On April 17, Ganado Advocates will be once again hosting its annual Banking & Payments Law Seminar in collaboration with the Malta Bankers’ Association. “Particularly this year, we not only mark 10 years since Malta joined the Banking Union in 2014 but we also look at the greater responsibility of banks and payment institutions to protect their customers from fraud in the light of the ever-growing payments industry,” say Dr Conrad Portanier and Dr Leonard Bonello from Ganado Advocates.
“The wider context of this event is that today, with payment fraud cases being a considerable part of the claims filed with the Arbiter for Financial Services, we now have a sizable number of judgements that allow us to extract common patterns and trends in the Arbiter’s judgements,” says Dr Conrad Portanier.
Over the past few years, the sector has seen the growth of digital payment platforms. But are these platforms complying enough and is the current regulation encouraging them to comply?
“Payment Services is still a relatively young industry since most institutions are barely a decade old and for a considerable period, this industry was largely under-supervised. But today, this industry has strategic importance and is highly regulated like other banks. But these players are also capable of using technological innovation as a compliance enabler,” adds Dr Leonard Bonello.
Through the PSD3 Directive and the PSR regulation, the European Commission aims to ‘bring payments and the wider financial sector into the digital age’.
Some find it difficult to reconcile this with the fact that local regulatory institutions have been showing active resistance to some of these platforms and insisting they not be referred to as ‘banks’. Even some traditional banks have been showing active resistance to these new payment platforms.
“I think this is an unfair criticism because the MFSA was one of the first regulators within the EU to issue a licence to an electronic money institution and to date, it remains one of the EU regulators which is most open to new applicants and has invested significantly in a specialised Fintech team,” says Dr Leonard Bonello.
“The resistance by local authorities could perhaps be motivated exclusively by a consumer protection agenda but with time and more awareness on these banking-like solutions, authorities might relax more on the way these institutions are marketed.”
“Let’s keep in mind that banks are larger institutions and are still balancing the varied demands of older, Gen X, and today’s tech-savvy generations and while some banks have already started capitalizing on opportunities as gatekeepers for new financial players, some others continue to resist the reality that traditional banking is obsolete.”
“Embracing technology is essential and viewing these new platforms as opportunities rather than threats, is crucial for banks’ survival,” added Dr Bonello.
Is there a risk of too much regulation and detailed requirements and is it true that banks spend half their time studying and implementing compliance obligations rather than carry out actual banking?
Dr Portanier notes that the rules that apply to the largest European banks are equally applicable to all of Malta’s banks and this is why smaller banks struggle with the volume of regulation thrown at them.
“The debate on whether we should go for an unbridled free market ideology or more intrusive regulatory capitalism has been going on for over a century but currently, particularly in the European Union, we have been experiencing more interventionist regulation.”
“Let’s not forget that Malta is still living its post-grey listing period, where banks are still very wary of compliance risks, even at the cost of losing business. Regulation remains necessary for protection against abusive behaviour but when this is excessive, it stifles business and innovation and creates barriers for new entrants.”
“The EU’s principle of proportionality ought to be applied more in practice. For instance, the law mandating instant payments within SEPA is a positive measure, but there should have been an opt-out for smaller banks. Striking the right balance remains the legislator’s constant bane,” said Dr Portanier.
Locally, up to a few years ago, blockchain was the talk of town and a very convenient bandwagon. Today, mentioning it is close to entering a minefield. What went wrong?
“Unfortunately, the industry was overhyped and blockchain was portrayed as being the solution to all problems but now that the dust has settled and that blockchain and crypto are here to stay, we know that these are just a small part of the financial services ecosystem,” adds Dr Bonello
“I prefer to focus on the fast-approaching MICA, the EU’s cryptocurrency regulation for which the Maltese framework was a clear source of inspiration for EU authorities and whose principles reflect the VFA framework and the strategic decisions taken by the MFSA at the time.”
Dr Leonard Bonello added that today’s biggest legal challenges arise from the convergence of banking and technology, especially with the integration of AI, machine learning and biometric authentication methods and that much more investment is needed in financial and technological literacy to address these challenges.
Malta this year celebrates 20 years as an EU member and 30 years as an international finance centre.
“As legal professionals, we need to ensure that the legislative and regulatory innovation which have characterised the island over the past two decades continue to be our defining features. We need to ensure that our laws reflect the changing financial and regulatory landscape and continue to foster competition, laws which allow minors to open wallets with an EMI in the same way that it is possible to open a bank account, laws which facilitate collateral over crypto assets and urgent updates to our company law.”
“Unfortunately, the transposition of EU regulation has become so intensive that we are losing our ability to innovate and legislate in a cutting-edge manner. We need to rekindle this skill to ensure that Malta remains an attractive hub for this industry,” concluded Dr Bonello.