On the cold morning of February 1, 1994, an audience of over 100 guests filled the conference room of the then Mġarr Hotel, Gozo. It was the start of a two-day residential seminar packed with discussions and presentations about how Malta was to evolve from an offshore to an international financial centre. The high-profile event, addressed by experts drafting the new financial services legislation that was to make its way to parliament later in the year, also signalled the transition of the Malta International Business Authority (MIBA) to the MFSC, which became today’s MFSA.
I still remember a particular slide from the opening presentation: “Malta is a latecomer to this business, and competing with the likes of Luxembourg, Dublin and the Channel Isles will be tough; but we can do it, as long as we have one word stamped on our visiting cards: reputation.”
I look back at that time as the birth of our financial services industry. Many of those present at the seminar, from politicians to regulators to practitioners, are still around and remember what we had resolved: that Malta could only realise its extensive and sophisticated ambitions through a modernisation of the legislative framework, a firm approach to regulation and supervision, and no-nonsense commitment to upholding reputation. How, then, did we find ourselves in today’s situation, as public discussion rages on while the Moneyval deadline looms closer? The reasons are more deep-rooted than might appear; they go back a couple of decades and cut across consecutive governments.
To start with, successive administrations maintained light watch over certain regulatory authorities – all in the spirit of bipartisan political consensus around the financial services industry, vaunted as vital to promote Malta as a stable financial centre. Prudent licensing policies that had initially steered Malta clear from financial activities taking place in competing jurisdictions like Cyprus, which suffered serious reputational consequences as a result, were flexed. And as anti-money laundering regulation tightened across Europe, propelled also by a wider international mandate for the FATF, Malta soft-pedalled on investigation and enforcement.
Moreover, ‘Know Your Customer’ procedures, fundamental to any anti-money laundering system, became primarily the responsibility of banks, ironically earning them criticism in the process for being too probing and demanding.
How did we find ourselves in today’s situation?
Over time, new banks and their controllers were licensed to operate when common sense should have suggested otherwise. The number of gaming companies and corporate services providers (CSPs) mushroomed but their activities were not matched by an increase in regulatory and supervisory resources. More recently, as Malta sought to become the go-to place for fintech and digital innovation, it allowed programmes promoting crypto exchanges and citizenship-by-investment (IIP), with their inherent higher risk profiles, to steal the limelight. Meanwhile, a national risk assessment, which took years to conclude, resulted as limited in scope and overall effectiveness. These are just a few examples of how reputation slipped from the centre stage of Malta’s design for its financial services industry.
The restructuring reforms carried out by MFSA, including stepping up prudential supervision and financial crime compliance as priorities for 2020, and by the FIAU, are positive and in the right direction. The national coordinating committee on combating money laundering is also in a race against time to remedy the Moneyval findings. But there are bigger ‘backstage’ issues that need to be addressed.
Urgently, the tone across all segments of the financial services industry and its promotion must return to reputation. Financial regulators and supervisors must have their independence protected from all kinds of pressure, whether from politicians, practitioners or their own boards.
Appointments to the governing bodies of these authorities and of agencies promoting the industry must be based solely on merit, ensuring that only individuals known for their competence, experience and integrity represent the face of Malta. This also means that politicians, regulators and practitioners must adhere to a culture of high ethical standards at all times and avoid even the slightest whiff of conflict when promoting Malta’s finance industry.
Although much has been done over the years to develop the right infrastructure and legislative framework, reputation and trust remain at the core of the financial services industry. That slide from 1994, and the resolve it carried, did not have an expiry date; in fact, they have never been more relevant.
Marcel Cassar, CEO of APS Bank and former chairman of the Malta Bankers’ Association