Strategic Plan 2011-2014 Achieving a global reach
MISSION STATEMENT
Ensure high standards of conduct and management in financial services and promote the legitimate expectations of consumers. Strategic Plan 2011 – 2014
Strategic Plan 2011 – 2014
i
SUMMARY
This document contains the Malta Financial Services Authority’s Strategic Plan for the period 2011 – 2014. When the Authority was set up in 2002, responsibility for supervision of all financial services providers and consumer protection were brought together in one organisation resulting in a consistent approach to regulation linked to the legitimate aspirations of consumers. The plan reviews the implementation of the first Strategic Plan 2007 – 2009 (Chapter 1) and most importantly it also reviews the role this sector plays in the Maltese economy (Chapter 2). Chapter 3 sets the vision for the Authority and the financial services sector it supervises. The Authority has set a number of objectives and goals that it intends to implement during the period of the plan. These are also described in Chapter 3. Against a background of crisis worldwide, the preparation of this plan was a rather lengthy exercise due to rapidly changing situations. The whole of 2010 was spent implementing and reviewing new regulatory structures within the MFSA. The co-operation of various members of staff was particularly important in the collation of data and other information. I wish to thank them all for an excellent exercise in co-operation.
Prof J V Bannister Chairman
Strategic Plan 2011 – 2014
iii
CONTENTS
Chapter 1 1.1 Chapter 2
Background
2
Strategic Plan 2007-2009
2
Financial Services and the Maltese Economy
13
2.1
Introduction
13
2.2
Contribution of Financial Services to the Maltese Economy
14
Fostering Malta as an International Financial Services Centre
18
3.1
The Malta Financial Services Sector
18
3.1.1
Banking Sector
18
3.1.2
Investment Services Sector
22
3.1.3
Insurance Sector
24
3.1.4
Maintaining a Competitive Financial Services Sector
26
3.2
Creating an appropriate regulatory and supervisory infrastructure
29
3.2.1
The new European Supervisory Framework
29
3.2.2
The Regulatory Architecture at the Malta Financial Services Authority
32
3.3
Reaffirm Malta’s reputation for competence, responsibility and trustworthiness
36
3.3.1
Enabling Innovation through Legislative and Regulatory Development
36
Chapter 3
3.3.1.1 Transposition of EU Directives
36
3.3.1.2 Review of Existing Legistlation and Regulations
39
3.3.2
Maintaining Excellence through Continuous Training
40
3.3.3
Morality and Ethics in the Financial Services Sector
43
3.3.4
Working with other countries and other finance centres
45
Implementation
51
Chapter 4
Strategic Plan 2011 – 2014
1
CHAPTER 1 – BACKGROUND
1.1 Strategic Plan 2007-2009 The MFSA’s strategic objectives for the period 2007 to 2009 included: networking with regulatory organisations and other agencies, creating risk based regulatory practices; upgrading technology to enhance operational effectiveness and sustaining and improving organisational excellence through human resource training. The following represents the work carried out in order to implement these objectives.
Objective 1– Network with other organizations in order to maximize the effectiveness of the regulatory regime and the management activities. The Authority utilises its own enforcement capability to oversee much of the direct, day-to-day supervision of companies. However, the growth in the number of international operators and the volume of international business require greater international interaction at the institutional level. This applies both to the Authority’s core regulatory functions, particularly as regards cooperation and coordination with other European and international regulatory agencies, as well as to the management support functions in areas that require ongoing contact with the market. The Authority has for a number of years been developing a variety of information sharing arrangements with foreign and local regulatory authorities and organizations and the global banking crisis has necessitated the signing of tri-partite MoUs to provide a coherent framework and enhance the parties’ preparedness to manage a domestic or cross-border financial crisis. During the period 2007-2009, a number of bilateral and trilateral Memoranda of Understanding (MOUs) for the exchange of regulatory information and collaboration were signed. The total number of MOUs signed at the end of 2010 stood at 26. Towards the end of 2009 an MOU was agreed with the China Banking Regulatory Commission and with the China Securities Commission in January 2010. The signing of these MoUs places Malta’s finance sector particularly the funds industry at the same level with the major funds domiciles particularly in the European Union. As a result of the these MoUs, Chinese Qualified Domestic Institutional Investors (“QDII”) are able to invest on behalf of Chinese investors into Malta domiciled investment funds (Professional Investor Funds and UCITS funds) regulated by the MFSA, thereby opening up MFSA regulated funds to one of the world’s largest pools of private capital. Also MFSA licensed companies are now able to access the Chinese Qualified Foreign Institutional Investor (“QFII”) status and invest directly in China. In mid2010 an MOU governing banking, insurance and pensions was also signed with the Australian Prudential Regulatory Authority. These are represented in Tables 1 and 2:
2
Strategic Plan 2011 – 2014
Table 1: Bilateral MOU signed during 2007-2010 Country
Responsibilities
Year
Australia
Credit Institutions, Insurance and Pension Funds
2010
China
Securities
2010
China
Credit Institutions
2010
South Africa
Securities, Insurance and Pension Funds
2009
Portugal
Credit Institutions
2009
Cayman Islands
Credit Institutions, Insurance, Securities and Trusts
2009
Dubai
Securities, Credit Institutions and Insurance
2008
Bermuda
Credit Institutions, Insurance and Securities
2008
Cyprus
Credit Institutions
2008
Austria
Banking, Insurance, Pension Funds and Securities
2007
Table 2: Multilateral MOUs signed during 2007-2010 Agreement
Date
Scope
International Association of Insurance Supervisors (IAIS)
2010
Insurance
Memorandum on Co-operation between banking supervisors, central banks and finance ministries of the EU on cross-border financial stability
2008
Banking
Memorandum on Co-operation between Ministry of Finance, the Economy and Investment, and Central Bank of Malta in the management of financial crisis situations
2009
Banking
Following the signing of the multilateral MOU with IOSCO in 2006, the MFSA applied in 2009 to become a signatory to thte International Association of Insurance Supervisors (IAIS) multilateral MOU in order to ensure Malta’s compliance with the high standards expected by the IAIS. The MFSA became a signatory to the IAIS multilateral MOU in October 2010. On the domestic front, following the signing of the EU multilateral MoU on cooperation on cross-border financial stability in 2008, the MFSA collaborated with the Ministry for Finance, the Economy and Investment (MFEI) and the Central Bank of Malta (CBM) in establishing the Domestic Standing Group, which has the responsibility for discussing issues related to the management of crisis situations. This ensures that these authorities are prepared in the eventuality of a financial crisis that could impact on the domestic financial system, including cross-border implications. This led to the signing of another MoU in 2009 between the MFSA, the CBM and the MFEI on the management of financial crisis situations when these arise. Moreover, the MFSA and the CBM continued to share information and discuss issues of mutual interest through the periodic meetings of the Standing Committee established between the two authorities. The MFSA continued to be an active member of the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Supervisors (CESR) and the Committee of Insurance and Occupational
Strategic Plan 2011 – 2014
3
Pensions Supervisors (CEIOPS) as well as the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS). In order to foster relations with the EU Committees, a CESR Chairmen ‘away day’ meeting was held in Malta in April 2008. The European Committees will as a result of the regulatory reform carried out by the European Union become European Supervisory Authorities in 2011. These will be named the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).The MFSA prepared itself for this task by reorganising its regulatory structures during 2010. The Authority became a member of the International Organisation of Pension Supervisors (IOPS) in 2007. IOPS is an independent international body representing supervisory authorities responsible for regulating private pension arrangements. The organisation currently has around 60 members and observers representing over 50 countries and territories worldwide. The Authority has continued to work closely with associations and consumer groups to discuss ongoing issues and has participated at meetings and events organised by the Alternative Investment Management Association (AIMA), the Federation of European Risk Management Associations (FERMA), the Society of Trust and Estate Practitioners (STEP), the Association of European Insurers (CEA), Eurofi (the Brussels-based think tank) and the International Bar Association (IBA), as well as other sectorial associations at national level in various countries. The Authority has also encouraged the holding in Malta of international industry events and workshops, such as the Malta Insurance Rendezvous in March 2009, the Malta Risk and Insurance Congress in November, 2010, the ICC International Financial Crime Forum in November 2009 and the Network Management Conference for transfer agents and custodians in June 2010. The Authority collaborates closely with the Consumer and Competition Division of the Office of Fair Trading and the Consumers’ Association, with whom it has worked on various joint projects. An MoU was also signed with the Office for Fair Competition in 2008. Through the European Union Dolceta project, the MFSA was also directly involved in the development of a web-based consumer education platform, targeted at trainers and other multipliers in consumer education as well as the “informed” consumer. The MFSA’s Consumer Complaints Unit has a rolling program of consumer protection education initiatives aimed at different target groups such as households, parents, students and youths, pensioners and the public in general. The program includes presentations to target audiences by members of the Unit, features in the media, participation on radio and television programs and the publication and dissemination of consumer oriented material. In order to expand its consumer protection network, in 2008 the Authority became a member of FIN-NET, the European out-of-court network for the resolution of disputes in the European Economic Area.
Objective 2 - Operate risk based regulatory practices to better anticipate threats which may potentially harm companies and ultimately consumers. The MFSA has regularly found itself in a position of reacting to regulatory situations rather than anticipating them. However, the Authority has gradually moved towards a risk-based supervisory approach that focuses the Authority’s resources on the mitigation of risks which are more likely to pose a threat to the market or to consumers, or that might give rise to financial crime. Management staff at different levels within the Authority have attended various training programs on risk based techniques.
4
Strategic Plan 2011 – 2014
Members of staff from the Banking Supervisory Unit have participated in an number of training events and conferences on risk management organised by the Bank for International Settlements, the 3L3 Committees, and the Banque de France. Other training programs attended were organised by the Committee of European Banking Supervisors (CEBS) and jointly by the three European Supervisory Committees (3L3) focused on assessment techniques of IT systems, interest risk and asset / liability management in banks, supervision of financial entities in financial conglomerates and issues related to prevention of money laundering. Insurance supervisors within the Insurance and Pensions Supervision Unit attended training programs on various aspects of the Insurance Solvency II Directive and on IFRS accounting for insurance organised by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). Staff within the Unit also benefited from a training program on internal models organised by the German regulatory authority, Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin), while a manager spent a six month attachment with the Government Actuarial Department (GAD) in the UK. Staff within the Securities and Markets Supervision Unit attended a number of cross sector programs on different aspects of the MiFID Directive and on corporate governance in the investment services sector organised jointly by the three European Regulatory Committees (3L3). Other training programs attended focussed on short selling, review of the Prospectus Directive and on the practical aspects of surveillance and investigatory powers of EU financial regulators. These were organised by the Committee of European Securities Regulators (CESR). Furthermore two members of staff at the Unit had the opportunity to attend two study visits at the Commission de Secteur Financier (CSSF) in Luxembourg respectively during October and November 2010. Staff within the Authorisation Unit attended an Arrow Risk-Based Regulation program organised by the UK FSA. The following table details out the training carried out between 2007 and 2010 Table 3: Training carried out – 2007/2010 Unit
Event
Organisers
Year held
Authorisation
Arrow risk-based regulation
UK FSA
2010
Banking
Compliance attachment
Compliance Department of ABN Amro
2007
Banking
Arrow Risk-Based Regulation – Foundation Level
UK Financial Services Authority
2008
Banking
Liquidity Risk
Bank for International Settlements
2008
Banking
Crisis Management
CEBS
2008
Banking
Credit Risk Transfer
3L3 Committee
2008
Banking
e-Money
UK Financial Services Authority
2008
Banking
Model Validation Process
Banque de France and CEBS
2008
Banking
Financial Stability Issues
Financial Stability Institute
2008
Banking
On-Site Supervision Techniques
Banque de France.
