Financial services regulator wants Malta to play in the 'Champions League'

Bloomberg TV airs Theresa May’s latest woes as it plays on the television in the lobby of the building that houses Malta’s Financial Services regulator.

The British PM’s last ditch effort to get a Brexit deal is a stark reminder of the turmoil outside the relative safety of Malta’s shores.

I am here in Mrieħel to meet the Malta Financial Services Authority’s chief executive Joseph Cuschieri, ahead of the roll out of a new three-year strategy and rebranding exercise for the regulator.

The prospect of Britain crashing out of the EU in a month’s time comes as a reality check in Malta, a country with an economy that has been performing well above par for its longest streak since independence.

There is little space for insularity in an interconnected world.

As I tap in my details into an iPad in the lobby to be granted an access card, Bloomberg in the background reports on the impending trade war between the US and China. Donald Trump is trying to roll back the frontiers as he embraces insularity.

It is another stark reminder of the complex global reality.

I am not here to speak with Cuschieri about the economy, the risks and prospects it faces. He is concerned about regulation. His job is to ensure that the financial services sector, a key economic driver, operates correctly.

But Malta is pretty much like a teenager who has rapidly outgrown her clothes. While the private sector has found the space to flourish in a country with a government that calls itself business-friendly, public services and infrastructure have lagged behind.

Aiming high: Cuschieri wants the Maltese jurisdiction to be among the top-tier European financial centres, making the leap into the 'Champions League'

Champions League football

The MFSA is no exception as it tries to keep up with a financial services sector that has grown bigger, become more complex and is challenging traditional models with technological innovation.

Cuschieri has been at the helm of the MFSA since April last year, taking over at a time when the authority faced flak over actual or perceived failings to properly supervise and act on concerns of money laundering.

He is unfazed by the criticism but acknowledges the need for change at the regulator that was born out of political consensus in its current outfit almost 20 years ago.

Statistics put the contribution of the financial services sector to gross value added at 11%, and rising. It also accounts for more than 10% of employment. The MFSA is responsible for 2,300 licensed entities.

But despite the importance of the sector to the domestic economy, Malta does not yet feature among the top European jurisdictions. This is something Cuschieri would like to change and to do so, the MFSA will have to up its game.

“Malta is playing football in the local premier league but I would like this jurisdiction to play in the Champions League. I want Malta to be up there among the top five European jurisdictions, alongside the likes of Ireland and Luxembourg,” he tells me as we sit down at the boardroom table in a makeshift office while refurbishment works are going on in other parts of the building.

Cuschieri acknowledges this is an ambitious target but he is convinced that with the right investment and mentality change, it can be achieved.

“To play in the top flight we need new players, new tactics and better facilities,” he continues with his football analogy.

And that is what the Vision 2021 rolled out last week plans to achieve. It was also accompanied by a consultation document laying out the MFSA’s fintech strategy to “harness innovation through technology”.

The MFSA released its Vision 2021 last week along with a consultation paper on its fintech strategy

Leaping out of the paper world

Embracing technology is key, Cuschieri insists. And it is not just about how to respond to technological innovation driven by the private sector – the Revoluts of this world – but also the manner through which the MFSA operates.

The regulator is still largely a paper-driven organisation in a world where transactions are carried out through mobile phone. He points to a cabinet in his office full of files linked to a recent case of enforcement. The information is all there but requires time to sift through.

“The MFSA of tomorrow has to provide regulatory efficacy. We need to increase the depth of our supervisions, be pro-active and fast. To do so, we need to invest in the right people and have systems running on the latest technology to help us rationalise the knowledge we collect and use it productively,” Cuschieri says.

He is under no illusion that this will require a big investment. Cuschieri envisages a regulator that will employ around 480 people by the end of 2021, up from the approximately 320 employees currently on its books.

The authority will have to invest more in training and rope in foreign nationals to boost its skills base.

Over the next three years, he says, the MFSA will have to invest anything between €8 million and €10 million to upgrade and change the technology that underpins its operations.

