The Malta Financial Services Centre is to become the sole regulator of all financial services in Malta and is to be renamed the Malta Financial Services Authority in terms of a bill which started being debated in the House of Representatives yesterday.

The bill, entitled the Special Funds (Regulation) Bill, also makes it possible for retirement funds for foreigners to be operated from Malta.

It features detailed amendments to the Central Bank of Malta Act, the Malta Financial Services Centre Act, the Malta Stock Exchange Act, the Investment Services Act, the Banking Act, the Insider Dealing Act, the Financial Institutions Act, the Professional Secrecy Act, the Controlled Companies (Procedure for Liquidation) Act, the Insurance Business Act and the Insurance Brokers and other intermediaries Act.

At the opening of the debate, Finance Minister John Dalli said this bill sought to update the financial sector. It followed two years of detailed talks with all the players involved and was also the fruit of the experience of the past few years.

The minister said competitiveness was vital for the financial services sector. This was an export oriented sector which had to compete with the best.

Competitiveness should not be associated solely with costs. It had to also involve innovation such as that which came from new sectors and products.

Mr Dalli said the financial services sector accounted for 12 per cent of GDP and employed 5,000 people at least.

Malta did not have the thousands of companies other countries could boast of. But Malta had been careful to protect its reputation and it had carefully filtered applicants. Malta wanted serious, active companies, not brass plate firms. Indeed the majority of applications were rejected.

He was sure Malta had much more fruit to reap in this sector in the future, even in sectors such as substantial tax revenue.

The first objective of this bill was to introduce retirement investment funds. It would also update other financial legislation to best international practices and rules, introducing new structures of regulation and, through the Professional Secrecy Act, new mechanisms on information exchange among regulators in Malta and abroad.

Another objective was for Malta to have a single regulator for the whole financial sector as announced in 1994. That would be the Malta Financial Services Centre (MFSC) which would be restructured and renamed the Malta Financial Services Authority (MFSA).

There was also added focus in the bill on protecting consumers in areas such as advertising, the right for redress, and the creation of investment protection schemes in all areas.

Since offshore companies had up to 2004 to operate, the bill provided for such companies only up to that date.

Speaking about regulators, Mr Dalli recalled that in 1994 there were four regulators, the finance ministry which regulated insurance, the MFSC which regulated financial services, the Central Bank for the banks and the Stock Exchange for the exchange.

The MFSC took over the regulation of the banks on January 1 in a seamless exercise.

Later this year, the new MFSA would also become the regulator of the stock exchange. It would be the listing authority and supervise stock brokers, among other activities.

The MFSA would be run by a board of governors having a five-year term. It would also have an executive committee to implement the policies set by the board. The authority would have two directorates - the Supervisory Council and the Board of Management and Resources, which would have the administrative role for the authority.

Mr Dalli said existing licences would remain in force.

The bill provided that the Financial Services Tribunal would be better constituted and incorporate all other financial services tribunals.

Mr Dalli said it was felt that Malta should only have one financial services regulator because the various sectors of financial sectors were getting closer together. For example, banks now were also involved in insurance and investment services. Having a single regulator would make for uniformity, better regulatory coverage of all financial services, and ease of operation and lower costs for companies having different financial operations, as there would be no duplication of work.

The bill included measures to ensure that the single regulator was accountable and those who disagreed with its decisions would have the right to appeal.

The minister said the bill provided that retirement investment funds could be set up by foreign, not Maltese, companies which wished to set up retirement schemes for their employees and operate them from Malta.

These would constitute what were known as the second and third pillar of pensions. Second pillar retirement schemes (the first being government pensions) involved arrangements between employers and workers of a kind which once also existed in Malta.

Such schemes were being successfully reintroduced in several countries and this was an area which should be objectively discussed in Malta in the context of the sustainability of pensions to supplement government pensions.

The third pillar was private retirement funds, with people opting to invest some of their money in private schemes.