2008
Banking
Financial Stability Arrangements
Banking Regulation and Supervisory Agency and the World Bank
2009
Strategic Plan 2011 – 2014
5
Unit
6
Event
Organisers
Year held
Banking
Introducing the Exposure Draft in Consolidation, Amortised Cost and Impairment and IFRS 9 Financial Instruments - Classification and Measurement
IASB
2009
Banking
Financial Reporting
Banque de France
2009
Banking
Negotiating Skills for European Supervisors
Deutsche Bundesbank
2009
Banking
Risk focused supervision and risk assessment
Banque de France and Federal Reserve Bank
2009
Banking
IT Risk Assessment in Banks
Banco de Espana and the Deutsche Bundesbank
2009
Banking
Implementation of ICAAP and the supervisory review process
CEBS
2009
Banking
Financial Forum
Paris Europlace Institute of Finance
2009
Banking
Advanced Risk Management
Bank of International Settlements
2009
Banking
Market and Credit Risk Models in Banks
European Supervisory Education Institute
2009
Banking
Supervision techniques
Deutsche Bundesbank
2010
Banking
Assessment techniques of IT systems, interest risk and asset/liability management in banks, supervision of financial entities in financial conglomerates and prevention of money laundering issues
CEBS jointly with the European Supervisory Committees
2010
Insurance
Evolving risk-based solvency frameworks and valuation methods
Financial Stability Institute
2008
Insurance
Group supervision and Internal Models
CEIOPS and MIB School of Management
2008
Insurance
Solvency II and consumer protection
CEIOPS
2008
Insurance
Internal Models and Solvency II
CEIOPS
2009
Insurance
Quantitative Approaches to Risk
MFSA Insurance Unit
2009
Insurance
Solvency II Insurance Supervision
CEIOPS
2009
Insurance
5th International Insurance Supervision Seminar on Core Supervisory Issues
IAIS
2009
Insurance
Insurance Solvency II Directive and IFRS accounting for insurance
CEIOPS
2010
Insurance
Internal models
Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin)
2010
Insurance
Attachment
UK Government Acturial Department
2010
Strategic Plan 2011 – 2014
Unit
Event
Organisers
Year held
Registry of Companies
8th Experts' Meeting on Money Laundering and Terrorist Financing Typologies
MONEYVAL
2009
Securities
MiFID Update
Financial \stability Institute of the Bank for International Settlements (BIS)
2007
Securities
Arrow Programme
UK Financial Services Authority
2007
Securities
Market and Liquidity Risk
Financial Stability Institute and the IOSCO
2008
Securities
Global Investment Funds Forum
ALFI & NICSA
2008
Securities
Capital Market Development, Enforcement and Oversight Training Programme
IOSCO
2008
Securities
Negotiating Skills for European Supervisors
3L3 Committee
2009
Securities
Corporate Governance Network
CESR
2009
Securities
Private Equity and Hedge Funds
European Commission
2009
Securities
Capital Requirements Directive Working Group
CESR
2009
Securities
Annual International Institute for Securities Market Development
Securities and Exchange Commission
2009
Securities
IOSCO Annual Conference
IOSCO
2009
Securities
Practical aspects of surveillance and investigatory powers of the financial authorities in relation to Market Abuse Directive
CESR
2009
Securities
Capital Requirements Directive for Investment firms
CESR
2009
Securities
18th Annual Global Investment Forum
ALFI & NICSA
2009
Securities
EU Capital Requirements Directive Working Group Meeting
CESR
2009
Securities
Aspects of the MiFID Directive and corporate governance in the investment services sector
European Supervisory Committees
2010
Securities
Aspects of the MiFID Directive and corporate governance in the investment services sector
European Supervisory Committees
Securities
Review of the Prospectus Directive and CESR aspects of surveillance and investigatory powers of EU financial regulators
2010
Securities
Study visits
2010
Commission de Secteur Financier (CSSF), Luxemburg
2010
Strategic Plan 2011 – 2014
7
Attendance to all the above training programs was complementary to periodic participation by staff in the different Supervisory Units in various technical working committees set up by the three European Supervisory Authorities. With the establishment of the supervisory colleges, there was an increased involvement by senior staff within the Authority in meetings related to supervisory colleges in banking and insurance. The Authority continues to reinforce the structures in place by which it can identify the extent to which firms can pose a risk. The approach is based on data the Authority gathers through compliance reports and other sources of information available. This enables the Authority to assess risks in the financial soundness of a firm, the type of market or business the firm operates in, the nature of the firm’s products and customers, its organisation and management, as well as its internal systems and controls. The approach is in line with EU Directives [(Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast); and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast), implemented in recent years and dovetails into the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review & Evaluation Process (SREP) under Basle II, and the Solvency II process which will be implemented under the EU Insurance Directive.
Objective 3 - Continuously upgrade technology to enhance the operational effectiveness and to improve public access to Registry of Companies and other information. The MFSA continuously identifies opportunities to enhance performance through the application of new technology. The introduction of performance enhancing technology is always at the forefront of the Authority’s agenda. Apart from the continuous internal upgrading of the hardware and software applications, the MFSA has undertaken a number of initiatives related to the improvement of external access to the information systems it operates. The Information and Communication Technologies Unit has continued to develop the Authority’s infrastructure to streamline business processes, consolidate redundant systems and technologies. The Authority has continued to upgrade the Registry of Companies online system launched at the end of 2006 by putting in place new functionalities which allow electronic forms to be filed and signed electronically using a personal digital signature. Additional features allowing the submission of various company forms electronically were also introduced. Preparations have also continued for the eventual launching of other tools such as XBRL (eXtensible Business Reporting Language). A new software system was introduced providing the regulatory units with the ability to import all data received in Excel Sheets into a backend database. The Financial Reporting Engine and Database (FRE/D) was introduced in 2009 and provides more efficient storage and backup of data and allows for a more in-depth analysis of the submitted data. The MFSA has also set-up an electronic transaction reporting system whose aim is to aid licence holders executing transactions in financial instruments to effectively and efficiently report transactions to the Authority in terms of Section 8 of the Markets in Financial Instruments Directive (MiFID) Directive 2004/39/EC. The Transaction Reporting Exchange Mechanism (TREM) is an instrument reference data storage collection and distribution system. The application was developed by the Authority according to the requirements defined by Committee of European Securities Regulators (CESR) and is able to handle Alternative Instrument Identifiers (AII). A new automated financial return for investment services licence holders and credit institutions was also launched 10th January 2007. The new online return which can be accessed through the MFSA
8
Strategic Plan 2011 – 2014
website forms, part of the transposition of the EU Capital Requirements Directive, Directive 2006/48/EC and Directive 2006/49/EC. A Risk Mitigation Seminar was also organised jointly with the Information Systems Audit and Control Association (ISACA) in 2007. The objective of the seminar was to highlight key issues in IT governance of particular interest to financial services licence holders and ISACA members. The sessions examined some of the standard frameworks available, their worldwide acceptance, inter-dependency and benefits, as well as the implementation of best practices. The backend infrastructure was also upgraded to provide high-end availability and more robustness. In parallel, information security and disaster preparedness for the Authority’s systems and data were also enhanced. Improvements included the upgrading of the server infrastructure; the offsite server room was upgraded; new network cabling in parts of the office building, the upgrade of internet bandwidth to 4Mbit Dedicated Symmetrical Bandwidth, and the implementation of an improved email filtering solution and firewall upgrade.
Objective 4 - Sustaining and improving organizational excellence through continuous staff training. The MFSA’s efforts to improve its organizational excellence encompass recruiting high quality staff and continuously investing in the knowledge base of staff. Staff members are encouraged to avail themselves of the Authority’s program for further training. The number of MFSA employees increased from 125 at the end of 2006 to around 168 at the end of 2010. Over the same period, Diploma qualifications increased from 17 in 2006 to 39 in 2010. Over the same period, 1st and 2nd Degree qualifications rose from 65 and 26 to 100 and 35 respectively. Members of staff obtained Diploma level qualifications in a range of areas including Financial Services Operations and Compliance, Actuarial Techniques, Banking and Financial Services, Trusts and Management-related subjects. Twelve others obtained first or second degrees in Financial Services subjects, Training and HR Management, Computing and Information Systems. There are currently over 35 employees undergoing further academic training. A number of employees obtained valuable exposure to other forms of regulatory techniques and business practices through attachments and secondments with the Financial Industry Regulatory Authority, the Chicago Board Options Exchange, the Option Clearing Corporation and the Chicago Board of Trade, all in the United States, the Committee of European Banking Supervisors (CEBS), the German regulatory authority, Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin) and the Commission de Secteur Financier (CSSF) in Luxembourg. The Authority also continued to send staff for attachment programs in compliance departments of other industry abroad thereby staying abreast of the needs of the financial services industry and of developments internationally. The Authority continued to be more proactive in providing training for those seeking employment in the financial services sector. Annual meetings were held with Guidance Teachers and the institutions providing further training in financial services were invited in 2007 to setup, together with the MFSA, an Education Consultative Council. The Education Consultative Council (ECC) brings together representatives of the Authority, the Malta College of Arts Science and Technology (MCAST), the Guidance and Counseling Unit within the Department of Education, the Malta International Training Centre (MITC), the Institute of Financial Services Practitioners
Strategic Plan 2011 – 2014
9
(IFSP), the Institute of Directors (Malta Branch) (IOD), the Society of Trusts and Estate Practitioners - Malta (STEP), the Institute of Legal Studies (ILS) and the Institute of Financial Services – Malta (IFS). The Malta Institute of Accountants (MIA) was invited to join the Council in 2010. The main objective of the Council continues to be to co-ordinate and share information on matters related to training and development for current and prospective employees within the financial services sector. The training and development of human resources in the financial services industry featured high on the MFSA agenda over the period covered by the Strategic Plan. Enhancing knowledge is grounded in the MFSA’s mission and values. The Authority is mindful that new companies in Malta’s rapidly developing financial services sector will require employees with enhanced skills beyond academic training. Over the last three years the MFSA and its training arm – the Malta International Training Centre (MITC) together with other training institutions - continued to offer regular training to sustain the growing needs of the industry, among which: • Alternative Investments with IFS • Asset Securitisation with International Faculty of Finance (UK) • Captive Insurance and Cell Companies course with ILS • Commercial Uses of Trusts with IFSP • Enterprise Risk Management (ERM) Basel II Focus with IFS • Foundation Certificate in Trusts Law & Management with IFSP • Hedge Funds Training with IFS • Insurance Accountants and Auditors Course with MITC • Insurance Undertakings with MITC • Introduction to Derivatives • Principles of Derivatives with ILS • Risk Management for Bankers – Basel II included with IFS • Single Euro Payments Area project (SEPA) and the Payments Services Directive with IFS • The Company Law Course with ILS • The Proposed EU Directive on Alternative Investment Fund Managers with ILS • Training Seminar for Current and Prospective Directors of Investment Companies with IFS • UCITS: Legal, Regulatory and Practical Issues with IFS • Understanding Financial Investments with IFS The following were organised directly by the Authority: • CRD Presentations to Investment services Licence Holders and Auditors • Implementation of the MiFID Directive in Malta • Malta Director Training Programme with the Institute of Directors • Programme for Prospective Directors of Insurance Companies • The Capital Requirements Directive with TAIEX • UCITS Training The MITC organizes the following courses on a continuous basis: • Advanced Applied Insurance Studies Diploma • Advanced Insurance Accountants and Auditors Course • Applied Insurance Studies Diploma • Basel II: The ICAAP Framework (Short Course) • Captive and Managed Insurance Companies Course
10
Strategic Plan 2011 – 2014
• Diploma in Actuarial Techniques • Diploma in Corporate Finance Treasury and Portfolio Management • Foundation in Insurance Certificate • Insurance Underwriting • Reinsurance (Short Course) • Solvency II (Short Course) • Tied Insurance Intermediaries Certificate In addition to these courses, the MFSA has been the key originator and lead developer of a number of new training programs including: • Advanced Insurance Accountants and Auditors Course with MITC and Bangor University • Diploma in Corporate Finance, Treasury and Portfolio Management developed with the University of Reading and MITC • Diploma in Financial Services Operations and Compliance designed jointly with the London School of Economics (LSE) and MITC. • Diploma in Fund Administration with IFS (Malta) and the University of Manchester Business School • Diploma in Risk Management with MITC and the Institute of Risk Management (UK) One of the main tasks carried out by the ECC was the publication in 2009 of a Report entitled “Building on success: Future Skills Requirements in the Financial Services Sector – an Action Plan” which maps out the measures that need to be taken to tackle a number of anticipated skills deficiencies in the financial services industry. The measures were identified through a comprehensive Survey on Future Skills Requirements in the Financial Services Sector carried out in 2008. The ECC Action Plan addressed major areas requiring attention ranging from career awareness to the availability of quality training opportunities, and from continuous professional training programs to skills requirements in small enterprises. In 2009, the Authority adopted a more practical approach in the promotion of careers in financial services sector in conjunction with the Career Guidance Unit within the Education Division and the Secretariat for Catholic Education. A career exposure program under the auspices of the MFSA Education Consultative Council was launched. In 2010, 77 Secondary school students (as against 60 during 2009) at higher levels had the opportunity of a job exposure to different work environments. In recognition of the need to tangibly promote careers in financial services, 19 institutions together with the MFSA (as against thirteen in 2009) covering the whole spectrum of the financial sector participated in the program. The ECC’s main projects and initiatives to date include: • Annual Meetings with Guidance Officers of Secondary Schools • Initiatives for Training Subsidy Scheme, Training Aid Framework and myPotential to become available for training in financial services • Job Descriptions and Qualifications Required in connection with expected industry human resource demands. • Media appearances • Participation in Career oriented events • Pilot Job Shadowing in financial services for secondary school students
