Reference is made to the editorial carried in the Times of Malta entitled ‘Way ahead for financial regulation’ (February 13). The editorial makes several points on which I wish to elaborate further.

Extent of regulation 

The editorial refers to the ‘remarkable failures’ experienced by financial regulation and states that “these were all the result not so much of lack of regulation as the lack of effective regulation”.

These remarkable failures were not limited to Malta. One cannot fail to mention the Wirecard scandal in Germany, the recent FTX failure, Lehmann Brothers and Monte dei Paschi... the list is long.

Secondly, stating that these failures were all the result of (in)effective regulation is an oversimplification of the issues involved. It is natural that financial regulation, like law in general, struggles to keep up, at times fails and is then recalibrated on an ex-post basis. If we are expecting financial regulation to always deal pre-emptively with all issues and our regulators to be infallible, then we are setting them up for failure.

Anyone working in the financial services industry in Malta knows that in the past years, the vast majority of financial institutions have forged ahead with performing sterling work in the best interests of their investors, shareholders and society at large while being subjected to disproportionate rules and fines and spiralling compliance costs. Meanwhile, operators have struggled with the ripple effect caused by these ‘remarkable failures’ and by other failures for which they were not to blame. 

Way forward (suggested by the editorial)

The editorial is suggesting the hammering out of a new regulatory system. Is it implying that the system itself failed us? Well, it didn’t. We should not fall into the trap experienced by other jurisdictions which blamed their regulatory system for all their woes and failed to address the real issues. Surely, the system may need refinements in places and enhancements in others.

The MFSA’s responsibility is stretched over too many sectors.  In most other jurisdictions, certain parts of what we refer to as “financial services” (as defined in article 2 of the MFSA Act) have been carved out from the remit of the single financial regulator and allocated to SROs, or to regulators set up to focus on an ad hoc industry.

The editorial also suggests that “more intrusive and ongoing scrutiny is needed to ensure that only people who are experienced and of integrity occupy decision-making roles in the sector”. Being intrusive and increasing scrutiny is already part of MFSA’s strategy since, at least, 2008.

The MFSA should choose when to be intrusive and should seek to be less intrusive. More reliance and responsibility should be placed on those occupying key positions in financial services providers similar to the regulatory approach taken in the UK. The regulatory intrusion which the sector has experienced in the last few years has been disproportionate, increased costs for financial institutions and made Malta less attractive for business.

 The editorial is also apparently expecting the MFSA to identify and manage risks that do not fall under its remit. While I can fully appreciate what the editorial is referring to, may I suggest that it is not the role of the MFSA to manage risks which do not fall within its supervisory functions.

The MFSA does not have the remit to ‘manage’ the risks posed to investors in the capital market. Its role is limited to, inter alia, safeguarding market integrity and ensuring investor confidence. The MFSA also supervises how investment products are promoted by intermediaries backed by very strong regulatory tools like MiFID II. What is needed is more investor education such that before making their investment decisions, investors are able to read the writing on the wall as disclosed in offering documentation, rather than blindly pursuing the annual coupon.

Finally, the editorial is suggesting that the MFSA should “... address the past regulatory failures that have seriously damaged the country’s reputation”. Regulatory failures have NOT seriously damaged the country’s reputation. In several instances, problems were laid at the doorstep of the MFSA and we all expected the MFSA to solve them without the training, tools or resources to do so; to make matters worse, the MFSA was expected to face the music in international fora.

Proposed way forward

I am taking this opportunity to outline what I would consider as the priorities for our financial services regulator and for the industry as a whole:

• focus more on training and on talent attraction and retention. The MFSA cannot afford further brain drain. The focus on training should be a priority for all the industry not just the MFSA. The sector has grown, it has matured and stakeholders have not invested sufficiently in human resources. We have not done enough to ensure that the quality of our talent pool and of our sector/industry leaders (current and future) are of the required standards to cope with a highly complex environment;

• apply proportionate regulation considering the size, nature and complexity of local financial institutions also when compared to those in other financial centres in the EU or outside;

• focus on efficiency. Reducing red tape should be a key objective. Reporting requirements should be aligned. Operators cannot afford an exponential increase in their costs due to excessive reporting requirements or dual or triple reporting of the same information to different regulators;

• a strategy is needed extending beyond financial services regulation to other areas impacting the ecosystem in which financial services providers operate, like the tax system, the justice system and company law to name a few;

• efforts at an international level should be increased for the country to continue its bridge-building with other jurisdictions, business partners, regulators and authorities. The MFSA should be part of these efforts as the financial services regulator although such initiatives require coordination at inter-ministerial/executive level and major contributions from all stakeholders, including industry;

• lastly: service providers are also gatekeepers. The first contact with a jurisdiction is made with these service providers. Therefore, it is incumbent on service providers to act as a sieve and consider their own and the country’s reputation when accepting business.

As a concluding remark, the editorial made no reference to the MFSA Strategic Statement which was issued some days ago. The statement makes for some interesting reading and the title (‘Securing our future as a resilient and efficient jurisdiction’) is immediately indicative of its contents. The statement refers to the regulatory burden being “kept under review with the aim to keep it efficient and outcome-driven”. It identifies five strategic pillars with a focus on agile and proactive regulation, sustaining the financial sector, good governance and compliance, innovation and public engagement.

The statement augurs well for the future and we are confident that the new chairman will find a solid base to build on and to contribute to the improvement and enhancement of financial regulation across the board. The challenge now is for all of us to walk the talk.

Andre Zerafa is a managing partner at Ganado Advocates.