Last January, Joe Bannister agreed to stay on at the helm of the Malta Financial Services Authority for a further five years. Although as the regulator he cannot comment on any cases, Vanessa Macdonald still found plenty of other challenging topics.

The MFSA has 234 staff – of which 120 are engaged in licensing, regulation and supervision. These must look after 26 credit institutions plus one EU branch, 125 investment service licences, 28 fund administrators and 60 insurance undertakings. And yet you only carried out 67 on-site inspections in 2013. Is that enough?

The number of on-site supervisions does not relate to the number of companies. Most things happen within the MFSA through compliance reporting by all which takes place quarterly or half yearly. The regulator may alter the frequency of reporting as necessary. It is the compliance reports which are fundamental for the MFSA to determine the risk posed by the company.

The point is whether you have sufficient resources for the growing number of entities you regulate. And whether you can find not only the skills but the experience you need...

You will have noticed that in the last two years, there was a significant increase in staff numbers. We do find the right people. One of the issues is that other companies poach from us, and that causes a headache as it could take months to recruit replacements.

The Oliver Wyman consultancy firm – who are now the consultants of the European Central Bank (ECB) – recently carried out a governance of supervision at MFSA.

The ECB is also conducting a capacity building exercise in every regulatory authority. We will await the results of these exercises and will then recruit.

We also have good, extensive training programmes, carried out by external supervisors: the German supervisor this year conducted training in banking and insurance, while the US Securities and Exchange Commission also comes regularly. We also have international trainers who do induction courses.

One of the problems of the MFSA – inherently because of its role but also because of your personal approach – is that much of work is done behind the scenes. But this may fuel the public perception that you let things slide by...

Not on supervisory issues. Those are enforced. But yes, we do enter into dialogue with operators and explain to them what they need to do – and it has worked. This also helps us when it comes to developing innovative regulation.

The unintended consequence is that people think that the MFSA doesn’t use a stick...

Obviously we cannot reveal what we do. The processes are confidential. But I can assure you that we do use a stick and we do get the results that we want.

People must understand that the regulator has certain obligations in terms of professional secrecy, so we cannot talk about what we are investigating.

And there are limitations at law on what we can enforce. But in the future, things will change with the introduction of the ‘conduct of business’ regulations, for which manuals are now being written.

The way companies deal with consumers will now obviously change – particularly when Mifid II (a directive on markets in financial instruments) comes into force in 2015. Staff are already undergoing training – we are lucky to have one of the drafters of the directive coming over.

What will it mean in practice for customers? We don’t yet have a financial ombudsman...

There is a difference between consumer complaints and consumer protection. The MFSA never had any consumer protection powers because it had no power to enforce any decision it took, any judgment it made, or any ruling it issued. Things will work differently when the government proceeds with the appointment of the ombudsman, hopefully early next year, who would be completely independent of the MFSA as it should be.

There have been cases in the past where guidelines and definitions were not as appropriate as they could have been on categories of investors. Have you changed anything yet?

We have to wait for Mifid II implementation in June 2015.

Why should you have to wait for anything to change the definition of a professional investor?

There are processes that the MFSA has to follow, and you have to see who is being affected and who is not.

You have had years in which to do this. Why has it not yet been done?

It is not something that you impose. For example, everyone thinks hedge funds – alternative investment funds –should only be sold to professional investors but actually the alternative investment fund managers directive (AIFMD) says that Alternative Investment Funds could be sold to retail investors.

It is not a question of standing up to say what should be done. We know what should be done but we have to conform to the directive although we have taken steps so that this does not easily happen.

Things will change with the introduction of the ‘conduct of business’ regulations

The MFSA is the only EU regulator that has issued formal guidelines on Sharia-compliant investments, a $2 trillion sector. But are guidelines enough? Shouldn’t we be doing more to attract activity in this sector?

The role of regulator is to create innovative legislation. The operators have to go out to attract business. The rules we issued were already there in a different format. We just gave them a different label and guided operators as to what is acceptable.

One misconception is that we do not allow Sharia banks. The issue is that they have to abide by IFRS accounting standards, such as for example, when it comes to capital requirements. This is a huge issue which is still being studied by both the IFRS and the Sharia committee.

The only issue in local law is a 1970s provision which says that banks cannot hold property except for their own use. Under Sharia, there are no mortgages and the banks own the property, transferring it to the client on maturity. However, even though they cannot do it that way here, they could interpret the provision to refer only to property in Malta and therefore avoid the issue.

Other jurisdictions like the Isle of Man are creating a regulatory regime which is conducive to Bitcoin – although it is still very controversial. How does the MFSA see it?

First of all, you cannot compare offshore and onshore jurisdictions. There was also a guideline issue by the ECB saying that virtual currencies should not be licensed. We have to conform to that.

In fact, a number of countries first allowed them but then withdrew completely. There was a Bitcoin exchange which failed and even ‘ATM-style’ exchangers are shutting down.

The lack of custodians is restricting growth. What can be done?

Malta quite rightly got labelled at the beginning as a jurisdiction for start-up funds. That was the attraction and still is.

When we developed the professional investor fund regime we determined that they could have a prime broker who can act as custodian. In the case of the experienced investor, they need a custodian – but the custodian could be anywhere in Europe, as long as it is a regulated bank.

Then the dynamics started to change. We started to see more UCITS funds and the hedge fund directive introduced the concept that the custodian must now be in the jurisdiction, although there is a four-year derogation, pushed by Malta.

There are already two major international custodians here – Citco and Deutsche Bank – and Bank of Valletta and a few others also provide custodian services. We just licensed Swissquote Bank and Reyl Bank, a private Swiss bank, is also planning to start custody operations. By the end of the year, there will be another two announcements and hopefully, discussions will also open with another bank.

So in terms of small funds, between €5 million and €30-50 million, we are covered. For medium-sized funds up to €100 million, we had preliminary discussions with one firm and some managers are already talking to it.

Indeed, we are seeing certain custodians taking on Malta business from either Dublin or Luxembourg and waiting to see how things will grow. We are now seeing big funds of €1 billion and more which are looking to be registered here.

At the appropriate time – once the figures are right – I am sure contact will be established with leading custodians. There are also many fund operators who are assuming that in 2016 they will be able to passport funds from offshore to onshore, so they prefer to wait offshore if this happens.

Custody works on volumes, so we cannot go out and persuade others to come to Malta. Setting up a full-blown custody operation is very expensive in terms of technology. Of course, we could look at our position in terms of the directive and how a company could establish a custody operation.

A document on this is being prepared with the Institute of Financial Services Practitioners and should be ready early December.

I am confident that by the end of 2015 or middle of 2016, the situation will be resolved.

We are also seeing tremendous growth in the number of fund managers. We normally expect to see around five a year but since the directive was applied, we already had about 40 new applications.

Remember that this year, in addition to normal business, we have so far had to convert 94 licences from the old regime to the AIFM Directive, deal with new managers and also with over 200 applications for individuals and entities to become Company Service Providers. This was in addition to the banks’ asset quality review, new licences for banks and insurance companies, introduction of Solvency II and new regulations for insurancesecuritization and listings on the Malta stock Exchange and the new exchange for the wholesale capital markets (EWSM).

These are one-offs so it is inevitable that you fall a bit behind. But all is moving in the right direction for financial services in Malta. It is up to all involved to make it a continuous success.