Strategic Plan 2011 – 2014
11
• Publication of brochures on Careers in Financial Services and training updates • Publication of List of Training Courses organised by the ECC Member institutions Consultation Meetings with the Malta Qualifications Council in respect of accreditation/certification of qualifications/training programmes and on validation of non-formal and informal learning • Secondary School Orientation visits at the MFSA
12
Strategic Plan 2011 – 2014
CHAPTER 2 - FINANCIAL SERVICES AND THE MALTESE ECONOMY 2.1 Introduction Financial sector firms, particularly credit institutions, have over the last couple of years been subjected to extreme stress. These institutions faced a crisis resulting from low interest rates and an expansion of financial and investment opportunities that arose from aggressive credit expansion, growing complexity in mortgage securitization, and loosening in underwriting standards combined with expanded linkages among national financial centers to spur a broad expansion in credit and economic growth. This rapid rate of growth pushed up the values of equities, commodities and real estate. Over time, the combination of higher commodity prices and rising housing costs affected consumers’ budgets. The crisis brought to the fore the limits of national supervisory authorities to deal with troubled banks particularly those with cross border operations. As a result, supervisory authorities raised the capital adequacy levels of financial institutions and created colleges of supervisors for cross border institutions. These policy requirements are aimed at strengthening the resources of branches and subsidiaries. Insurance companies and pension funds have been less affected by the crisis. The crisis did not appear to have had a major immediate impact on sales of insurance products as life insurance premiums grew in contrast to non-life premium products although this trend could not continue if liquidity-constrained clients decide to raise cash by cancelling their life insurance policies. Insurance companies providing credit risk insurance were particularly affected and in combination with a decrease in the value of their assets particularly financial products together with a decline in interest rates experienced considerable problems with their balance sheet. Insurance companies providing credit guarantees required the intervention of prudential authorities to prevent bankruptcies. The near collapse of AIG was directly linked to the underwriting of credit risk. The size of its liabilities and the central role its credit derivatives operation played as counterparty in the over-thecounter market repeatedly necessitated extraordinary intervention by the US Government. The value of pension fund assets is estimated to have fallen by about 20 per cent during 2008. Many pension funds switched their portfolios to government bonds rather than continuing with high risk investments. Although it is widely acknowledged that hedge funds did not contribute to the crisis, they have been affected by the events which followed. The period from the last quarter of 2008 to mid-2009 was one of the worst on record for the hedge fund industry. Returns were negative across all investment strategies, including funds of funds. The industry contracted sharply. A number of funds have had to close because of poor performance resulting in investors withdrawing funds on a large scale and also because of lack of funding through new subscriptions. Furthermore counterparties pressed for increased transaction margins. Assets under management shrank by more than one third in the course of the second half of 2008. Many fund managers attempted to preserve capital by restricting withdrawals through increasing or introducing lock-in periods. The industry showed signs of recovery during the second half of 2009. Many funds showed better performance and some even showing yields in double digits, however new investment is not flowing in as in the pre-crisis days. To avoid the fate of smaller funds that were liquidated as a result of investor withdrawals, many larger funds have oriented their marketing towards institutional investors. This shift is bringing with it greater investment strategy transparency and greater scrutiny in the risk management processes. Responding to the challenges of the developing investment environment, some
Strategic Plan 2011 – 2014
13
of the larger funds introduced lower fee schedules and processes that pay closer attention to the needs of large institutional clients. The response by institutions to the crisis may result in the limiting of internationalization of the financial sector. The elimination of excess capacity in the sector is therefore a prerequisite for achieving sustainable levels of profitability. This means rates of return will for the foreseeable future be much lower than in the pre-crisis days.
2.2 Contribution of Financial Services to the Maltese Economy As the Maltese economy becomes more service oriented, financial services are becoming important to Malta’s economic future. There is therefore a strong case for the industry to approach the sector’s future growth with a strong determination to continue to push out the boundaries. A determination on the side of industry to compete and innovate will ensure a successful future and provide customers with more choice. The financial services industry is valuable to Malta. It is therefore in Malta’s long-term and strategic interests to ensure that – subject to effective regulation and supervision – the financial services sector is improved and strengthened in order to maximise its contribution to the Maltese economy. Malta’s strengths have been its open market based economy, its regulatory, accounting and legal frameworks, its skilled labour force, its developing mass of financial services participants, as well as the use of English as a business language and the relative long-term stability and predictability of its tax regime. The Maltese financial services sector is much diversified and includes banking, insurance, asset management operations and a wide array of supporting professional services. The proportion of financial services in Malta is not high to warrant concerns about an “unbalanced” economy. The Gross Value Added (GVA) in the Financial Intermediation sector which was almost 5.5 per cent of the total Gross Value Added in 2009 increased to 7.5 per cent in 2010. The GVA has consistently increased since 2007 when the value was 4.2 per cent. The 2010 value is similar to the United States but less than in both Ireland and Luxembourg. The financial services industry is starting to play a vital role in the Maltese economy. The total number of full time gainfully occupied in direct financial intermediation services amounted to 6,300 in December 2010. This represents about four per cent of the total gainfully occupied. Additionally, there were 529 registered part time employees in the sector. A further 1,500 persons are estimated to work in professional and other services that are ancillary to financial services. In 2010, the Gross Value Added per employee in the Financial Intermediation sector was around €62,000 per capita per employee. The total income tax collected after refund from companies engaged in financial intermediation is estimated to have reached almost €19 million in 2009, financing much needed for Government revenue. In 2009, Foreign Direct Investment (FDI) flows in Malta in the Financial Intermediation sector amounted to 68 per cent of the total FDI while in 2008 it amounted to 61 per cent. Financial services also have a number of multiplier effects on the rest of the non-financial economy. This effect is vital to the national economy, for government and public services, for companies – whether international or domestic – and for citizens. Estimates for the total proportion of the economy made up
14
Strategic Plan 2011 – 2014
by the financial services industry are difficult to resolve due to the effects of “financial intermediation services indirectly measured”. These include related services such as accountancy, legal and treasury services and the demand generated by the financial services sector for other indirect services, such as IT, telecommunications, publishing, hospitality and other business related. Data on these services is not normally published by the National Statistics Office. The main core areas of the financial sector – banking, insurance, investments – support individuals and businesses by: • providing finance for individuals, households, business and government, • helping businesses and individuals manage their risks effectively, and • allowing society to accumulate wealth through sensible investments. Also payment systems and other types of financial services infrastructure such as clearing and settlement provide the mechanisms through which businesses and individuals can carry out transactions quickly and reliably through a global network. The global financial crisis has had very little effect on the Maltese financial services sector. None of the currently licensed banking institutions suffered a liquidity crisis although they suffered a lower return on their foreign investments. Malta’s financial services sector continues to improve on its positive performance in recent years. The World Economic Forum’s Global Competitiveness Index 2010-2011 ranked Malta 11th out of 139 countries for its financial market development, up by two notches from the 13th position in 2009. The banking system in Malta was reported in 2010 to be the 10th soundest in the world, three notches up from the previous year. Key performance indicators for the financial services sector also confirm the sector’s standing as a leading innovator in the Maltese economy. The prevalence of the traditional banking model in Malta, where banks fund their lending activities mainly from deposit taking, became more pronounced in 2008 and 2009 as it became increasingly difficult to tap liquidity from the international markets. It is clear that this model has paid dividends during the crisis. An analysis on the level of international lending and borrowing for 2010 by the banks licensed in Malta is illustrated in Chart 1.
Strategic Plan 2011 – 2014
15
Chart 1: International Lending and Borrowing: Top Ten Countries by liabilities 12 10
Billions (€)
8 6 4
2
Greece
France
Germany
Luxembourg
United States
United Kingdom
Switzerland
Austria
Turkey
Malta
0
The economic downturn was found to have an effect on the returns of Malta domiciled collective investment schemes. The aggregate Net Asset Value (NAV) of PIFs, UCITS, and Non-UCITS as at end 2010 registered around €8 billion after it had decreased to €6.2 billion in June 2009. This represents an increase of 13.5 per cent over the end of 2009.
450
9
400
8
350
Net Asset Value (€)
Billions
10
7
300
6
250
5 200
4
150
3
100
2 1
50
0
0 Dec-07 PIFs
16
Strategic Plan 2011 – 2014
Non UCITS
Dec-08 UCITS
Dec-09 Aggregate NAV
Dec-10 Number of funds (incl. sub-funds)
Number of funds (incl. sub-funds)
Chart 2: Net Asset Value against number of funds (including sub-funds) for the period 2007 – 2010.
Data published in the European Financial Stability and Integration Report (EFSIR) for 2010, states that (at over 60%), Malta is the member state with the highest share of Gross Written Premia (GWP) subscribed in the country from other EU and non-EU insurers in 2009. On the other hand, cross-border and international business is also growing fast in the other direction. The Maltese insurance sector has in fact been developing strongly since Malta joined the EU in 2004. Although the sector is not yet as strong as it is in other Member States such as France, Luxembourg and the United Kingdom. Between the period 2008 and 2009 total risk/commitments written by life, non-life and re-insurance business companies established in Malta increased by around 20 per cent annually (Table 7). Table 7: Total Gross Premium Written by companies established in Malta: 2007-2009 2007 Risks/commitments (€ 000’s)
2008 Risks/commitments (€ 000’s)
2009 Risks/commitments (€ 000’s)
238,074
189,779
222,408
Life Non-Life
337,163
418,836
506,680
Reinsurers
198,734
262,460
314,660
Total
773,971
871,075
1,043,748
In the General Business Sector, the GPW in relation to risks situated in Malta increased by three per cent over the period 2008 – 2009, from €93 million in 2008 to €96 million in 2009. Over the same period, an increase of 11 per cent in the GPW in relation to risks situated outside Malta was registered, specifically from €557 million in 2008 to €621 million in 2009 (Table 8). A per capita average of €310 was spent on non-life insurance in 2009. This represents a decline over 2008 where €312 was spent on non-life insurance.1 The gross premiums written by companies with Head Office in Malta for the long-term business increased by 48 per cent over 2008, from €221 million in 2008 to €327 million in 2009. These figures include investment contracts without Discretionary Participation Features (DPF). Growth in GPW was recorded where Malta is the country of commitment (seven per cent) and where Malta is not the country of commitment (238 per cent) (Table 8). On a per capita basis, an average of €480 was spent on life insurance in 2009. This represents a growth on 2008 where an average of €450 was spent on life insurance.2 Table 8: Gross Premium Written by companies: Risks/Commitments in Malta and outside Malta – 2007 – 2009 2007
2008
2009
Risks/ commitments in Malta (€ 000’s)
Risks/ commitments outside Malta (€ 000’s)
Risks/ commitments in Malta (€ 000’s)
Risks/ commitments outside Malta (€ 000’s)
Risks/ commitments in Malta (€ 000’s)
Risks/ commitments outside Malta (€ 000’s)
Life
228,081
37,114
182,075
39,339
194,493
132,941
NonLife
90,121
418,655
92,659
557,002
95,676
620,638
Per capita average figures include GPW of non EU/EAA insurers authorised under the Insurance Business Act and EU/EAA insurers carrying out business in Malta under the right of establishment. 2 ibid 1
Strategic Plan 2011 – 2014
17
CHAPTER 3 – FOSTERING MALTA AS AN INTERNATIONAL FINANCIAL SERVICES CENTRE 3.1 The Malta Financial Services Sector Malta’s development as an international financial centre is reflected in the range of financial services available. Malta continues to be positively ranked for its performance in the financial sector. The World Economic Forum’s Global Competitiveness Index 2010 – 2011 ranked Malta 11th out of 139 countries for its financial market development.
