Brincat views EU membership as robbing Malta of financial sector flexibility

Opposition finance spokesman Leo Brincat has argued in parliament that EU membership would rob Malta of the flexibility and attractiveness of its financial services sector. At the same time the Central Bank would be effectively surrendering its monetary policy role to the European Central Bank.

Mr Brincat was speaking during the debate on the Special Funds (Regulation) Bill. The bill provides for the regulation of retirement funds for foreigners. It also amends 11 financial laws, one of whose main purposes is to restructure the MFSC as the sole regulator of financial services. The MFSC will be renamed the Malta Financial Services Authority.

In the first part of his speech Mr Brincat said he had been given a copy of this bill late last year and was later asked if he had any amendments to propose. Following discussions in the parliamentary group and talks with financial practitioners, the opposition told the minister it did not object to the provisions on retirement funds as long they did not mean the schemes were being introduced for the Maltese through the back door. Since the minister had made it clear that these schemes would apply only for foreigners, the opposition had no objections.

On the bulk of the amendments to the financial laws, the opposition did not see the need to propose any further changes and would prefer to see how they functioned in practice.

The opposition had reservations, however, on the amendments involving the Central Bank and the MFSC. 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. The opposition believed politicians should not interfere in the running of the bank. But the governor, despite the independence of the bank, was appointed by the government and was therefore considered as being a political appointment. The opposition felt a new government should not be saddled with the political appointments made by its predecessor.

The opposition also disagreed that the MFSC should assume the supervisory role of the banks from the Central Bank.

Mr Brincat said the opposition was concerned that the minister had moved all the amendments in one bill, even when he knew of the opposition's objections over part of it. As a result, the opposition, despite approving of most of the bill, would still have to vote against.

The minister was right to underline, in his introduction, the importance of innovation in the context of competitiveness, but one also had to consider wage moderation, productivity, value added, the product range, entrepreneurship in the running of companies, and less red tape. Unfortunately, EU membership could lead to increased bureaucracy.

The challenge facing Malta in the financial services sector was to maintain its standards while attracting more business.

The opposition felt Malta could align itself with much of the international regulation of this sector without aligning itself word for word with that of the EU.

Partnership with the EU, rather than membership, would enable Malta to be more flexible in this sector and create its own business niches. Membership of the EU would deny Malta the features which distinguished it from other jurisdictions in the EU and hence, its attractiveness.

EU membership had to be seen in the long term. He felt that tax harmonisation would rise further in the EU's priority list in the future and could well see the light of day. Thus it would be countries which would not be tied to tax harmonisation which could be flexible and create their own niche of activity.

Malta should retain the right to retain its different characteristics while safeguarding standards and guarding against money laundering and the use of funds for terrorism.

Furthermore, although the government was boasting that the Central Bank was being made more independent, EU membership would actually reduce such independence, not least because the bank would be made subject to the decisions of the European Central Bank. The unaccountable ECB had control over interest rates in all EU member states in a one-size-fits-all model, even though certain interest rates may be inappropriate for certain countries.

With interest rates being the most important instrument of monetary policy, the independence of the Central Bank would therefore diminish. Even in price stability matters, national banks had to follow the guidelines of the ECB.

Indeed, one should question how independent the ECB itself was. There was no doubt that there was an upstairs-downstairs mentality in the ECB, with the bigger countries having the major influence in its operations. Through EU membership, Malta would be surrendering monetary policy to the ECB.

The opposition did not agree that the MFSC should take over the supervisory role of the banks from the Central Bank. Indeed, the IMF in a report on Malta had recommended that the Central Bank should remain the regulator of the banking system and the supervisor of the Malta Stock Exchange.

In 1996, the IMF had said the MFSC should align its supervisory standards with those of the bank.

Mr Brincat observed that since it would be the regulator of the financial services sector, the MFSC would no longer have the role of promoting Malta as a financial services sector. This role would be passed to a new organisation, possibly that which would also group the MDC, IPSE and METCO.

The ineffectiveness of the MDC to date in the promotion of investment in Malta was not a good augury. Malta needed effective marketing to attract high net worth clients.

This bill, Mr Brincat said, was clearly part of the government's plans to align legislation with EU rules.

The bill would align Malta to the statute of the European System of Central Banks.

Referring to the independence of the Central Bank, Mr Brincat said that if the bank was to be independent, would certain appointments be made by parliament, like the Ombudsman?

He observed that the law did not provide for ways to remove the governor.

A future Labour government would amend the law to ensure that the governor would be appointed for a maximum, not a minimum of five years.

If the bank was to be independent, its directors, too, should be fully independent of the government. Some of the current directors also served in other roles for the government, although he was not saying anything against their personal integrity.

He stressed that there had to be transparency in the way the Central Bank operated, making it easier for the bank to react to economic shocks. Political influence in the bank was still being felt to this day, even though it was not as great as in other sectors. Political influence could be seen, for example, in the way the Central Bank annual report, the Quarterly Review and the business perceptions survey were presented.

There should not be circumstances which led the bank to hide certain projections or information that was unfavourable to the government of the day. That eroded its independence. Neither could politics be involved in the way appointments were made within the bank.

If the bank was to be restructured, would it adopt explicit inflation targets? What role would it have in economic planning?

Mr Brincat observed that in terms of the bill, the governor could be requested to report to the House Public Accounts Committee at intervals of at least six months. He felt that this six-month limitation should be removed since there could be circumstances, like the events of September 11, which could justify debate between the committee and the governor on a more frequent basis.

Turning to the provisions of the bill on the MFSC (which will become an authority), Mr Brincat said the bill was too detailed on the structure of the new authority. Those who felt the authority would enjoy independence should see clause six, which laid down that the board of the authority would have to follow guidelines established by the government.

Mr Brincat observed there was more flexibility in the eligibility of persons who could serve on the board of the authority than in the case of the Central Bank. Eligibility in this case was not restricted to people having banking, economic and financial expertise but extended to other professions and those having an industrial background. This was as it should be, and eligibility of the persons who could serve on the board of the bank should be extended. Furthermore, the term of office of the chairman and the board of the MFSC would be for "not more" than five years, in contrast to the case with regard to the Central Bank. The government should be consistent and adopt the same system for the Central Bank as for the MFSA.

Mr Brincat said it was important for the authority to lay greater stress on consumer rights, such as in the case of unsolicited requests for investment made by phone or mail.