by Moneyval - an EU mechanism with powers to conduct ad hoc inspections even on the private sector. It consists of 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 in 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 in place to counter money laundering and the funding of terrorism, 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 last inspection carried out in 2012, but following the PANA reports and the Pilatus Bank closure one expects a more inquisitive approach. At the IFSP annual general meeting, the feeling was that, inevitably, the current practice of joint inspections carried out by MFSA and FIAU will be tightened. Moneyval reported that the number of on-site visits was low. In addition, the absence of a national risk assessment to identify risk areas for ML/FT gave rise to concerns with regard to the effective implementation of risk-based supervisory activity. Such pressure and other factors led them to instigate reform at the MFSA such that a consultation exercise among practitioners and industry at large 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. It came into effect last month with the appointment of Prof. John Mamo.
The undivided attention is on alleged money laundering transactions at Pilatus - an Iranian bank which was introduced to Malta in 2012 and audited by KPMG. It has added an impetus to speed up the reform process given that due to a number of leaked FIAU reports on the bank, they 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 places MFSA in the spotlight since the EBA was 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 that MFSA is to undergo a legislative revamp is welcome. This overhaul is built on a public consultation process launched last year. In brief, this article is advocating 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. Having all your eggs in one basket comes at a price. Just consider the onerous responsibility the MFSA has for the direct supervision of all regulated firms (including banks, funds, insurance and SICAVs). This includes both prudential and conduct of business purposes and, at the same time, the duty to take remedial and timely enforcement action against firms where it identifies regulatory failures.
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 a single regulator until recently - 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 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.
Certainly, MFSA suffers from a lack of human resources, especially experienced ones. Experienced staff often resign to take on 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 a regulator level but also in IT and Fintech. Progress to improve the growth of funds and insurance sectors has faced challenges regarding new registrations when compared to established EU centres which are gaining ground in terms of UK business relocating due to Brexit.
But not everything is doom and gloom. Observers recognise that our national AML/CFT framework can be further strengthened to be more effective. The authorities have conducted a National Risk Assessment (NRA) to identify our highest threats and vulnerabilities, as well as a gap assessment to identify those areas in our institutional framework which require improvement. A comprehensive exercise covers all key elements of our national framework: from supervision and intelligence gathering to investigation to prosecution and confiscation.
The Strategy highlights seven initiatives, broken down into approximately 50 actions, to be implemented over the next three years. The regulatory pressures arising from a number of heightened directives such as the fourth and fifth AML and others has placed the MFSA in the spotlight 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 will lead us to face competition in the market place. They are our hallmarks for success earned in the financial services sector.
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Mr Mangion is a partner in PKF, an audit and business advisory firm.