3.1.1 Banking Sector The Maltese banking sector consisted of 25 credit institutions in 2010. Three of these are majority Maltese-owned while 22 are foreign credit institutions having a physical presence in Malta. Fourteen foreign credit institutions are from EU countries, six from non-EU countries and another two are branches from non-EU countries. Chart 3: Credit institutions with majority shareholding from EU and Non-EU countries
32% Non-EU
68% EU
Complementing the traditional retail functions, banks are increasingly offering private and investment banking, project finance, treasury services and syndicated loans. Malta also hosts a number of institutions specializing in trade-related products such as structured trade finance, factoring and forfaiting. At the start of the financial crisis in 2007, global banking operations experienced significant contractions in their balance sheets. However, the Maltese banking sector remained resilient due particularly to the strong capital base and liquidity of Maltese banks which continued to enjoy strong positive deposit to loan ratios. The banking system was reported to be the 10th soundest in the world by The World Economic Forum’s Global Competitiveness Index 2010-2011.
18
Strategic Plan 2011 – 2014
The total assets of the banking sector amounted to €49.5 billion in 2010. This represents an increase of almost nine billion euros or 21 per cent in the total assets of the whole of the banking sector in Malta over 2009 and follows a decrease of 2.7 per cent in 2009 over 2008. The assets of the banking sector serving the domestic market3 also registered growth in 2010, from €14.6 billion in 2009 (or 35.9 per cent of the total assets of the whole banking sector) to €17.9 billion in 2010 (or 36.1 per cent of the total assets of the whole banking sector). During 2010, total deposits in the banking sector continued to grow, reaching €26.1 billion representing an increase of almost four billion euro or around 19 per cent over 2009 following an increase of almost three per cent in 2009 over 2008. In the banking sector serving the domestic market, total deposits amounted to €12.8 billion or almost 50 per cent of the total deposit liabilities in the banking sector. Deposits for the banking sector serving the domestic market in 2010 increased by 20.5 per cent over 2009. The corresponding figure for 2009 represents an increase of 3.4 per cent per cent over 2008 following a smaller increase of 1.3 per cent for 2008 over 2007. Chart 4: Bank deposits of aggregate credit institutions against domestic credit institutions – 2008 – 2010
Billions
30
25
Deposits (€)
20
15
10 5 0 Dec-08 Deposits of aggregate credit institutions
Dec-09
Dec-10
Deposits of domestic credit institutions
The composition of the deposits in the whole banking sector in 2010 was as follows: 72.9 per cent were time deposits, 17 per cent were savings accounts while current accounts amounted to 10.1 per cent. The composition of deposits in the banking sector serving the domestic market shows that 45.9 per cent were in the form of time deposits; 34.4 per cent were savings and 19.7 per cent were current deposits.
3
Domestic credit institutions denote institutions whose business is wholly or largely made up of domestic business.
Strategic Plan 2011 – 2014
19
Chart 5: Distribution of bank deposits in 2010 (Domestic credit institutions against aggregate credit institutions) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 Aggregate Banking Sector Current
Domestic Banking Sector Savings
Time
A sectorial analysis of total bank lending shows that 30 per cent of loans in 2010 were advanced to the financial and insurance intermediation sector followed by the households and individuals sector (14 per cent), and manufacturing sector (10 per cent).
Billions
Chart 6: Loans and advances by sector in 2010 (Domestic credit institutions against aggregate credit institutions) 8 7
Loans and advances (€)
6 5 4 3 2 1
Domestic credit institutions
20
Strategic Plan 2011 – 2014
Aggregate credit institutions
Manufacturing
Real Estate activities
Accomodation and food services activities
Electricity, gas and air conditioning supply
Transportation and storage
Financial and insurance activities
Wholesale and retail trade,repain of motor vehicles and motor cycles
Construction
Households and individuals
0
The lending portfolios of banking institutions operating on the domestic market target different economic sectors than those targeted by the banking system as a whole. In contrast to the total banking sector, households and individuals sector accounted for 34 per cent of lending in the domestic banking sector in 2010, followed by the construction sector (13 per cent), and the wholesale and retail trade, repair of motor vehicles and motor cycles sector (9 per cent). While Maltese banks have been spared the full impact of the financial crisis, in the years ahead they will be operating in an environment that is likely to have changed as a result of the global economic and financial crisis. Maltese banks, similar to banks in other Member States will face tougher regulation, higher capital requirements and, perhaps, also scarcer funding.They will have to strengthen their capacity to manage risk and growth itself. The small size of the domestic market, moreover, will require them to be more innovative and outward looking, exploiting the opportunities of the Single Market and of Malta’s strategic location on the EU’s southernmost frontier. Only in this way will they be able to compete and continue to play a vital role in support of a modernising and growing economy. The future challenge for the banking sector is to remain competitive. In the short-term, the banking system must endeavour to emerge from the current downturn well equipped to seize the opportunities that will no doubt arise once the crisis has run its course. For this purpose, it will be important for the banking institutions to build on their strengths and minimise their weaknesses. Payment systems are an important component of liquidity management. The efficient execution of payment instructions is vital, as payment failures can result not only in higher costs but also liquidity problems. It is, therefore, somehow not clear why banks in Malta have opted for only an indirect participation in TARGET2 thereby relying entirely on their foreign correspondents to settle payments in euro. Indirect participation may, according to the Central Bank of Malta, give rise to operational problems and additional costs, moreover this also carries a reputation risk in the event of a payment failure, and implies the need to have in place a contingency plan to cater for the operational failure of counterparties. In this respect, it is therefore important that Maltese banks take a direct participation in the system. Another project which should help Maltese banks play a more active role in Europe is the Single Euro Payments Area (SEPA), which went live in 2008. The transposition of the Payments Services Directive (Directive 2007/64/EC) into national law was completed in May 2010. SEPA represents the next major step towards closer European financial integration and is a further building block towards the realisation of the full potential of the Single Market. Its objective is to remove the distinction between domestic and cross-border payments, promoting efficiency and safety, minimising transaction costs and reducing bank charges. Malta stands to gain from SEPA. Along with the benefits of financial market integration, increased competition and scope for innovation, there is also a strong potential to attract e-commerce payment business and payment factory operations for trans-national corporations. Investing in SEPA should not, therefore, be viewed as an expense, but rather as a business opportunity that will help banks pre-empt competition law problems, reduce costs and expand in new markets. In time, it may also come to offer new and profitable services, such as e-invoicing and reconciliation. The development of new financial infrastructures will be given an added boost with the implementation of the new E-Money Directive (Directive 2009/110/EC) which aims at modernising the EU rules on
Strategic Plan 2011 – 2014
21
electronic money, updating the prudential regime and facilitating market access to new participants for electronic money institutions. The directive complements the regulatory framework for payment institutions created by the Payment Services Directive. The groundwork for the transposition and implementation of the E-Money Directive was carried out in 2010 and the Directive should be fully transposed during the first half of 2011.
3.1.2 Investment Services Sector The investment services sector continues to consolidate and expand with the establishment of more international service providers. As at the end 2010, there were 102 investment services licence holders, an increase of 62 per cent over the period 2007 – 2010. During this period, the number of authorized Category 2 investment services increased from 47 to 73. Other investment services companies had their licence extended to provide additional services. Chart 7: Investment services companies licensed during the period 2007 – 2010 80
Investment Services Licenses
70 60 50 40 30 20 10 0 Category 1a Category 1b Category 2 Category 2 & 4 Category 3 Category 3 &4 Category 4 2007
2008
2009
RFA
2010
The number of newly licensed Collective Investment Schemes continued to increase. At the end of 2010, the total number of active funds (including sub-funds) was 410 with the majority of the licences targeting Professional Investor Funds. In the period since joining the European Union in May 2004 to the end of 2010 a total of 610 collective investment scheme licences were issued. The aggregate Net Asset Value (NAV) of Malta domiciled investment funds (PIFs, UCITS, and Non-UCITS) as at end of 2010 was around €8 billion.
22
Strategic Plan 2011 – 2014
450
9
400
Billion
10
Net Asset Value (€)
8
350
7
300
6
250
5 200
4
150
3 2
100
1
50
0
0 Dec-07 PIFs
Non UCITS
Dec-08 UCITS
Dec-09 Aggregate NAV
Number of funds (incl. sub-funds)
Chart 8: Net Asset Value against number of schemes (including sub-funds) for the period 2007 – 2010.
Dec-10 Number of funds (incl. sub-funds)
Malta has all the necessary infrastructure in place for the continued expansion of the investment services sector. Accountants are trained under IFRS, which Malta adopted in 1998 well before other EU Member States. Key performance indicators for the financial services sector confirm the sector’s standing as a leading innovator in the Maltese economy. The soundness of Maltese banks has been ranked in 10th position. Malta is in the 12th position in the assessment carried out on the regulation of securities exchanges and in the 8th position on the strength of auditing and reporting standards. Malta offers a range of fund vehicles (including investment companies, mutual funds, limited partnerships, foundations and unit trusts), which can be tailored to suit investor requirements and investment policy. However, while most of the currently domiciled funds follow the traditional investment company, it is important that the industry starts to adapt to new structures particularly limited partnerships. Also the industry should become more involved in the launching of funds under the Prospectus Directive (Directive 2003/71/EC). The Prospectus Directive seeks to harmonise the requirements for drafting, approval and distribution of a prospectus in offerings and listings of securities within the EU. A key aim of the directive is to provide for a prospectus that, having been cleared by one EU competent authority can be used as a “passport” for offers or listings in all other EU countries without further review or the imposition of further disclosure requirements. This is a direction that should be exploited by the industry for closed ended funds. While Malta is already seeing the development of advanced FOREX trading platforms, other technologybased products such as Exchange Traded Funds (ETFs) have not yet taken root. Malta cannot afford to fall behind in this area which has been attracting vast amounts of capital at a phenomenal rate.
Strategic Plan 2011 – 2014
23
3.1.3 Insurance Sector The insurance sector has grown substantially with new authorizations of insurance undertakings particularly in the non-life insurance business. At the end of 2010, the insurance sector grew to 50 insurance companies (including eight companies servicing the domestic market) providing insurance services across 27 EU countries and beyond. These are divided into 33 licensed non-life insurance companies, eight life insurance companies, two composite and seven reinsurance companies. These figures include four protected cell companies (incorporating 13 cells) and eight affiliated insurance companies. The 2010 figures contrast with those of 2007, where there were 20 non-life insurance companies, five life insurance companies, three composite companies, and two reinsurance companies. Chart 9: Insurance companies licensed during the period 2007 – 2010. 35
Insurance undertakings
30 25 20 15 10 5 0
2007
2008 Non Life
Life
2010
2009 Composite
Reinsurance
The gross premiums written (GPW) for non-life business by all the insurance undertakings domiciled in Malta continues to increase over previous years. The gross premium stood at €716m in 2009, an increase of around 10 per cent on the 2008 figure of €649million. The gross premium written by insurance undertakings writing domestic business during 2009 was at a similar level to that of 2008 with only a three per cent increase being registered (€93m to €96m). On the other hand an 11 per cent increase was registered in 2009 for insurance undertakings writing business outside Malta (€557m to €621m).
24
Strategic Plan 2011 – 2014
Gross Premiums written (€)
Millions
Chart 10: Total Gross Premium written by companies with head office in Malta - General Business 2007-2009 700 600 500 400 300 200 100 0 Risks situated in Malta
Risks situated outside Malta 2007
Risks situated in Malta
Risks situated outside Malta 2008
Risks situated in Malta
Risks situated outside Malta
2009
Gross premiums written by companies for life business also increased in 2009. Total gross premium written by life insurance companies domiciled in Malta amounted to €327 million in 2009 against the €221 million registered in 2008, an increase of 48 per cent. These figures include the investment contracts without Discretionary Participation Features (DPF)). The 2009 increase over 2008 in gross premium written was registered in both commitments where Malta was the country of commitment (7 per cent) and gross premium written where Malta was not the country of commitment (238 per cent).
Strategic Plan 2011 – 2014
25
Chart 11: Total Gross Premium written by companies with head office in Malta – Life Insurance Business: 2007 - 2009 Millions
250
Gross Premiums written (€)
200
150
100
50
2009
Commitments where Malta is not the country of commitment
Commitments where Malta is the country of commitment
2008
Commitments where Malta is not the country of commitment
Commitments where Malta is the country of commitment
2007
Commitments where Malta is not the country of commitment
Commitments where Malta is the country of commitment
0
The small increases in the domestic market can be related to the fact that many may have preferred to keep or transfer their savings to traditionally secure products as evidenced by more surrenders, fewer single premium investments, and fewer new linked long-term premiums in 2008. The increases observed in the risk written outside Malta are due to data being made available by newly established companies. It is clear that the insurance business sector can expand further despite the successes achieved so far. Development of the international insurance business is taking place at a steady pace while the local market remains fluid. There are no impediments at the regulatory level although the industry is going to face challenges with the introduction of Solvency II.