“If we want to become a top-tier regulator in Europe we need to invest… in a dynamic financial environment, our technology has to be mission-critical and people have to undergo continuous training to beef up expertise and technical competences,” he insists.

One of the objectives of the vision is to set up what is being dubbed as an academy of excellence for financial supervisors.

The proposal is to provide training to young and experienced supervisors both within the MFSA and private industry.

“Supervision is also the responsibility of private operators and this is why we will be releasing a supervisory strategy document that will list what is expected from licence holders to comply with anti-money laundering regulations,” he adds.

The supervisory strategy document released on Monday and provides regulatory clarity for licence holders. It will form part of the regulator’s efforts to communicate better with stakeholders and raise the level of awareness on money laundering issues.

The financial services authority will have to increase fees for operators to cover the costs for enhanced regulatory efficacy

Fees will have to go up

Cuschieri says the proposed transformation of the MFSA is likely to see the organisation’s budget surpass the €40 million mark at the end of the three-year plan. The regulator’s current budget is a yearly average of €26 million.

Cuschieri hopes to bridge the gap in funding by increasing the fees operators pay the MFSA. He insists this is also an issue of operational independence for the regulator.

“The International Monetary Fund and other international organisations insist on operational independence for regulators like the MFSA.

Today, half of our funding comes from the government and the rest comes from fees that we collect. Over time, the MFSA has to be able to recover a substantial part of its costs from operators to make it as much as possible self-reliant for its funding,” Cuschieri says.

A cost-recovery model is unlikely to go down well with the sector. But pundits in the field do acknowledge the apparent dissonance between the extremely high fees companies pay practitioners and the low regulatory fees paid to the MFSA.

Cuschieri says that at some point fees will have to increase but he promises this will be accompanied by a more efficient service.

“If we mean business, there has to be a revision of fees. Higher charges will be accompanied by a more efficient service. The intention is to have a self-sustaining authority, a model very similar to other foreign institutions like the ECB, which is financed by European banks,” Cuschieri says.

The three-year plan will also adopt what Cuschieri describes as a risk-based approach when assessing operators.

The fight against money laundering is not one country's battle, Cuschieri says

Combatting financial crime

A risk profile will categorise the different licence holders accordingly. This will be useful at on-boarding stage when the company applies for a licence, and subsequently at supervisory stage.

The risk profile will determine the frequency and depth of ongoing assessments. It will also help sharpen the focus when combatting money laundering and other financial crimes.

Cuschieri explains that the agency responsible for anti-money laundering supervision in Malta is the Financial Intelligence Analysis Unit. The FIAU carries out inspections together with the MFSA.

On its part, the MFSA carries out supervisory visits to assess prudential and good conduct by firms.

“I have suggested that inspections and supervisions related to money laundering should be the remit of the MFSA, which will then allow the FIAU to dedicate its resources to intelligence gathering in the fight against financial crime,” Cuschieri says.

Any such decision will have to be taken at a political level but within the current set-up he has instructed MFSA supervisors carrying out inspections for prudential and good conduct to also keep an eye on money laundering activities.

All Europe has to step up in the fight against financial crime and this is why pointing fingers will get us nowhere Joseph Cuschieri

“The MFSA has a specialised team on financial crime that works very well with the FIAU but if my inspectors, carrying out supervisions for things other than money laundering, notice something untoward, they will report such matters to the FIAU,” Cuschieri says.

He adds that the MFSA has to increase not just the frequency of inspections but also their quality. But he insists, the fight against money laundering is not one country’s battle.

“We have to know what type of information to look out for, what to ask for and how to analyse it. We need to improve but combatting money laundering is a Europe-wide issue and all member states have to up their game. All Europe has to step up in the fight against financial crime and this is why pointing fingers will get us nowhere,” he says.

Cuschieri admits his vision is ambitious but is confident that the people at MFSA will step up to the challenge.

After two decades of constant growth in the financial services sector, Cuschieri believes it is time to shift the gear upwards.

Only time will tell whether the Maltese jurisdiction will end up playing in the Champions League of financial services but Cuschieri wants to ensure the MFSA plays a significant role in this transformation.