The Malta Independent 24 October 2020, Saturday

MFSA – independence from Castille power strings

George M Mangion Tuesday, 13 October 2020, 14:02 Last update: about 10 days ago

Over two decades since the financial sector was piloted by Professor Bannister as chairman at MFSA, he saw the sector grow from a modest size in 1994 to a vibrant one, which gave birth to a reputable Centre of international business.  

During Bannister's watch commentators lament that MFSA's autonomy from the strings at Castille was paper thin so it comes as no surprise that the International Monetary Fund and other international organisations are insisting on its operational independence.

ADVERTISEMENT

The board of governors and the CEO have always been nominated by the government of the day (he who hires the piper sets the tune). The demise of private banks such as Nemea, Sata Bank and Pilatus last year were the fruits of past mistakes in banking supervision and we are all too wise - now blaming that oversight was found wanting. 

One welcomes the latest IMF report which has been requested by government that gives a piercing analysis of the factors which attributed to the recent shortcomings in the banking sector.  Pre-COVID pandemic, this contributes 11% to the gross value added and also accounts for more than 10% of employment.  MFSA as a super regulator employs around 320 professionals (with a wish list for another 200).  

This is no small team to oversee approximately 2,300 licensed entities but MFSA envisages the scope for regulation is growing and wants to recruit more trained staff.  In the aftermath of Panama Papers, Venice reports, Greco and Council of Europe revelations, the MFSA now wishes to further tighten the screws by clamping down rules concerning 5th AML i.e. money laundering and terrorist financing. The new CEO at the MFSA wants to be seen as a Colossus fighting the infidels that penetrated the fragile fortress with their Trojan horse leaving in its wake a stigma of AML and terrorist financings decoys.  

He claims that Malta needs to grow responsibly and set standards which are in line or better than those of our peers in Europe. Stoically, he embraces technology and innovation, entering the FinTech space with optimism and preparedness.  

This is all very grand but it warrants a higher subvention. It is a fact that the annual surplus (circa €10m) mainly posted by the registry of companies (MBR) has always helped fund operations at the MFSA with the balance repatriated to government. Recently MBR has moved to larger offices and does not share its surplus with the MFSA.  

There is a rumour that the MFSA is contemplating securing the extra funding needed for a transformation to be sourced partly out of a future increase in fees charged to practitioners.  This is not advisable. The MFSA has long stopped financing promotion of the sector, rightly saying it cannot be seen compromising its impartiality. This is commendable, but then the sector has to be actively promoted by practitioners to compete with other jurisdictions that are actively fine-tuning their laws and financial concessions to lure blue chip companies.  

Practitioners, therefore in the absence of state promotion have to dig deeper in their pockets to fund promotion by touring the globe, attend conferences, seminars and give marketing presentations so that the island stands a better chance to compete. The logic to load practitioners with higher fees may not be a good idea. Practitioners cannot be rendered uncompetitive on the global scene by extra charges expected in the post-COVID recovery.  

This extra funding is warranted in a scenario that saw financial institutions constantly changing and adapting to new rules. Quoting an example two years ago, we witnessed Malta's bold attempt to be rated as the Blockchain island in Europe.  

This government sponsored promotion resulted in the MFSA having to put a lot of effort in drafting cutting edge legislation and set the groundwork for VFA licenses to be issued.  Initiatives by private practitioners are always welcome; therefore, it is opportune for PKF Malta in launching The Bit-Pod online concept.

This is a meeting place for informal discussions among practitioners, engineers and DLT enthusiasts to network and discuss latest topics on the vast subject of this technology. It is a non-profit organisation as it helps connect entrepreneurs (mainly start-ups) to people, programming engineers and other resources across the DLT and virtual currencies domain.  Whether you are looking to connect, learn, share or work, the Bit-Pod offers a selection of opportunities to network with other start-ups. This may help you to scale the slippery slopes of licensing and running an ICO or a virtual wallet.  

Back to Fintech regulation, the fly in the ointment is the need to renovate banking supervision and secure complete independence of the regulator from potential government override. Again, referring to the Financial Sector Assessment programme on Malta's financial stability, this found that the banking sector was in good health, but warned that high exposure to property-related loans and rising property prices posed a risk to the country's financial system.  

It found that our retail banks face challenges coming from a property and construction boom.  It emphasises that "Core domestic banks' high exposure to property-related loans, together with the rapid house price appreciation, poses a risk".  

It does not come as a surprise, that in the shadow of the disgraced Pilatus bank (now with its license revoked). The Pilatus bank (last audited by KPMG) was the centre of political controversy ever since a series of leaked FIAU intelligence reports flagged evidence of money-laundering and serious compliance shortcomings four years ago. The ECB investigators identified a lack of checks over accounts held by Pilatus Bank, which was shut after its Iranian owner, Ali Sadr Hashemi Nejad, was arrested in the United States on money-laundering and sanctions violation charges (now freed of all charges).   

Despite warnings, BoV kept scant details about the source of wealth of Pilatus' directors and no documentation was provided when Ali Sadr opened an account in 2014, the ECB report said.  

In conclusion, on a positive note, we hope that the 2021 Budget will revisit such weaknesses by formulating a five-year programme to rid banks from non-performing loans and enable them to start upgrading their risk profile to accelerate the issue of credit to deserving start-ups.

[email protected]

 

The writer is a partner in PKF Malta, an audit and business advisory firm.


  • don't miss