3.1.4 Maintaining a Competitive Financial Services Sector Malta’s financial services industry is continuously gaining momentum and gradually the Island is becoming recognized as an important financial services centre with a worldwide reputation for excellence. Developing this sector of the economy is one of the Government’s top economic priorities, and the continued success of the financial services sector will be crucial in achieving this objective. The Maltese financial services industry is both diversified and has a lot of depth. It operates locally, at the European level and is ready to reach globally. The role of the MFSA is to continue to create a successful regulatory framework which ensures that Malta will be home to an innovative, competitive and thriving industry in the future through an ongoing partnership with the industry and the Government. The ambitious task is therefore to continue creating a sector which is innovative, competitive and thriving internationally – a financial services industry underpinned by world-class infrastructure and universally recognised on the global stage. Our strategy is to sustain and maximise the industry’s success. The MFSA will achieve this by ensuring that the right competitive environment continues to flourish.
26
Strategic Plan 2011 – 2014
Three strategic aims support our vision and are built on promoting competitiveness. We will continue to: • build the regulatory profile • support and encourage innovation through appropriate legislative changes • maintain excellence through continuous training Malta’s financial services industry is already international. Our strategy therefore aims to keep it that way, with firms choosing Malta as their domicile. Malta will continue to build on its history of innovation and international excellence in financial services. Today it has particular strengths in banking, life assurance and pensions, investment management and asset servicing. It also has vibrant general insurance, corporate finance and broking services sectors, and a strong community of professional advisors and service providers. . Financial services employment is starting to become a major contributor to Malta’s economy. The industry currently accounts for some four per cent of the total gainfully occupied, employing 6,300 persons directly, almost 1500 more in a range of related industries particularly in professional services such as accountancy, legal services and computing, and another 529 as part time employees in 2010. Over the last 3 years, financial services employment has grown at a faster rate than other economic sectors in Malta. The quality of life in Malta is a key factor in helping to attract the best talent in financial services to live and work here and we have advised the Government on a special program for international professionals to work in Malta. The aim is to attract knowledge currently not available so that the local industry can benefit from new experiences. The industry also attracts the best Maltese graduates who wish to remain in Malta rather than seek opportunities elsewhere. In addition to salary, benefits and career opportunities, prospective international employees want to know that where they live and work will offer a good education for their families, ease of travel to and from work, affordable housing and a rich and vibrant cultural scene. The financial services industry not only provides employment. It provides quality employment that is crucial to a strong economy. Table 1 shows that average earnings are higher in financial services than the average, across a range of occupational groups. This gives the industry a strong competitive advantage in attracting new staff into financial services employment. Table 9: Average earnings by economic sector. Source: Eurostat Average annual gross earnings by economic activity in Malta - NACE Rev. 2 Year 2008 Agriculture, forestry and fishing
Total in Full-time unit4 Average (€) -
Mining and quarrying
17,143
Manufacturing
17,961
Electricity, gas, steam and air conditioning supply
19,216
Water supply; sewerage, waste management and remediation activities
17,990
Construction
9,684
Wholesale and retail trade; repair of motor vehicles and motorcycles
11,124
Strategic Plan 2011 – 2014
27
Average annual gross earnings by economic activity in Malta - NACE Rev. 2 Year 2008
Total in Full-time unit4 Average (€)
Transportation and storage
20,781
Accommodation and food service activities
12,206
Information and Communication
15,716
Financial and insurance activities
27,167
Real estate activities
13,213
Professional, scientific and technical activities
13,213
Administrative and support service activities
14,117
Public administration and defence; compulsory social security
18,698
Education
15,577
Human health and social work activities
17,993
Arts, entertainment and recreation
12,046
Other service activities
12,069
Private households with employed persons
-
Extra-territorial organizations and bodies
-
Average
15,695
Average earnings in Malta are more competitive than in the European financial sector as a whole. This is combined with financial services staff being well qualified compared with the sector average and the rest of the economy. Together, these benefits enhance competitive advantage for companies. Table 10: Average earnings in other jurisdictions. Countries
Average annual gross earnings in Financial Intermediation (€) (2007)5
Ireland
57,7916
Luxembourg
71,768
Malta
27,282
United Kingdom
82,377
Source: Eurostat
Malta’s heritage and long experience as a financial centre particularly in banking and insurance, combined with a high quality living and working environment, present an appealing proposition for companies. Further attractions include good availability of highly skilled staff and strength at all levels of education: from schools through to further and higher education institutions. Moreover, although Malta is an ideal location from which to access mainland European markets, the industry is a global industry and the competitive pressures are intense. Our cost structures remain competitive with the rest of Europe. According to figures published by Eurostat for 2007, 2008 and 2009, Malta has one of the lowest salary increases in the workforce for 2007, 2008 and 2009:
Figures quoted are average gross earnings of full time and part time employees. Figures quoted are average gross earnings of full time employees. 6 2005 figure 4 5
28
Strategic Plan 2011 – 2014
Chart 12: Percentage pay increases for 2009 and 2010 (Source Eurostat) 7 6 5 4 3
% Pay Increases 2009
2
% Pay Increases 2010
1 0 EU27
MT
CZ
DE
IE
FR
CY
LU
AT
UK
NL
-1 -2
According to figures published by Eurostat for 2009, Malta had pay increases in line with the EU average, however the percentage pay increase was well below the EU average. It is important that increases in costs continue to be maintained so that the financial sector continues to remain competitive.
3.2 Creating an appropriate regulatory and supervisory infrastructure 3.2.1 The new European Supervisory Framework The financial crisis of 2008 has revealed that a consistent set of regulatory rules were required worldwide. The regulatory framework in the European Union lacked harmonization as Member States have options in the enforcement of the relevant Directives. These options have led to a wide diversity of national transpositions related to local traditions, legislations and practices in each and every Member State. The de Larosière Report quotes a number of major inconsistencies arising due to a lack of a harmonized set of rules: • the differences regarding the sectorial extent of EU supervision. Some EU countries have an extended definition of credit institutions (i.e. “établissements de crédit”), while other members have much more limited definitions; • reporting obligations are very diverse in the EU, some institutions, especially the non-listed ones, have no obligation to issue accounting reports; • the definition of core capital differs from one Member State to another, with an impact in terms of communication whereby some companies do not subtract goodwill from the definition of core capital; • different accounting practices exist for provisions related to pensions which create serious distortions in the calculation of prudential own funds;
Strategic Plan 2011 – 2014
29
• the directive on insurance mediation has led to highly divergent transpositions in the Member States. Some Member States have transposed the directive as it is with almost no national additions, while others have complemented the directive with very extensive national rules inducing competition distortions; • there is limited harmonisation of the way in which insurance companies have to calculate their technical provisions making it difficult to compare the solvency standing of insurance companies; • differences exist in the definition of regulatory capital regarding financial institutions; • there is no single agreed methodology to validate risks assessments by financial institutions; • there are still substantial differences in the modalities related to deposit insurance; • there is no harmonisation whatsoever for insurance guarantee schemes. Although these issues relate to the effectiveness of the single market in financial services rather than to the financial crisis, the de Larosière Report indicated three main reasons as to why the European Union required a set of harmonized rules. These are: • a single market in financial services cannot function properly if national rules and regulations are significantly different from one country to the other; • diversity in rules and regulations creates competitive distortions and encourages regulatory arbitrage which for cross-border groups goes against efficiency and the normal group approaches to risk management and capital allocation; • in cases of institutional failures, the management of crises in case of cross-border institutions is made all the more difficult. In order to avoid these distortions the de Larosière Report recommended that: – Member States and the European Parliament should avoid legislation derogations permitting inconsistent transposition and application and the European Commission and the Level 3 Committees should identify and eliminate national exceptions in order to reduce distortions of competition and regulatory arbitrage and consequently improve the functioning of the single market and improve the efficiency of cross-border financial activity at EU and global level; – the EU should “speak with one voice” when it participates in international arrangements such as the Basel committee, the FSF and the IMF. The experiences of the financial crises in 2008 brought to the forefront the important distinction between micro- and macro- prudential supervision. Micro-prudential supervision attempts to mitigate the risk of contagion and the subsequent negative externalities in terms of confidence in the overall financial system while macro-prudential supervision attempts to limit the distress of the financial system as a whole in order to protect the overall economy from significant losses in real output. Macro-prudential analysis pays particular attention to common or correlated shocks and to shocks to those parts of the financial system that trigger contagious knock-on or feedback effects. Therefore micro-prudential supervision cannot effectively safeguard financial stability without adequately taking into account developments at the macro-level while macro-supervision impacts supervision at the micro-level. Although the way in which the financial sector is supervised in the EU has not been one of the primary causes behind the crisis, there have been real and important failures at both the macro and microprudential supervisory level. Pre-crisis, there was too much emphasis on the supervision of individual firms and too little on the macro-prudential side and there was no mechanism to ensure that the assessment of risk is translated into action. Also, the supervisory processes and practices on a cross5
30
Figures quoted are average gross earnings of full time employees.
Strategic Plan 2011 – 2014
border basis were inadequate and no mechanism existed for questioning the decisions of a national supervisor. This is particularly important when a financial institution extends its activities by branching into other countries from its home country. The peer review arrangements developed within the Level 3 committees were not very effective as there is extensive reliance on the decisions of the home supervisor. This happened particularly in the case of the Icelandic banks which created significant risks in countries, particularly the UK and the Netherlands, other than that of the home regulator. Therefore the first key lesson to be drawn from the crisis was therefore an urgent need to upgrade macro- and micro-prudential supervision in the EU for all financial activities. An effective mechanism to allow home supervisors to challenge decisions made by host supervisors was clearly required. Information flow among supervisors also needed to be optimized in order to create mutual confidence among supervisors. As a consequence the de Larosière Report proposed new structures to make all European supervision more effective and so improve financial stability in all the Member States of the EU. The main purpose of the new structures being the strengthening of the quality of both national supervision and European supervision as the Level 3 committees under their existing mandate as advisory committees to the Commission are severely constrained in their work. As the structure and role of the Level 3 committees was not considered sufficient to ensure financial stability in the EU and all its Member States, the de Larosière report proposed the establishment of a European System of Financial Supervision (ESFS) consisting of an integrated network of European financial supervisors which would work with enhanced Level 3 committees (“Authorities”). The Level 3 Committees CESR, CEBS and CEIOPS were eventually transformed into three European Authorities: a European Banking Authority, a European Insurance and Occupational Pensions Authority and a European Securities and Markets Authority which will be managed by a board comprised of the chairs of the national supervisory authorities. The ESFS is expected to have a largely decentralised structure, fully respecting the proportionality and subsidiarity principles of the Treaty. This means that the supervisor of the home Member State will continue to function as the first point of contact for the firm, while the European centre should coordinate the application of common high level supervisory standards, guarantee strong cooperation with the other supervisors and importantly guarantee that the interests of host supervisors are properly safeguarded. This means proper and timely information exchange among all supervisors to enable complete assessment – from the national to European to global levels. The de Larosière Report considers that the proposed improvements in the organisation of supervision cannot be looked at in isolation from the rules which supervisors have to implement and from the crisis management and resolution arrangements that have to be implemented when required. Therefore the new European Institutions and the Level 3 committees are tasked to prepare a consistent set of core rules. Key-differences in national legislation arising from exceptions, derogations, additions made at national level or ambiguities contained in directives which have a material impact on the market will be identified and removed. Following adoption of the de Larosière Report and decisions taken at the European Council of Heads of State in June 2009 to establish three ESAs under the ESFS, the European Commission in September 2009 adopted legislative proposals to further strengthen financial supervision in Europe including the creation of a European System of Financial Supervisors with three new European Supervisory Authorities. The proposals became an integral part of the Commission’s strategy for preventing future crises.
