Regulating financial services

As financial markets continue to evolve, it may be puzzling for consumers of financial services to know where they stand. The Sunday Times asked the Malta Financial Services Centre to explain its role.

Financial services are regulated to the strictest levels through a body of legislation enacted and updated over a number of years. The Investment Services Act, the Banking Act, the Financial Institutions Act and the Insurance Business Act provide for the authorisation and regulation of investment services providers, banks and financial institutions, and insurance companies, respectively.

Additional supporting legislation has been enacted to prevent any possible abuse by the licence holders to the detriment of consumers. This includes the Professional Secrecy Act, the Prevention of Money Laundering Act, which establishes the Financial Intelligence Analysis Unit, and the Prevention of Market Abuse Act, which came into force last month.

The financial services industry in Malta is adequately regulated, as has been certified by various international organisations, including the Financial Action Task Force in 1999, the Organisation for Economic Co-operation and Development (OECD) in 2000, the Council of Europe Money Laundering Committee in 2001, and EU Peer Review in 2002 and the International Monetary Fund in 2003.

A well regulated environment, as opposed to an excessively regulated or unregulated industry, provides an excellent breeding ground for licence holders to set up and operate in Malta in a professional manner for the benefit of prospective clients.

Autonomous body

The Malta Financial Services Authority is an autonomous public institution set up and regulated by law. Within the MFSA, the Supervisory Council, headed by the director general, is responsible for licencing, monitoring and supervising all activities related to financial services.

There are four directors responsible for regulating banking, securities, insurance and pensions, and another director for company compliance, who report to the director general.

In line with other jurisdictions, the MFSA Act also provides for the setting up of a consumer complaints manager, whose role is that of providing consumers of financial services with a free service to investigate complaints against financial entities. The complaints manager considers each case impartially and on its own merits.

A single regulator

The transition from a multi-regulated financial services industry to a single financial services regulator, the MFSA, was a structured part of Malta's long-term strategy to create a mainstream financial services centre in the country.

The aim was to create an effective regulatory regime based on a robust structure within which a single regulator has clearly defined regulatory objectives. Apart from being able to respond to rapid changes in the market, the regulator has a single set of functions and powers, and the flexibility to take full account of the different regulatory approaches appropriate to different firms, markets and consumers.

Finance companies have also benefited from a reduction in bureaucracy, streamlined procedures, lower fees and compliance costs, and a more consistent implementation of standards.

Complaining to MFSA

A consumer usually resorts to lodging a complaint with the MFSA's Consumer Complaints Office when the product or service acquired does not rise to the consumer's expectations. Very often, the consumer contacts the Consumer Complaints Office after getting in touch with the licence holder and is not happy with the outcome or the way in which the problem has been handled.

The complaints manager may be able to help with complaints with banks, intermediaries providing investment services, insurance companies, and intermediaries and stockbrokers.

Each case is looked into by the consumer complaints manager, who considers each case impartially and on its merits after discussing it with all the parties concerned. In the majority of cases, the consumer complaints manager succeeds to bring the parties to an amicable solution.

When this is not possible, the matter could still be referred to other redress schemes. The consumer complaints manager at the MFSA does not have empowerment clauses over licence holders and he can only mediate between the parties concerned.

However, from past records it can be shown that the majority of cases are resolved through mediation to the benefit of both parties.

Safeguarding rights of all involved

The MFSA safeguards the rights of all those involved in the financial services industry through proper regulation and by keeping abreast of changes in the financial services industry. The MFSA has supported the creation of the Financial Services Consultation Council, which represents the financial services industry and meets monthly, with the MFSA having observer status.

The council is presented with draft proposed changes and its feedback is obtained prior to the implementation of these changes. With regard to its regulatory role, the regulatory units within the MFSA carry out regular on-site inspections to verify that the legal provisions and the conditions attached to their licenses are being complied with.

Compensation schemes

Asked what remedy the MFSA offers when something goes wrong with money invested directly overseas, like in the Argentina bonds issue, the MFSA said compensation schemes are only intended for licence holders who are licensed by the MFSA.

All investment licence holders are vetted prior to obtaining a licence and the MFSA ensures that these licence holders give proper and adequate advice to their customers who want to invest money aboard.

If an investment goes wrong and the investor was properly advised about the risks that his investment would encounter, there is nothing the MFSA can do. The consumer complaints manager or the regulator will only take action if there are shortcomings on the part of the licence holder, such as giving false advice or inaccurate information.

If the consumer feels misled, either through overselling or through not being fully informed on the implications of the policy/service/ investment bought, there is recourse to the consumer complaints manager at the MFSA who will look into these irregularities and if necessary inform the regulator accordingly.

Any further decision will then be contemplated by the Supervisory Council, which may entail penalties or fines.