Malta recently ranked first for efficiency in transposing directives into national legislation – but the chairman of Finance Malta, Kenneth Farrugia, believes that the pace of innovation needs to accelerate.

“We claim to be nimble, but we need to push it much more. Innovation needs to be much faster paced. We need to induce changes which will make Malta competitive as quickly as possible,” he said.

Malta has benefited from its innovative legislation, from protected cell companies to remuneration policies, and from the self-managed concept to securitisation. But with so much happening in the financial services world, all jurisdictions have to be one step ahead.

“This is very important for us as it gives a first mover advantage. The MFSA does an excellent job in that respect. But as the industry grows we need to remain customer centric as far as efficiency is concerned – across the board. “Our responsiveness to process in a reasonable timeline needs to be on both the side of practitioners dealing with customers and the regulatory side. Practitioners need to be efficient. They cannot take on business without strengthening their infrastructure.

“We need to measure how long it takes for a company coming to Malta to get approval so we can benchmark ourselves.”

Malta’s financial services sector is booming and Mr Farrugia confirmed that the conduit of business was very strong and not sector specific. He laughed when asked about some practitioners’ half-joking jibes that Finance Malta should be renamed Fund Malta.

He listed the various events covered by Finance Malta, which covered a wide range of financial services including asset management, insurance, financial institutions, trusts and foundations as well as wealth management. He confirmed that apart from capital markets, particular focus would be given next year to Islamic finance.

“This market is set to grow but it is useless to talk about it without having a proper marketing programme. In fact, we are organising our first event on the topic in December,” he said. “We are organising at event on securitisation in New York in the first quarter of next year.

“Of course, the growth of the funds sector is very important and it is definitely one that we want to keep pushing forward, alongside the others. But we do not want to be a jurisdiction that is underpinned by just one sector. Quite the contrary, a very positive nice thing about our financial sector is that it is driven by diversity, not only in terms of the sectors that we are supporting but also in terms of the clusters that are shaping themselves.”

The importance of diversity is more important than ever before. Many other island states like the Bahamas, Jersey, Guernsey, Bermuda have economies which depend on just one particular sector within one segment. When that sector dips, then so does the entire economy of the jurisdiction – something that Malta has managed to avoid, even in the darkest days following the financial crisis of 2008.

Financial arbitration welcomed

Diversity and innovation are both tools which will help Malta through the current climate, especially with pressure building up for tax transparency and even tax harmonisation. Since the government in 1994 passed legislation, changing Malta from an offshore to an onshore jurisdiction, it has managed to avoid the stigma of a tax haven – even if that sometimes meant fighting against attempts to paint it that way.

Clearly a good tax system is important to investors: 75 per cent of EY respondents in the Attractiveness Survey found corporate taxation attractive or very attractive and half of them considered it a factor in investment decisions. But there is a difference between an attractive regime and a tax haven. Mr Farrugia is fiercely proud of Malta’s tax regime, saying it is based on fully transparent legislation which was whitelisted by the OECD.

In Malta, we have not invested in [legal expertise in the courts]. As the industry evolves we are bound to experience problems and we should pre-empt it

“We do not have – like some other jurisdictions – a regime which is underpinned by bespoke arrangements with operators to attract them to the island. I don’t want to mention names but we have seen the stories that emerged in the media lately. We have never had these issues. No one can claim that our tax regime has grey areas.

“Is it one of selling propositions that we have a good tax regime? Yes.

“Is it our only one? No.”

This point becomes ever more important given talk of harmonising taxes in the EU. Mr Farrugia said that the finance minister, Edward Scicluna, has been very clear and outspoken on this: tax is the sovereign right of a country.

“I think we are all for fostering close collaboration between member states in the EU. However, we cannot apply a blanket rate across all member states because of the different economic realities.

“Take one example: Malta, in contrast to all other member states, increased pensions this year. We would not have been able to do so had there been a policy for all the member states. You have to have the flexibility within each member state to tailor its economic policies to reflect its realities.

“What applies in one member state would not apply in another. Of course there should be scrutiny of government finances and regulation but I am totally against the idea of having a minimum effective rate of tax. That should be left in the hands of the national authority,” he said unequivocally.

Another change looming on the horizon is the OECD’S Base Erosion and Profit Shifting (Beps) which could make double taxation agreements – another of Malta’s competitive advantages – a thing of the past.

“It could be an opportunity for Malta as we are a tried and tested jurisdiction.

“About eight years ago, financial services were predominantly driven by the setting up of products in Malta; we are now seeing the setting up of service operations on the island. This gives us much more substance as service operations are much more ‘sticky’.

“If a jurisdiction is compelling, then you strengthen your presence there. This is what we have seen happening with a number of operations which started with a minimal presence and then grew. We just had the opening of Credorax which went from single digit presence – probably the minimum required from a regulatory point of view – and now has some 90 people,” he pointed out.

Discussions on Beps are still going on, but the new structure is just the latest challenge, following on the Financial Transactions Tax and the Common Consolidated Corporate Tax Base, to name but two.

Another challenge for the financial services industry is reputational risk, and this does not only come from the sector itself. Can gaming and financial services happily co-exist in a jurisdiction? Wouldn’t the fear of money laundering – including the recent claims of Mafia involvement – imply so? The chairman was pragmatic.

“There is a reputational risk in everything. There will be incidents, as happens everywhere with mis-selling, pensions, mortgages and so on. It is not something you like but you have to live with it. These are the unintended consequences of an industry that is evolving.

“Let us not be overly phobic about it. We clearly need to carry on strengthening our screening and due diligence processes to make sure that the businesses that come here are reputable, and we must do periodic reviews of those businesses to ensure that there is ongoing governance.”

The provision of resolution mechanisms is also important in this respect. Although the consumer affairs section of the Malta Financial Services Authority is very active, the intention is for the financial ombudsman or arbiter to have a completely separate structure.

“It is preferable for the ombudsman to be separate from the MFSA as there could be a conflict of interest if you have the same entity giving a company a licence and at the same time having to reprimand it.”

However, he also warned that the system should not be abused by investors: “Let us appreciate that there are clients who try to put pressure on providers by threatening to go to the media. We have to make sure that we have a level playing field. If there is abuse, we should be able to get it at the roots.”

London is setting up a specialist court for financial markets aimed at international disputes – would it be presumptuous for Malta to do the same?

“Malta does not have a specialised court for commercial cases, let alone for financial services. We need to do something about this. It is extremely important as when you have an operator in the market who wants redress they do not go to the local courts. We need to have some sort of tribunal with the necessary legal expertise… I think we should start with a unit or organisation which can assist companies seeking redress and then, and only then, look internationally.

“In Malta, we have not invested in this area. As the industry evolves we are bound to experience problems and we should pre-empt it. You should not build something like that as a knee jerk reaction. It is in the interest of the legal and consultancy profession to have someone who can understand the implications if there is a case involving complex derivatives, for example.

“I am definitely all for a financial services tribunal within the law courts which can take on financial services cases and have executive powers.”