Strategic Plan 2011 – 2014
31
In December 2009, the Swedish Presidency succeeded in achieving an agreement at the level of the Ecofin Council on the package of texts for the supervisory reform. It was agreed that the Authorities should have the following key-competences: • • • • • •
legally binding mediation between national supervisors; adoption of binding supervisory standards; adoption of binding technical decisions applicable to individual financial institutions; oversight and coordination of colleges of supervisors; designation, where needed, of group supervisors; licensing and supervision of specific EU-wide institutions (e.g. Credit Rating Agencies, and posttrading infrastructures); • binding cooperation with the ESRB to ensure adequate macro-prudential supervision. The Commission’s supervision proposals were considered by the European Parliament, and the creation of the new Authorities took place in January of 2011. The new ESAs have a legal personality with accountability to the European Parliament and the Council of the European Union as well as administrative and financial autonomy with revenues coming mainly from obligatory contributions from national supervisory authorities and EU’s General Budget. There will be a continuation of competences held by CESR, CEBS and CEIOPS including the continuation of on-going work and projects. The ESAs will have a vital role to play advising the Commission on “level 2” implementing legislation, and also in drafting technical standards in many areas laid down in sectorial Directives. Consequently they will harmonise many technical areas where rules currently diverge between Member States and contribute to the development of a Single European Rulebook for the financial sector thereby ensuring consistency in the application of EU law. In certain cases, they may require national supervisory authorities to take specific actions to remedy an emergency situation. The ESAs will participate in colleges of supervisors and settle disagreements in cross-border situations between authorities, including within colleges of supervisors
3.2.2 The Regulatory Architecture at the Malta Financial Services Authority In the light of the financial crisis, the Malta Financial Services Authority (MFSA) assessed how it could maximise the benefits of a single regulator and to minimise any potential drawbacks. The first moves towards the creation of a single financial services regulator in Malta took place in 1994, before the MFSA was created in 2002. The creation of the MFSA was secured by the addition of financial services sub-sectors with the last addition being the regulation of banking and recognised investment exchanges. However, as time went by, it was realised that the full benefits of a single regulator were not being achieved as the internal structure was not sufficiently integrated, although the statutory and effective independence of the MFSA was achieved through legislative and internal procedures. This was reflected in the creation of the Supervisory Council and in splitting the regulatory functions of the MFSA from its operational functions (with the regulatory and operational functions coordinated by the high-level Coordination Committee). The internal structures and working arrangements developed since 2002 owed more to long-standing and self-reinforcing cultural differences than to any constraints imposed by legislation. Malta retains sector-
32
Strategic Plan 2011 – 2014
specific legislation for banking, insurance and securities. This necessitates some differences in regulation across sectors. However, over time it was evident that there was considerable scope even within the existing legislation to introduce greater harmonisation of approach across sectors within the MFSA at all stages of the regulatory process (policy, licensing, supervision and enforcement). The lack of internal integration at the MFSA was at times reflected in the different approaches adopted across sectors to the key regulatory functions of licensing, supervision and regulatory policy and that a more integrated structure should lead to a more consistent approach to licensing, a common framework for riskbased supervision and for on-site visits and off-site monitoring and analysis, and more effective working across Units. Moreover, the growth of conglomerates makes it difficult for sector-based regulators to understand and to address group-wide risks in a conglomerate; to assess group-wide systems and controls, senior management, and capital and liquidity; and to develop the capacity to respond effectively to problems arising in any part of a conglomerate. It is generally recognised by the MFSA and in external reviews such as those undertaken by the IMF (within the context of strong endorsement of Malta’s comprehensive legal framework and its adherence to international standards and codes) that there is considerable scope to introduce a more common culture across the Authority, to benefit from greater harmonisation and consistency in functions such as licensing and risk-based supervision, and to improve co-operation and information-sharing across the Authority. The MFSA has clearly stated its intention to play its part in the delivery of the ambitious vision for the growth of financial services in Malta, to develop and protect the island’s reputation as a world-class international financial centre, and to be flexible, responsive, open and efficient while adhering robustly to international best practice and standards. These improvements would enhance the effectiveness of the MFSA, and they will become of even greater importance as financial services firms and groups in Malta become more active across the banking, insurance and securities sectors. The MFSA has placed considerable emphasis on providing prompt and efficient licensing procedures, within its overall aim to provide “an effective and comprehensive service by being innovative, approachable, timely and efficient.” (Strategic Plan 2007-2009, page 8). Firms and individuals generally welcome the MFSA’s transparent approach, including its willingness to meet applicants and to discuss matters with them constructively. However, firms and individuals increasingly operate in more than one sector and the MFSA is required to operate a consistent approach across sectors as otherwise firms and individuals will face unnecessary costs. The strength of the cultural differences across the sector-based regulatory Units that undertake licensing, have constrained the extent of harmonisation to date. Therefore, the most effective and efficient way to deliver the benefits of greater harmonisation was to create an integrated Authorisation Unit with responsibility for developing proposals for greater cross-sector harmonisation of licensing requirements, internal procedures and timetables, for taking these proposals to the Supervisory Council for approval, and for implementing agreed changes. The removal of the licensing function from the other regulatory Units was combined with efficient and effective arrangements to ensure that supervisors are properly informed about licence applications, and appropriately involved in the processing of applications and in decisions taken. This need not be a “one size fits all” model. The creation of the Authorisation Unit has meant that a decision needed to be taken on the future of the supervisory Units. One option was the creation of a single Supervision Unit covering all the sectors. However, this would have created a much larger unit than the other Units across the MFSA. The recommended option
Strategic Plan 2011 – 2014
33
was therefore to create fewer, but still broadly sector-specific, supervision Units. The structure of these supervision Units takes into account the numbers and types of firms currently regulated by the MFSA, the likely patterns of the growth of the financial sector in Malta, and the synergies from bringing together the regulation of various types of activity. The most logical way forward was to combine (a) insurance and pensions, and (b) investment and fund management firms, market abuse, Recognised Investment Exchange(s), listing and the code of corporate governance, trustees, nominees and others with banking supervision remaining unchanged. However as the financial services sector continues to grow and the number of conglomerates increases the rationale would be to establish a separate unit to supervise conglomerates, with all “single sector” firms in a second Unit. There were also evident other aspects where the MFSA could benefit from greater integration. First, each of the main supervision units has its own policy function, including legal support. This is effective in many respects, including in keeping track of, being represented on, and inputting sector expertise into EU and other international committees and working groups. However, this sector-based approach is less effective when considering the scope for greater cross-sector harmonisation of policy (both internationally and domestically). The Solvency II Directive raises some similar issues for insurance firms – including with respect to the “three pillar” framework, the use of internal models by firms, and group-wide capital requirements – as those for banks under the Capital Requirements Directive. And more generally the three EU supervision committees (CESR. CEBS and CEIOPS) which in 2011 become Authorities (ESMA, EBA and EIOPA) maintain an ever-lengthening list of cross-cutting issues. Also some policy issues are cross-sector in nature. Examples include retail conduct of business issues, the implications of market-wide product developments, anti-money laundering and others. A policy coordination function would therefore help to identify cross-cutting issues, to discuss their importance and implications with the sector-specific supervision Units, and to make proposals to the Supervisory Council on which issues should be taken forward and by whom. It has also become necessary for the MFSA and the CBM to co-ordinate their work and co-operate further in ensuring the stability of the financial system, a statutory obligation of the CBM. There is therefore, value in the MFSA contributing to the financial stability work of the CBM such as in research into the position of systemically important groups and the implications of financial stability considerations for the setting of capital, liquidity and sector exposure requirements for these groups; and into threats to the aspirations of Malta to grow as an international financial centre. Some risks could threaten this objective (in particular through their impact on the reputation of the MFSA, or more generally of Malta as a financial centre) even if they do not pose significant risks to local consumers and investors. Within the MFSA this has led to the Strategic Development Unit becoming the Regulatory Development Unit and forming part of the Supervisory Council. Therefore the Supervisory Council is currently composed of a) Authorisation Unit, b) Banking Supervision Unit; c) Insurance and Pensions Supervision Unit; d) Regulatory Development Unit and e) Securities and Markets Supervision Unit while the Board of Management and Resources is composed of a) Administration and Finance Unit; b) Communications Unit; c) Human Resources Training and Development Unit and d) Information and Computer Technologies Unit. The structures are illustrated in Charts 13 and 14 below:
34
Strategic Plan 2011 – 2014
Chart13: Composition of the Supervisory Council
Director General
Director Banking Supervision Unit
Director Securities and Markets Unit
Director Insurance and Pensions Supervision Unit
Director Regulatory Development Unit
Director Authorisation Unit
Chart 14: Composition of the Board of Management & Resources
Chief Operating Officer
Director Communications Unit
Director Finance and Administration Unit
Director Human Resources Development and Training Unit
Director Information and Communication Technologies Unit
The integration progress has meant that the Registry of Companies will no longer have a regulatory function and does not form part of the restructured Supervisory Council. However, considering that the Registry has major responsibilities under the Companies Act and in the financing of the MFSA, the Board of Governors decided that the Registrar should form part of Co-ordination Committee: Chart 15: Composition of the Co-ordination Committee
Chairman
Director Legal and Informational Affairs
Director General
Chief Operating Officer
Registrar of Companies
Strategic Plan 2011 – 2014
35
The handling of consumer complaints is in most countries undertaken in a different area (or even a different agency) than regulation. In the case of the MFSA, the Consumer Complaints Unit reports to the Board of Governors. Since the functions of this Unit are regulated by relevant legislation which may be subject to policy decisions by the MFSA Board it will continue to report directly to the MFSA Board as proposed for the Registry of Companies. However, it is important that information flows to the Supervision Units are maintained and that this arrangement provides sufficient oversight of these functions and accountability. In order to maintain the highest standards in regulation and supervision, the Board of Governors of the MFSA requested that the internal audit of the MFSA regulatory activities for 2010 is carried out as an independent assessment using the same format as the FSAP, and this assessment and future assessments should be made public. The main findings of the 2010 Independent Assessment indicate that considerable progress has been made by the MFSA after taking over the responsibility of supervising the banking sector from the Central Bank of Malta in January 2002. Subsequently, the entry into the EU in 2004 has also had the main impact of introducing in the Malta financial services sector all the EU Directives aimed at strengthening the banking sector. As a result of these relevant changes, a significant improvement in the overall compliance to the Basle Core Principles [BCPs] has taken place. The independent assessment concluded that the MFSA is Compliant with twenty BCPs and Largely Compliant with the five remaining Principles; there are no instances where the MFSA is Materially NonCompliant or Non-Compliant. This compares favourably with the 2002/2003 FSAP where the MFSA was Compliant with 11 Principles, Largely Compliant with 12 Principles, and Materially Non-Compliant with one Principle. Also as a result of the progress made since 2003 regarding IOSCO Principles the independent assessment concluded that the MFSA has Implemented” 24 Principles (versus 22 in 2003) and has Broadly Implemented four Principles (versus six Partially Implemented in 2003). Two Principles remain Not Applicable. At the time of the 2002/2003 FSAP, the IAIS Insurance Core Principles [ICPs] consisted of 17 Core Principles based on standards adopted in 2000. In October 2003 the number of principles was increased from 17 to 28. Therefore an update of the 2002/2003 FSAP through a principle by principle review could not be carried out. However, the overall 2010 independent assessment is that the MFSA observes most of the 28 ICPs. The number of Observed was 22, Largely Observed four, Partly Observed two and Non-Observed none. The independent assessment for compliance with international core principles will be followed by an independent review of the governance structure together with an assessment of the management of risk.
3.3 Reaffirm Malta’s reputation for competence, responsibility and trustworthiness 3.3.1 Enabling Innovation through Legislative and Regulatory Development 3.3.1.1 Transposition of EU Directives Through the various European Supervisory Authorities, the MFSA is engaged in the development of EU legislation and the standardisation of regulation and supervisory practices. Further down the line this process of implementation of EU policy and legislation transforms itself into a transposition process at national level.
36
Strategic Plan 2011 – 2014
Currently a number of EU Directives are being reviewed and new ones introduced in the light of the global financial crisis and the subsequent understanding agreed by the G20 on the future of regulation and supervision. The legislation includes the following: Capital Requirements Directive (CRD) The Authority is proceeding with the revision to the Banking Act and the Banking Rules in line with the Capital Requirements Directive (Directives 2006/48/EC and 2006/49/EC which are collectively known as the ‘CRD’). The Banking Act (Amendment) Bill, was published on 17 December 2010, transposes the provisions of CRD II. The corresponding Act will come into force in early 2011. Extensive changes to the Banking Rules were also carried out in 2010. The changes are related to the implementation of CRD II & III. Further changes to the CRD being proposed by the Commission, which are being designated as CRD IV, cover the following seven specific areas: Section I: Section II: Section III: Section IV: Section V: Section VI: Section VII:
Liquidity standards Definition of capital Leverage ratio Counterparty credit risk Countercyclical measures Systemically important financial institutions Single rule book in banking
The proposed CRD IV changes are closely aligned with the forthcoming Basel II framework and the introduction of a global liquidity standard which are currently being drawn up by the Basel Committee on Banking Supervision. Units of Collective Investments in Transferable Securities (UCITS) IV Directive 2009/65/EC is designed to make UCITS more efficient, in particular as regards the cross-border activities of fund management companies. The Authority will continue to consult regularly with the industry to ensure the smooth transposition and implementation and takes an active part in the Working Group Committee of the European Securities and Markets Authority (ESMA) on the transposition of the UCITS IV Directive. A special section dedicated entirely to UCITS IV was also created on the Authority’s website. The section is regularly updated and contains copies of all consultation documents issued by the Authority as well as all the documentation and circulars issued by ESMA. These implementing measures were published in the Official Journal of the European Union (OJ) on 10 July 2010: • Directive 2010/43/EU deals with organisational requirements, conflicts of interests, conduct of business, risk management and the content of the agreement between a depositary and a management company. Member states need to implement this Directive by 30 June 2011. • Directive 2010/42/EU deals with fund mergers, master-feeder structures and notification procedures. Member states need to implement the Directive by 30 June 2011, except for the provisions of Articles 7 and 29 which have to be implemented by 31 December 2013.