This bill would regulate the operation of such schemes from Malta, including the operation of the funds.

The bill amended the Central Bank of Malta Act to strengthen the independence of the bank. The bank was already de facto independent and that was now being introduced in the law.

As a result, the governor of the Central Bank would be appointed for five years. The governor and the deputy government may not have other functions which conflicted with their duties. The governor (or his deputy) alone would have the responsibility to set monetary policy. No politician may interfere in the setting of monetary policy. The governor would be assisted by a Monetary Policy Advisory Council which would announce its decisions as soon as possible.

The Minister of Finance had to be informed of the Central Bank's policies and the bank would be obliged to issue regular reports. The governor could be requested to report to the House Public Accounts Committee on monetary policy.

The bank would enjoy greater autonomy in its operations and the finance minister would have no powers on the bank's decisions involving, among other matters, lending, investment, allocation of reserve funds, the opening of accounts and changes to the bank's bye laws.

The bank was being given greater powers on the collection of information.

The bill also provided that the bank may not participate in the primary market of stocks and treasury bills.

The main role of the bank would therefore be to maintain price stability.

Mr Dalli said the bill provided that the Malta Stock Exchange Act would become the Financial Markets Act. The supervisory and regulatory role would be transferred to the Malta Financial Services Centre (now the authority). The exclusivity of the exchange as the only securities market was being removed.

The Stock Exchange Tribunal would be amalgamated with the strengthened Financial Services Tribunal.

A new system was being introduced to deter abuse. When abuse was suspected, the exchange would report to the authority which would appoint an investigator for the purpose.

The Investment Services Act was being updated. The mission statement was being widened to the promotion of competition and choice.

The bill was being aligned to the requirements of the World Trade Organisation and international markets. Stockbrokers would be made subject to this law. Regulations on advertising were being beefed up to ensure that advertising was not misleading.

The Banking Act was also being amended. The word "bank" in the definitions clause was being substituted by "credit institution." It was being ensured that those involved in the business of e-money would also be licensed as a credit institution.

The bill covered the "close links" sector, such as when companies were associated to banks.

It was also being laid down that the head office of a bank had to be located in the country where it was registered.

There would be stronger controls on the transfer of shareholding.

The Financial Institutions Act was being amended on the same lines as the Banking Act, also including areas such as the exchange of information.

In the insurance sector, the bill was strengthening controls, international collaboration between regulators and protection to policy-holders.

The Insider Dealing Act and the Professional Secrecy Act were being amended to include new offences such as, with regard to the former, market manipulation, the spreading of false information and other measures to achieve market making.

With regard to the latter law, cases of disclosure were being extended to avoid the possibility of crime being hidden. At the same time, protection was being extended to those who revealed such crime.

The amendments to the Controlled Companies Act were consequential to the amendments to the Banking Act.

Concluding, Mr Dalli said the financial services sector was an area where both political sides had collaborated.

Opposition finance spokesman Leo Brincat said the opposition agreed with this bill except for the sections dealing with the Central Bank and the MFSC. The fact that the government was going ahead with the changes involving the Central Bank and the MFSC, despite the opposition's objections, meant the opposition would vote against this bill.

The opposition did not object to the provisions on retirement funds as long as they did not mean the funds were being introduced for the Maltese through the back door.

The opposition disagreed that on the pretext of Central Bank independence, the appointment of the governor of the bank would be for a "minimum" of five years rather than a maximum. However independent the bank may be, this was a political appointment and the opposition felt that new governments should not be saddled with appointments made by their predecessors.

The opposition also disagreed that the MFSC had assumed the supervisory role of the banks from the Central Bank.

Mr Brincat in his speech said EU membership would rob Malta of the flexibility and comparative advantage it enjoyed in the financial services sector.

Furthermore, the Central Bank would actually lose independence, since it would be made subject to the decisions of the European Central Bank even with regard to interest rates, which were a prime instrument of monetary policy.

A full report will be carried in another issue.

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