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
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.