The financial service sector owes much of its vibrant success to the pragmatic approach of the Malta Financial Services Authority which is the main regulator of the industry. In the last 20 years this industry has grown at a fast rate. Today it boasts about 10,000 employees and accounts for 10 per cent of Malta’s GDP. So many are asking why the need is felt for a review of the MFSA operations when its past success is acknowledged by most industry practitioners.
The simple answer to this question is that every organisation needs to restructure itself from time to time to take into account the changing environment in which it operates. Many rightly believe that the MFSA’s success can be attributed, at least in part, to the ability of its senior management to give a personalised service to those seeking to benefit from Malta’s investor-friendly legal and fiscal framework. The bipartisan approach to the development of the regulator’s role continues to be an important cornerstone for the success of future reform plans.
The brief White Paper issued by the government on the strengthening of the MFSA is an ideal opportunity to define the blueprint on which to model the renovation of this important institution. A good starting point in the renovation debate should be the identification of the weaknesses that are perceived to be affecting the present functioning of the MFSA.
The rapid growth in financial services in the last few years, combined with the increasing complexity of these services, makes it necessary for regulators to ensure that they have the relevant human and ICT infrastructure to regulate and oversee the industry effectively. This operational excellence should not be limited to the stage of dealing with applications from prospective investors. It should be an ongoing process that ensures that, once established in Malta, financial services operators can rely on a productive dialogue with the regulator. A review of the processes of MFSA as well as more investment in human resources are indispensable.
Another perceived weakness is that at times the MFSA seems to be spreading itself too thinly. The White Paper understandably urges the regulator to “continue to innovate”. If Malta’s attraction continues to be mainly based on favourable financial and fiscal legislation, then the industry runs the risk of other countries emulating this model and posing tough competition for Malta. Some practitioners argue that Malta’s financial services industry should concentrate on specific areas of financial expertise so that it can earn a valuable reputation as a centre of excellence in specific services. Trying to be all things to all men may not be the best strategy for the future.
Another mandatory requirement for the success of a renewed MFSA is the strengthening of the understanding of the risks that are inherent in certain sectors of the financial services industry. It takes only one mishandled supervisory action to attract negative financial media reports that do the local industry undeniable harm. Past experience shows that in the last few years the MFSA could have been more effective in nipping in the bud nascent misconduct by certain operators.
A clear distinction is also needed in the two main functions of the MFSA – the business promotion and the regulatory. Business promotion will always be important for the MFSA to attract new operators to Malta. But this role can at times be in conflict with the role of a regulator of the industry. A sincere dialogue is needed with the established operators, intermediaries as well as governance experts to ensure that the MFSA’s different roles are always managed at arm’s length from each other.
Politicians need to be judicious if ever they feel the need to criticise the financial services regulator, lest they inadvertently do harm to the industry as a whole. Above all, the regulator needs to enjoy genuine autonomy from the political administration, for on this depends its credibility.