As Malta’s single regulator of financial services marks its 20th anniversary in July this year, the MFSA is renewing its commitment to continue strengthening, consolidating and future-proofing the sector.
The ever-changing regulatory landscape and the growing complexity of businesses which are developing at a speedy rate, call for the MFSA to fine-tune its strategy for the next two years. This will also help it build further on its regulatory foundations that have been re-shaped as a result of the major economic events which have marked the past 20 years, such as Malta’s entry in the EU, the financial crisis, as well as the more recent FATF greylisting.
The world now stands on the brink of the Fourth Industrial Revolution, making digitalisation inevitable. Businesses are adopting new technologies to add value to their product offering and level up their game in an increasingly competitive market. This new business dynamic poses yet another challenge for the MFSA as a supervisor of financial services entities, not only to keep abreast with the latest evolutions in the technology sphere, but also to establish how these may impact the nature of the services which it licenses. On this note, MFSA Chief Executive Officer Joseph Gavin states that, “Working closely with our counterparts, we must keep these developments under constant review as we seek to better understand the risks, work on new policy responses, and reflect these in our supervisory framework.”
Malta’s payment and electronic money services industry is one very clear example of how the legal infrastructure has in recent years been developed to reflect the regulation and supervision of more innovative and technologically driven activities. MFSA CEO Joseph Gavin explains that striking the right balance between, on the one hand, creating innovative legal concepts and supervisory techniques to mitigate the inherent risks, and on the other, allowing innovation to add value to the financial system, is key. “We see this as an area of strategic focus going forward. The Authority will need to factor this into its longer-term planning process while ensuring that appropriate timely initiatives and targeted legislative interventions also feature among its more immediate priorities,” he adds.
With payment firms being in a strong phase of growth, they are potentially and gradually encroaching on the banking space. Nonetheless, banking remains a solid trend which is also currently shaping financial services. Yet again, the banking sector has proven its resilience in times of economic stress induced by the COVID-19 pandemic and reputational risks, on top of the tightening of regulatory obligations and intensified supervisory scrutiny. Commenting on the priorities for this sector, CEO Joseph Gavin said that in order to further strengthen banks’ resilience to systemic vulnerabilities, “our efforts will also need to focus on the consolidation of our supervisory systems, the sound development and growth of the banking system, and the standard of service delivery of credit institutions, in line with the effective implementation of the EU banking package.”
A sector which has also maintained its momentum, despite the highly competitive environment that it operates in is that of securities and markets. Besides the ongoing updates in regulatory frameworks and processes for investment funds, the MFSA recognises that an additional focus is required on strategic needs, including efforts to increase choice and reduce concentration risk in custody service provision. To this end, it is committed to fostering and improving the competitive position of the securities and markets sector over the next couple of years with an emphasis on improved processes, niche products, and development of a more institutional focus.
Featuring a diverse set of business models, the insurance sector is consistently growing. The strong legal and regulatory infrastructure has enabled the jurisdiction to develop into a cross-border insurance hub. Taking on EU regulatory best practices and improving on its risk-based supervisory model is an ongoing pursuit for the Authority, which is intent on deploying more data and tech-based tools in its supervisory work. Supporting this stance, Mr Gavin said, “We also see that increasing local availability of actuarial expertise and other specialisations could unlock further potential in this area and that this would in turn call for enhancement of supervisory competences and risk management frameworks on our part.”
Following the launch of the new Company Services Providers (CSP) regime, the Authority now has an increased number of providers falling within scope of this new CSP legislation. Given this latest development, MFSA CEO Joseph Gavin recognises that raising standards within the sector is all the more necessary due to the gatekeeping role which CSP and trustee services play within the wider economy, placing transparency, risk awareness and two-way communication at the centre of the MFSA’s expectations.
Turning to an over-arching priority which remains valid and relevant across all sectors within the industry -governance and compliance - CEO Joseph Gavin reiterates the importance of maintaining a strong compliance culture, not only because it contributes to efficient regulation, but it also adds value to the business, by placing consumer interests, market integrity and financial soundness at its core - “the MFSA expects the industry to be a beacon of good corporate governance that spurs corporate investees and users of the financial system to follow suit.” Undoubtedly, MFSA’s expectations on governance standards are here to stay, and to which, an added sustainability dimension is anticipated in the coming years.
With sustainable finance gaining ground on a global level, financial supervision will become a completely different ball game as legislation is expected to be widely impacted by the EU’s sustainable finance action plan. Even though the details in this package are still being fine-tuned, regulators already need to start integrating key legislative elements in their prudential and conduct supervisory regime. Engaging with other foreign competent authorities and stakeholders to ensure convergence and best practice adoption is a must. Additionally, the MFSA will concentrate its efforts on developing its capacities to meet the challenging supervisory responsibilities in this area, integrate environmental, social and governance (ESG) market monitoring and risk assessment into its processes, and develop the tools to ensure transparency and tackle greenwashing.
To ensure that the strategy for the next two years is backed by a well-equipped staff complement, the MFSA will continue to invest further in supervisory technology. This will enable the regulator to carry out more in-depth and timely supervision, strengthen its enforcement framework and enhance risk-based oversight across the board while providing Supervisors the support necessary to continue their professional development, especially through its Financial Supervisors Academy. While the MFSA is keen on driving the sector towards these goals in the coming months and years, Mr Gavin remarked that the role of the participants in the industry is just as weighty. All stakeholders must work together to safeguard the industry and uphold the integrity of the jurisdiction, because ultimately, a vibrant financial services sector is beneficial to everyone.
Finally, the MFSA CEO said that with these objectives the MFSA is set on “actively contributing to the future of the financial services industry in Malta by fine-tuning the skills we have developed over the years, opening up to new opportunities, and strengthening the industry overall.”