Strategic Plan 2011 – 2014
37
• Regulation EU/583/2010 deals with key investor information and conditions to be met when providing key investor information or a prospectus in a durable medium other than paper or by means of a website. This Regulation will apply from 1 July 2011. • Regulation EU/584/2010 deals with the form and content of the standard notification letter and UCITS attestation, the use of electronic communication between competent authorities for the purpose of notification, and procedures for on-the-spot verifications and investigations and the exchange of information between competent authorities. This Regulation will apply from 1 July 2011. The MFSA consultation process with regards to UCITS IV is will be completed in early 2011 and the relevant Rules and Regulations are expected to be in place well before the June transposition deadlines. Solvency II Solvency II is a fundamental review of the capital adequacy regime for European insurers and reinsurers, which will take effect from January 2013. It aims to establish a revised set of EU-wide capital requirements, valuation techniques and risk management standards that will replace the current Solvency I requirements. The final text of Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (recast) was adopted by the Council on 10th November 2009. Work on the transposition of Solvency II into Maltese legislation is ongoing. The Authority has started issuing a series of guidance papers with the aim of highlighting and explaining key elements of the Solvency II regime, in order to stimulate and help insurance undertakings in their preparations for the Solvency II implementation. The first Guidance Papers to be published concerned “The use and approval of internal models for regulatory capital purposes in insurance” and “The system of Governance under Solvency II”. The European Commission had also asked Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) to conduct a range of Quantitative Impact Studies (‘QIS’) aimed at assessing the underlying assumptions to the ‘standard model’ as referred to in the Directive. This process came to an end in late 2010 and the Commission is due to publish the findings of QIS 5 at the beginning of 2011. The MFSA is also engaged in the ongoing debate in European regulatory and industry fora on the impact of Solvency II on captive insurers and protected cell companies. The Authority has also commissioned its own technical studies in this respect with the aim of issuing the appropriate guidelines once the position at EU level becomes clearer. In the meantime the MFSA will be working with CEIOPS on the identification of issues related to the application of Solvency II to captive insurance companies and protected cell companies. Electronic Money Institutions Directive Directive 2009/110/EC was published in the Official Journal on 10th December 2009. The MFSA forms part of the E-Money Directive Transposition Group (EMDTG) set up by the Committee of European Banking Supervisors (CEBS) and has also set up its internal working group to draft the necessary legislative changes. The transposition process of this Directive was finalised by end April 2011. The Alternative Investment Fund Managers Directive (AIFM) The Alternative Investment Fund Managers (AIFM) Directive is the most important legislative process facing by the European investment industry since the introduction of the UCITS Directive. The European Commission, Council and Parliament are now in the final phase of discussions aimed at reaching an agreement on the final AIFMD text. As with other EU legislation the Authority is actively involved in discussions at European level.
38
Strategic Plan 2011 – 2014
3.3.1.2 Review of Existing Legislation and Regulations The 2008-09 economic downturn led to reduced growth, rising unemployment and soaring public sector debt in various countries. These economic difficulties come at a time of increasing political pressure to meet various social challenges, many of which are global in nature (such as climate change) or require global action (health, food, security, the growing scarcity of clean water). To recover, countries need to find new and sustainable sources of growth. Innovation drives growth. Future growth must therefore increasingly come from innovation through the introduction of a new or significantly improved product whether a good or a service. Innovation is therefore essential if licensed firms are to thrive in today’s highly competitive and connected global economy. It holds the key, both in advanced and emerging economies, to employment generation and enhanced productivity growth through knowledge creation and its subsequent application and diffusion. Innovation is a much broader notion than R&D and can be influenced by new policy. It can occur in any sector of the economy, including services which in the case of the MFSA is financial services. The MFSA will continue to establish the legislative frameworks and regulations that will enable licensed firms to engage in innovation. The ultimate strategic objective is not innovation per se, as it is up to the companies to create innovative products. However, it is the duty of the MFSA to create the legislative and regulatory framework that will nurture innovative products while ensuring that this is done without exposing consumers to unwarranted risks. Another important function of the MFSA is to “advise the Government generally on the formulation of policies in the field of financial services, and to make recommendations to Government on action which in the opinion of the Authority would be expedient in relation to matters falling within the regulatory and supervisory functions of the Authority” (Art. 4(1) (e) MFSA Act). The MFSA may also issue Rules regulating the procedures and duties of persons licensed or authorised by it, or falling under its regulatory or supervisory functions (Art. 16(2)(a) MFSA Act). Through the Agenda for Maltese Financial Services in Europe (2004) and the Strategic Plan (2007 – 2009), the MFSA has always held the development of an enabling legal and regulatory environment as one of its primary objectives. The attainment of the targets linked to this objective has always relied heavily on the twin processes of research and innovation. The ongoing development and implementation of policies in this respect have helped Malta develop a strong foothold in the single market for financial services and is still the main driver behind the country’s efforts to: • Integrate its financial services sector ever more closely into the single market; • Provide the Maltese economy with an opportunity to diversify and expand its global reach by providing services that can penetrate distant markets; • Develop servicing capabilities that require economies of scale and that cannot otherwise be developed or sustained on the back of a small domestic market; • Continue to develop the sector into an engine for growth and job creation thereby contributing to the national economy The MFSA believes in the development of a dynamic framework that enables the industry to develop new products and services while ensuring that regulators can be ahead of the game. Facilitating the ongoing
Strategic Plan 2011 – 2014
39
exchange of ideas and information between the regulatory development and product innovation processes is a key to this objective. For this purpose, the MFSA will continue with its open approach to discussing issues of concern to the market and to the regulators as they arise. Feedback obtained through various initiatives that facilitate this debate would in turn be fed into the regulatory development process, while information on the implementation of new legislation and regulation would be communicated to the industry through consultation papers, working groups, seminars, workshops and networking events aimed at helping regulators and industry alike to develop new concepts and ideas that can be translated into better regulation and better financial products. During the period of this Strategic Plan, the MFSA plans to continue with the revision of the Companies Act, a process started under the previous Strategic Plan (2007-2009). A review of The Trust and Trustees Act, for which a working group between industry practitioners and the Authority has been set up, and the Financial Institutions Act, to eliminate inconsistencies with other financial services laws, will also be carried out. Furthermore the Bill upgrading the Special Funds Act to the Retirement Pensions Act will hopefully see its passage through Parliament in the very near future. As the insurance and funds sector are becoming the major players in the development of Malta as a finance centre various innovative changes started being introduced in 2010. These included the introduction of incorporated cell companies for both insurance and funds business, amendments to the Tenth Schedule of the Companies Act to make it applicable for funds and the introduction of the Special Investment Vehicle licensed with Contractual Funds. A future major review will be the introduction of regulations for the licensing and supervision of alternative investment managers and funds under the new Alternative Investment Fund Managers Directive and the applicability of Protected Cell Companies to Captive Insurance Companies under Solvency II. The list of proposed changes is by no means exhaustive and others may be introduced as the requirement arises.
3.3.2 Maintaining Excellence through Continuous Training From the basic facilities in banking and insurance available over 20 years ago, the Maltese financial services sector has expanded into securities, investments, trust management, pension management, fund services and other activities. The sector provides a rewarding career for many and is a substantial contributor to the economy. There is a public commitment to strengthen Malta’s position as an important financial services centre. It could be stated that the recent international financial crisis did not result in a negative impact on local financial services institutions and consequently no job losses were evident. This should not be solely attributed to the rigorous regulation and supervision standards but also to the professional competence of the employees and the culture of continuous training and development. Good and sound qualifications are the key to our continued success. The MFSA maintains contact with the Malta Qualifications Council to provide validation for formal, non-formal and informal learning initiatives. It will also continue to provide support for the development of new qualifications provided by the University of Malta, MCAST and self-funded institutes collaborating with recognized foreign Universities. The MFSA recognises its pivotal role in ensuring that professional training and development is maintained and sustained both at the Authority and industry level. Also the training provided follows a strategic approach to meet the future skills requirements in the sector both for employees already working and potential employees in the industry.
