Moneyval report - let the virtuous throw the first stone | PKF Malta

MFSA’s board of Governors need to focus on its strengths and strive to enhance them, not try to offer everything to everyone. Ideally, they must invest more in recruitment of foreign experts

Banks need direction to face the tsunami that is expected to hit them when and if new technologies like blockchain become mainstream
Banks need direction to face the tsunami that is expected to hit them when and if new technologies like blockchain become mainstream

One welcomes the new financial crime compliance plan announced by the MFSA. It is essential that the rules of doing business within the global financial system are not only well written but also robustly enforced. Professor Joe Bannister is the outgoing MFSA’s chief regulator and was revered as the Supremo who for more than two decades stood like a Colossus managing the growth of the financial centre and rigorously overseeing that the name of Malta is above reproach - a truly prim and proper domicile which attracted billions of new business.  

The financial sector grew from a modest size in 1994, to give birth to a reputable Centre of international business. A leak oozing out of Paradise Papers came as a bolt out of the blue. It reveals how Bannister had links to a Russian mining firm.

This news was denied by the incumbent. He played down his role in the venture saying he was a non-executive director of one of its shareholders namely ACP Special Situations No. 2 Limited.  

Quoting “The Times of Malta” it stated inter alia, that it has seen evidence showing how the Russian mining company IMHL claims that Prof. Bannister being part of its “management”. This entity is conveniently domiciled in the British Virgin Islands.

Prof. Bannister stood firm against such accusations - he says his position was cleared by the prime ministers he has served under. Can the storm be ignored as a bad dream - will it pass away when we wake up or are we bracing for casualties that may eventually tarnish our name in the international markets?

The report expected from Moneyval following the recent assessment of compliance controls in local financial institutions will soon be published and its recommendations (if any) will not go unnoticed. Last week, the CEO of HSBC, admitted that the domicile has suffered reputational damage when he announced that the bank posted a 23% drop in annual profits before tax for 2018.

The storm has not subsided and the recent reform put into place by the MFSA does not come a moment too soon. Yet, one cannot say it is all doom and gloom. The root of the problem can be partly attributed to the fast rate of economic growth which inevitably generated more compliance duties. This extra workload led to the grim realization that MFSA had a shortage of human resources, especially experienced ones.

During his tenure, Prof. Bannister had navigated the ship through stormy waters facing the turbulent times of the 2007/8 recession but the ride was not a smooth one and new challenges pounded mercilessly on the MFSA galleon. In particular, it needs young blood to harness the challenges of cutting-edge legislation concerning Fintech, Blockchain, Banking Compliance, Cybercrime and Cryptocurrencies.

Banks need direction to face the tsunami that is expected to hit them when and if such technologies become mainstream. Last week a cyberattack paralyzed Bank of Valletta foreign transactions for a day - some observers fear this may be a harbinger of friability resulting from attacks by hackers.

Needless to say, MFSA’s board of Governors need to focus on its strengths and strive to enhance them, not try to offer everything to everyone. Ideally, they must invest more in recruitment of foreign experts (until locals can be trained).

Progress in funds, asset management, pensions, banking and insurance sectors has slowed albeit Brexit has created new opportunities which are gaining ground in terms of potential UK business relocations.

We have to stop seeing the Authority as a cash-cow, i.e. the mentality of generating millions. Perhaps now is the ideal time to seriously try to reform the single regulator model and split the Authority into two agencies mirroring a Twin Peaks structure.

Readers may ask what is “twin peak” system. This model has evolved spontaneously over a period of time and is a recognisable feature in most parts of the world.  In this regard, the two peaks refer to the two faces of regulation having the first part comprising prudential regulation – the financial sustainability of financial institutions.

The second, being a more recent development started emerging in the mid-1980s which is market conduct regulation. Market conduct is characterised by phrases such as “Treating Customers Fairly (TCF)”.  So, from this angle, market conduct regulates the relationship between financial institutions and the customers. It is not an easy task but once MFSA is restructured as a twin peak model it will be better suited to use its su­per­vi­sory pow­ers to in­ter­vene ear­lier rather than later.

One may ques­tion why, with all the reg­u­lar site inspections of banks/funds by MFSA, in five years, there was a precipitous col­lapse of La Vallette Multi Manager Property Fund, Malta Cross Financial Services firm, Swedish Pension fund debacle, collapse of Sata and Nemea Internet banks, Setanta insurance (among others).  

All this suggests borrowing a leaf from the FSA’s successful reform carried out in the UK following the collapse of British banks such as HBOS and Northern Rock in 2008. UK institutional reforms led to a divorce of regulatory aspects - that is one part to fo­cus on reg­u­lated busi­ness and an­other as a sep­a­rate in­de­pen­dent en­tity re­spon­si­ble for con­sumer pro­tec­tion.

With hindsight some may recall the La Valette scheme operating as a sub­sidiary of Bank of Val­letta (BOV) in­vested part of its funds in high-risk sub prop­erty that went mys­te­ri­ously up the creek leav­ing a black hole of about €50 mil­lion. At the time BOV acted as its cus­to­dian and is­sued a clean bill of health during its four-year ten­ure.  

The saga was dif­fused when directors at Bank of Valetta (with­out as­sum­ing re­spon­si­bil­ity for any wrongs) ac­cepted to pay ag­grieved unit hold­ers a per­cent­age of their in­vest­ment on a take-it or leave-it fi­nal set­tle­ment of­fer.  Following protracted appeals in court, a number of unit holders were further compensated by another top-up thus mitigating part of their losses. All this begs the ques­tion – is the con­sumer ad­e­quately pro­tected?  

With hindsight, it had to be the le­gal protest fielded by unit hold­ers that alerted the reg­u­la­tor into action.  Following a barrage of criticism in the media, MFSA ap­pointed Mazars (a local audit firm) to ex­am­ine the list of claimants and identify any mis-selling to unit holders classified as in­ex­pe­ri­enced. The latter were fur­ther com­pen­sated cap­ping the to­tal re­fund at €1 each unit.

This left an uncomfortable criticism of locking the barn after the horse has bolted.  

In con­clu­sion, it is clear that keep­ing the sta­tus quo is not an op­tion, but of course while any re­form at MFSA needs to be car­ried out ex­pe­di­tiously, yet it is commendable not to ignore suggestions for improvement anticipated from the Moneyval report.

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