Outlook for financial regulation
The financial crisis of just over a decade ago led to a root and branch reform of financial regulation. A banking union for the euro area is still a work in progress. However, systemically important banks are now regulated by the European Central Bank through the Single Supervisory Mechanism that is managed by joint supervisory teams from local regulators in member states and an ECB team. Malta’s three major banks fall under this regulatory regime.
The publication of the Malta Financial Services Authority’s strategic plan for the next three years confirms the regulator’s commitment to bridging the credibility gap this institution has as a result of its lax control of certain operators in the financial services sector. The Pilatus Bank saga and the demise of Satabank are an embarrassing albatross hanging round the MFSA’s neck.
The sooner the regulators bury their recent past reputation, the better chance will Malta have to restore its reputation as a respectable financial centre.
The MFSA’s strategic plan includes the classical textbook elements one expects from a professional organisation. Statements on vision, mission and objectives are only as good as the underlying determination to do what is right in a particular area of economic activity for the common good of society.
It is surprising that the MFSA is only now concentrating on re-engineering its governance structures by introducing a risk committee, risk management practices and an audit committee. Regulated banks have already addressed these issues over the past several years. Still, it is never too late to put things right.
The MFSA’s declaration “to safeguard the integrity of markets and maintaining stability within the financial sector” can only be effective when it asserts its independence from the government in its decisions.
Banks’ primary obligation is to protect depositors’ interests and shareholders’ investment. They do this by evaluating and managing the risks that in their expert opinion gives them the best risk-reward balance.
The Prime Minister seems to disagree with this subordination of priorities. He bitterly complained about the banks’ “reticence” to open accounts to “legitimate” people who want such a service. In a condescending tone, he declared that banks are not supposed to be just “safety deposit boxes” and also accused them of breaking the EU rules through their reticence to open accounts.
The Prime Minister knows that the European Parliament had instructed the European Commission and the ECB to tighten on regulation to curb money laundering practices and financial crime that was robbing member states of revenue that could be used to promote legitimate economic activities. He also knows that the Commission and the International Monetary Fund have warned against the risks of money laundering that Malta’s business model partly based on the sale of citizenship rights and e-gaming poses. Banks are not regulated by governments but by independent institutions like the ECB.
Of course, banks need to differentiate between high-risk clients and all the rest when conducting their due diligence processes. These processes need to be simplified for ordinary people that pose a minimum risk of financial crime in order not to cause undue hardships. The MFSA is right to repeat this message through moral suasion.
Politicians should, however, resist dictating to banks how to conduct their business and, much less, to endorse economic models they consider inappropriate to protect their depositors’ interests.
This is a Times of Malta print editorial