Upping the game in financial regulation

The determination and personality of the new Commissioner of Police will be crucial to improving authorities’ image on dealing with financial crime 

The recent annual report of the Malta Financial Services Authority has shown just how much has changed since new management came in to run the show.

With increased manpower and more onsite inspections, the regulator is rebuilding itself to win the confidence of international institutions, becoming a true watchdog with increased inspections and enforcement, higher compliance standards, head-hunting professionals from the UK to join its senior team, and restoring trust in the regulator.  

These changes have been crucial in moving Malta’s financial regulator away from the mediocrity of the past, where sluggishness and an opaque licensing of certain institutions led to poor supervision. 

In its past incarnation, the MFSA was accused of placating the numerous interests in the financial sector, allowing the sector to grow amid accusations over the years of a financial services authority that at times looked the other way. 

The accusations were various, but stemmed from the handling of a number of cases over poor supervision, such as the Maltese Cross bust, Nemea Bank, and Pilatus. For example, warnings on the serious regulatory shortcomings inside the online-only bank Nemea had been pouring in from the European Central Bank for 12 months before anything was done by the MFSA. 

In clear-cut cases of questionable practices, the MFSA turned out to be too slow to prevent the inevitable. On one occasion, when the MFSA was run by former chairman Joseph Bannister, the regulator remarked on the €6.2 million misappropriation at the Maltese Cross Financial Services firm – whose books the MFSA did not inspect for six years – that “notwithstanding the Authority’s supervisory effort, the chance that a licensed entity may fail cannot be eliminated. No supervisory system is waterproof and it is therefore unreasonable to expect supervisors to prevent all failures, particularly when we are dealing with humans whose behaviour might change during the years, together with their circumstances.” 

The MFSA has often been under pressure for failing to act faster on accusations of mis-selling or to order compensation for wronged clients. The same can be said for the prolonged case in the BOV La Valette property fund, where millions upon millions of depositors’ cash were lost but the case was never treated with the urgency it merited. A similarly slow process was also undertaken with the Swedish pensions debacle at the heart of the Maltese-run Falcon Funds. All of these cases dealt a blow to retail investor confidence. The suspected lack of any MFSA on-site inspections at a firm such as Maltese Cross indeed raised the issue of whether the MFSA could even undertake an industry-wide exercise to give comfort to the public that what happened at Maltese Cross is not happening elsewhere, despite a workforce of over 250 at the time. 

Today, the MFSA has moved forward with a mission for more transparency and increased manpower. Its recently unveiled supervisory and Enforcement Dashboard for example highlights the key performance indicators on regulatory oversight and enforcement effectiveness. It showcases the progress made in capacity building and resourcing, increase in training and educational activities, enforcement actions and on-site examinations. For example, in 2017 at the height of the Pilatus scandal, just 177 inspections were carried out; in 2020 this will double to over 350. Employees over the same period have increased from 270 to a projected 450 by end-year. 

These are reforms which have also come hand-in-hand with investment in technology, data management, information systems, a risk-aware culture and the reforms to meet international standards. 

MFSA CEO Joseph Cuschieri has already stated that financial crime is going to be the main plank on which the MFSA will focus, apart from conduct and prudential supervision. The supervisory dashboard indeed shows that the MFSA’s new direction has lived up to its aspirations, with more training, more international expertise, and also better salaries and job conditions. 

A similar situation arose at the Financial Intelligence Analysis Unit, where, under pressure from European authorities, the FIAU had to reorganise itself across most levels: including beefing up its staff complement, increasing its budgets, and issuing new guidelines on how it carries out its supervisory efforts. 

Together the MFSA and FIAU are cooperating closely on investigations. Now there needs to be strong political will to keep on supporting these two important institutions and also to carry out a final, revolutionary change inside the Maltese police. An issue at stake is whether once MFSA and FIAU investigations are carried out, the police force is well equipped and well-resourced enough to take these investigations over with further interrogations and final prosecutions. Scandal has rocked the police force in the last seven years, and so far, unlike the MFSA and the FIAU, it seems little has been done to improve its image. Will a new broom at the head of the police force clean the Augean Stables? Much of this will be determined by the spine and personality of the new Commissioner of Police. They should clearly take a leaf out of the book of the MFSA and FIAU, which in the last two years have done much to step up their game. 

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