A robust legal regime, a knowledgeable workforce and a sound reputation sustain the growth of the local financial services sector, says Simon Grech, Institute of Financial Services Malta president.

The local financial services sector is relatively young. However, it has achieved maturity fairly quickly. What has contributed to this growth?

While it is true that Malta’s development as a financial services centre is relatively recent, one must keep in mind that our banking history dates back a long number of years. Moreover, the island’s long association with the UK has meant that we have generally built our financial services sector on the renowned British model and this gives us quite a natural advantage over competing jurisdictions.

Apart from this, there are a number of factors which have helped provide accelerated growth. The system is robust, well-regulated but still flexible enough not to stifle industry players and investors. The international crisis of 2008 and its insignificant impact on the local system have obviously helped improve our reputation in no small way. Another contributing factor is the political consensus that always existed to support the growth and well-being of this sector. This has resulted in very smooth progress and the creation of a robust legal regime which was further enhanced through EU membership.

Finally, our education system has managed to adapt quickly to the needs of this industry and has generally managed to produce an adequate supply of suitably qualified employees

What is the sector’s contribution to the national GDP?

According to the latest figures published by the National Statistics Office, the contribution of banking and insurance to Malta’s gross value added is 8.1 per cent. One has to also take into consideration that banking and insurance are the main drivers of foreign direct investment flow into Malta particularly from the EU.

Financial services together with the gaming sector contribute to higher value added employment when compared to more traditional sectors. The current 8.1 per cent is based on the old European system of accounts (ESA95). The National Statistics Office has already announced that with the new system, known as ESA2010, which will be introduced this month, this share is bound to change due to methodological changes necessitated by this system. Certainly the gross value added of the financial sector will go up in absolute terms, but we have to wait for official figures to see whether this will result in a higher share of total gross value added.

Does the financial services sector have a spill-over effect on other sectors?

An efficient and well-regulated financial services sector is probably one of the very best sources of ancillary business to an economy. The local experience shows that the foreign investment being attracted towards the sector brings in a large number of foreigners, be it for short visits or longer stays.

These are normally people of affluence who therefore inject money directly intoour economy. The increased employment in the industry is also another benefit. Together with other areas such as gaming and tourism, financial services has served in no small way to keep the local economy going in the turbulent times experienced by many countries around us. Banks, collective investment vehicles, insurance companies and other components of the industry also have a more direct impact on the economy in that they are often the providers of finance to other economic sectors.

How important is a strong relationship between the regulator and companies operating in the financial services sector?

As long as the roles of the regulator and the industry are clear and borders are respected, a good relationship between regulators and practitioners should be highly beneficial to the industry. Regulation and a knowledgeable workforce are key to a safe environment, where clients can feel comfortable about their financial transactions and investments.

On the other hand, the regulator must recognise that no matter how sophisticated and complex regulation becomes, there will always be conduct risk of those working in the sector. The closer the regulator is to the industry, the easier it should be to understand gaps in the regulation and consequently to curb abuse in a timely manner.

Is there the risk of over-regulation?

The problem does not lie with the amount of regulation as much as with the way it is deployed in competing regimes. The local financial services industry is probably feeling quite uptight by the current surge in legislation, considering the relatively easy ride it had during the financial crisis. However, considering the amount of business being attracted to our shores, it is critical that our regulation should be prepared to deter unwanted business which may create future problems which countries with similar ambitions to our own are already facing.

In my view, the most important thing is that we retain the right balance between protecting the country’s reputation and remaining attractive to good business.

What role does the Institute of Financial Services play in this regard?

The Institute of Financial Services is one of the oldest local institutes and has been in existence for more than 50 years.

Over the years, the institute has continuously adapted and upgraded its financial services training to ensure that the local industry is equipped with the requisite skills to meet existing and future demand.

Up to just over a decade ago, the institute was instrumental in providing a large number of bankers with the academic preparation required to carry out their work professionally. More recently, the needs of the industry have changed significantly with much more diversified requirements and this necessitated the institute to adapt accordingly and to prepare practising and prospective financial services employees for a wide range of roles.

Our array of short and long courses now covers areas of major importance to the industry, including regulation and compliance, financial advice, trusts, fund management and administration, risk, credit and many others. The institute is also at the forefront in promoting financial literacy and continued professional development.

Is the sector venturing beyond the Euromed area?

The answer to this question has to be a cautious yes. Our strategic position, the reputation we are gaining and the fact that we have adopted the euro at quite an early stage have helped us grow the industry. On the other hand, while our business is not restricted to the Euromed area, there will always be limitations due to our size, logistical difficulties and varying regulatory requirements that will make it more difficult and risky to venture outside the more immediate catchment area. However, prospects beyond the Euromed area do exist.

Is Malta developing its skills to cater for specialised financial services?

There are a number of local players who, like our institute, are keen on supporting the industry to grow further. In this respect, there is a very focused effort to ensure that the required skills exist for every opportunity that hits our shores. It is also very admirable that the regulator is incredibly supportive in this respect.

Having said this, there have been instances where the business has actually preceded the availability of the required skills. While this may seem positive, caution must be exercised to ensure that business is not lost or mishandled due to lack of suitably qualified and competent personnel.