40
Strategic Plan 2011 – 2014
Growth, innovation and expansion require human and material resources and the MFSA has maintained that properly trained, qualified and motivated personnel would be needed to sustain the introduction and expansion of financial services companies in Malta. In this regard, on a micro level, the Human Resources and Development Unit (HR Unit) takes care of the recruitment of personnel and supports the workforce through training and development initiatives. The Authority also formulated two other important objectives on a macro level as part of the 2007-2009 Strategic Plan. In 2007, the Authority established the Education Consultative Council (ECC) bringing together the professional training institutes linked to the financial services industry. The members of ECC are the Guidance Unit of the Department of Education, the Malta College of Arts, Science & Technology (MCAST), the Malta International Training Centre (MITC), the Institute of Financial Services – Malta (IFS), the Institute of Financial Services Practitioners (IFSP), the Society of Trust and Estate Practitioners – Malta (STEP), the Institute of Legal Studies (ILS) and the Institute of Directors – Malta (IoD). The Council is supported by the HR Unit at the MFSA. The HR Unit provides the necessary technical and logistic support for training programs in which it is directly involved as well as those held under the auspices of the ECC. During the term of this Strategic Plan, a review of the ECC composition will be carried out to review the functionality of the Council and the developments in the industry. This is important given that the Council will maintain the review of relevant local and international developments related to training and continuous professional development and will co-ordinate initiatives towards filling any skills gaps that were and may be identified within the sector. Seeing the need for more people to join the accountancy profession the Authority has already invited the Malta Institute of Accountants to join the ECC in order to create more synergies in training for a financial services career. ECC members share information and co-ordinate vocational training and continuous professional development at all levels to those who work, or plan to work in the financial services industry. During 2009, an Action Plan was drawn up by the ECC from the results of a scientifically based survey carried out during 2008, as indicated by the MFSA previous Strategic Plan, to establish the future skills requirements in the financial services sector. The study obtained a clear picture of the skills deficiencies within the sector. Once the skill gaps were identified, the Council asked its members to respond pro-actively and design programs to meet the needs for future advancements. Internal Staff Training and Development Training will continue to focus both on technical and personal skills development through on-the-job experiences and off-the-job events, including individual attachments with industry operators and/or regulatory bodies abroad. The main source to determine internal training needs and programs will continue to be the feedback received through the staff annual appraisal process and other periodic requests from Head of Units. The MFSA continues to provide financial support through the Self Development Scheme. At end of 2009, a record number of 25% of the MFSA workforce are undergoing studies to achieve further qualifications in specialised areas of financial services – four for a Specialised Diploma, 15 to obtain a first Degree and 17 for a post-graduate degree. Continued exposure of staff within the Supervisory Units through participation and attendance to programs organised by these 3L3 Committees of the Committee of European Securities Regulators (CESR), the Committee of European Banking Supervisors (CEBS) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) with the aim to promote supervisory convergence and by giving adequate training to
Strategic Plan 2011 – 2014
41
supervisors in creation of a common supervisory culture continues to be a major objective. Furthermore, the Authority intends to host a number of supervisory training events as set by the 3L3 Committees in order to provide exposure to Maltese professionals and to supervisors from other Member States within the 3L3 Committees. These events will help the MFSA Malta develop a reputation for training of professionals and provide comfort to licence holders that sufficiently trained professionals are available in Malta. The process of interaction at the training level also helps the MFSA to identify opportunities available for foreign attachments from which employees would benefit. It is also the intention that staff attachments will not be limited to national regulatory bodies but also include international operators in financial services. The HR Unit is identifying attachments particularly in the actuarial profession. Industry Training and Development The principal objective of the ECC continues to be to act as a forum for debate, co-ordination and information sharing on matters related to training and development for current and prospective employees within the Financial Services sector. When considering ‘prospective employees’ the ECC refers to persons who would like to move to financial services from other sectors, persons registering for work and women who would like to re-enter in employment. The ECC also focuses on students at secondary education, post-secondary and tertiary levels. As already indicated, the main roadmap of the ECC was formulated in an Action Plan issued during May 2009 following the scientific survey carried out by the MFSA Development Strategic Unit to identify skills requirements within the finance industry. The structure of this Action Plan reflected the varied perspectives taken by each ECC Member consequent to their areas of activity. It is to be pointed out here that during the period of this Strategic Plan, the ECC will review the implementation of the measures indicated in the Action Plan and take also into consideration any additional measures which will be appropriate from time to time. Career Awareness The ECC continues to build on past initiatives to promote on a wider scale awareness on the attractiveness of career openings in the financial services sector and in developing further the existing collaboration between all stakeholders particularly service providers, training organisations and career guidance officers. This will definitely help in providing the necessary available information to a wider range of students and in attracting the best skilled. If the industry is to be attract some of the most capable people, it must be perceived, particularly by students, as adhering to high standards of professionalism and offering good opportunities for advancement and a rewarding compensation. During 2009, two booklets entitled ‘Jobs, Carreers and Opportunities in Malta’s Financial Services Industry’ and ‘Careers in Financial Services’ were published. These publications, together with other attractive promotional material have proved to be highly popular with students during career orientation sessions and of guidance to parents as well. The MFSA will continue to publish material on careers and opportunities in the financial services and will seek to disseminate this material through various media. In line with the objectives established for the ECC, there should be more emphasis on the introduction of financial literacy in the schools starting from primary school level. It is important that curriculum modules on financial literacy should be supported by the Education Authorities. The MFSA will be undertaking efforts through the ECC to create awareness of this requirement as also the need for continuous awareness particularly at the secondary schools level of the various job opportunities within the financial services sector. This is the stage during which students make crucial career related choices. In this regard, both the MFSA and the Guidance Unit at the Education Department will continue to endeavour to find ways
42
Strategic Plan 2011 – 2014
and means to develop further from year to year the job-shadowing project intended for students at the higher secondary and post-secondary level, which was launched during 2009. The HR Unit, with the assistance of the Consumer Complaints Unit, has for a number of years taken an active role in students’ career orientation visits and in other career awareness conventions organised either by secondary schools/colleges themselves or by the Education Department. These initiatives will be maintained and sustained for the period of this Strategic Plan. At the University level the MFSA will participate in annual career conventions organised on the University campus. The primary focus will be on students undergoing studies related to financial services, particularly accountancy, law, insurance and banking and finance but emphasis will also be placed on University Students reading for degrees in economics, management, mathematics, statistics and information and communications technology. Industry Training and Continuous Professional Development The results of the Skills Gaps Survey referred to the need to build upon current training mechanisms to enable the creation of further opportunities for up skilling, re-training, specialisation and development and maintenance of the required soft skills. Since the presentation of the findings of the Skills Gaps Survey, ECC members have evaluated how a number of training related gaps can be concretely addressed. Furthermore, the Authority will increase its efforts to encourage the industry to be more supportive and to enter into partnership in particular on-the-job skills training similar to the job shadowing scheme that was launched during 2009. It is hoped that these efforts will result in the maintenance and, where necessary, the improvement in the professional levels of current employees in financial services and in the expansion of the pool of labour that will be available to the sector, particularly at the technical level. Most of these programs will also offer opportunities for re-training and continuous professional development. It is important that all licence holders and their employees participate in the training programs. Funding is a crucial element in providing quality training. The MFSA provides a substantial part of its budget for training programs. There is no shortage of funding for licence holders and persons intending to seek employment in the financial services industry. Funding opportunities are provided by the Employment and Training Corporation’s Training Aid Framework program and the Training Subsidy Scheme and the myPotential scheme managed by Malta Enterprise.
3.3.3 Morality and Ethics in the Financial Services Sector The fundamental purpose of a business is to maximize profit and shareholder value. Unfortunately the means utilised to achieve these objectives are never questioned with the result that the ethical behaviour of a company and its employees falls by the wayside. Ethical issues in the financial services industry affect everyone, employees and consumer alike and go beyond competence requirements and ability. Continuous reports in the media about huge bonuses, fraud, mis-selling have created a worldwide perception that the financial services sector is a highly unethical business where a sense of greed rather than high morality prevails. Although the industry is highly regulated, ethical lapses have occurred and will unfortunately continue to occur. There is almost daily a new article in the financial press detailing a breakdown in ethics within a company in the financial services industry that leads to disciplinary action by one regulatory agency or another. In addition, those in the industry know that notices issued by
Strategic Plan 2011 – 2014
43
regulators citing numerous suspensions, revocations and disciplinary actions against individuals often never make the press. It is for this reason that the MFSA is taking steps to publish all sanctions including reprimands on its website. There definitely appears to be a growing problem with ethical behaviour in the financial services industry. The descriptions of the misdeeds carried out by competent professionals in order to enrich themselves at the expense of those who trusted them to manage their money, is raising concerns at the highest level of the ethical state of the financial services industry and those who work in it. These lapses can take various forms both at the level of employees and at the level of the company. The basis of this unethical behaviour appears to arise from the fact that moral behaviour is equated with what is legally acceptable and disregards the fact that even though an action may not be illegal, it may still not be ethical. Apologists would have us believe that the lack of ethics in the financial services industry is a reflection of our society. If society in general is tending to lack ethical behaviour then this must not be allowed to happen in the financial services sector. There must be absolute standards of ethical behaviour otherwise the industry will not survive. Consumers of financial services need to hold the industry to higher standards as well. The standard that businesses and their employees must not steal money or borrow from clients’ accounts is an absolute standard. There is no grey area in this ethical standard. However, this does not solely apply to directly stealing money from clients. These are many ways of stealing money from clients which may be less obvious but just as wrong. These include purposely over-billing the client, or placing the client in an investment that paid more commission than another with less benefits or had hidden fees, or allowed a market timer to come in and profit from my clients accounts as long as financial institution made some extra money. All these represent a breakdown of ethical standards by the people making the decisions. Although employees sign a document saying that they will adhere to a code of ethical standards, they do not need to know anything about those standards to be a designation holder in good standing. The industry has thousands of meetings about new product training, investment analysis, how to market financial services, technology training, etc., but how often do they hold meetings on ethical training particularly for front office employees? Unfortunately companies fuel self-interest through their reward structures which encourage unethical behavior and turn a blind eye provided the fundamental purpose is achieved. Fundamentally there is therefore a responsibility by the company to instruct its employees in ethical behavior towards clients and to ensure proper mentoring Companies need to spend more time, attention and money on the ethical training of their employees. Sometimes the push to act unethically comes from the client. How many clients expect their insurance agents to falsify their applications or claims? How many clients pressurize their financial advisors to find them products with a high return? The situation therefore has to be tackled in a two pronged manner, the company and its employees and also the consumers. Progress is being achieved in the international alignment of remuneration principles. The FSB’s Implementation Standards agreed in late 2009 and endorsed at the Pittsburgh G20 Summit, represent a notable advance in international alignment. At EU level, the European Commission produced proposals to incorporate remuneration rules into the Capital Requirements Directive (CRD3) in mid-2009. The amendments to CRD3 that include provisions on remuneration were approved by the Council in late 2009 and agreement on a common text was
44
Strategic Plan 2011 – 2014
reached between the Commission, Council and European Parliament in mid- 2010. CRD3 applies to all banks and building societies and investment firms to which the Market in Financial Instruments Directive (MiFID) rules apply. CRD3 contains crucial text on proportionality with regards to remuneration policies and practices and proposes that firms may apply the provisions in different ways according to their size and the complexity of their activities as it may not be appropriate for some investment firms to comply with all specific provisions on remuneration. A European Banking Authority (EBA) group is currently working on guidelines for implementing the CRD3 remuneration provisions. Further work is being also carried out by EBA to provide guidance on implementing the text of CRD3. Both the proposed AIFMD (covering asset managers and hedge funds) and Solvency II (for insurers) include clauses on remuneration. The texts are at a higher level than CRD3 and they do not currently include specific numbers on the proportions of variable remuneration to be deferred. Negotiations are continuing on both, and the current expectation is that these Directives may come into force towards the end of 2012 or early 2013. This would mean that the provisions on remuneration may not apply before the 2013 remuneration reviews for firms captured by these Directives. However, some investment firms may be subject first to CRD3’s remuneration requirements before they come under the remit of AIFMD. UCITS does not currently include any remuneration proposals. The MFSA will be publishing guidelines on the implementation of remuneration rules in banks, insurance companies and investment firms. These rules will also be brought to the attention of directors of licensed firms falling under the relevant directive. Guidelines for directors of investment firms are expected to be published during the term of this Strategic Plan. However, mostly importantly the MFSA has to decide whether to extend the remuneration rules to all types of licensed firms. It is clear that the proposed shake-up is going to bring in some welcome changes in the way financial services firms conduct their business and, as a result, consumers should benefit from higher standards and a more transparent and trustworthy service. However, it is important that consumers play their part as well. It is important that they deal only with licensed businesses and take time to find an appropriate adviser who understands their needs and not any salesman whose only interest is the sale of the product. The MFSA is responsible for educating consumers about financial services and to investigate complaints from consumers against financial entities. The Authority does a lot work on consumer education through publications and the media. It urges consumers not to approach the Authority when they have a complaint but to listen to the advice the Authority gives to consumers on how to approach the purchase of financial services products. This is available on the website: http://mymoneybox.mfsa.com.mt. Mymoneybox provides comprehensive information on issues relating to banking, investments and insurance. This information is updated regularly to keep financial services consumers informed not solely of their rights but also of their responsibilities.
3.3.4 Working with other countries and other finance centres In today’s global economy European companies have never been more dependent on effective access to the markets. European companies are increasingly looking to succeed not just in the large economies of the developed world but in the larger emerging economies such as China, India, Brazil and Russia and in also other Latin American and Asian countries.
Strategic Plan 2011 – 2014
45
The European Union has created an open market access to its Member States through the creation of a single market particularly in financial services and gives access through inward investment in a way that stimulates competitiveness and innovation. In parallel, there should be open markets and fair trading conditions. In particular, the emerging economies that have benefited from the global trading system to achieve high growth rates should now bring down their own barriers and further open their markets. In a highly competitive global economy, market access will significantly influence Malta’s financial services sector. The EU priority in maintaining open global markets is through its commitment to the WTO, the multilateral trading system and the Doha Round. Progressive global liberalisation is the only way that genuinely delivers for all, developing and developed countries alike. As part of this Strategic Plan, the MFSA plans to continue to develop strategic partnerships with other regulatory authorities as it is in this manner that our licensed companies can obtain market access. Some areas of the financial services sector are relatively straight forward while for other typically insurance business there are clearly trade barriers. A strong relationship with other regulatory authorities is a key function leading to a smooth trading relationship in the financial services sector. The aim is to enforce multilateral and bilateral agreements and ensuring that more third country markets were open to our companies. The MFSA is looking forward within the period of this strategic plan to deepen the relationship with that jurisdiction with whom an MoU has already been signed. It will look, depending on what is permissible at law, to extend the exchange of letters with Switzerland to a formal MoU and to negotiate formal MoUs with various countries in the Far East and Latin America. Table 11: MoUs in force Country
46
Entity
Scope of Agreement
Australia
Australian Prudential Regulation Authority
Banking, Insurance and Pensions
Austria
Financial Market Authority
Banking, Insurance, Pension Funds and Securities
Belgium
Banking, Finance and Insurance Commission
Banking, Securities and Insurance
Bermuda
Bermuda Monetary Authority
Credit Institutions, Insurance, Securities and Trusts
Cayman Islands
Cayman Islands Monetary Authority
Credit Institutions, Insurance, Securities and Trusts
China
China Banking Regulatory Commission
Banking
China
China Securities Regulatory Commission
Securities
Cyprus
Credit Institutions
Credit Institutions
Dubai Emirate
Dubai Financial Services Authority
Securities, Credit Institutions, Insurance and Trusts
Germany
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
Banking, Securities and Insurance
Gibraltar
Financial Services Commission
Banking, Securities and Insurance
Guernsey
Guernsey Financial Services Commission
Banking, Investment Services, Insurance and Fiduciary Services
Strategic Plan 2011 – 2014
Country
Entity
Scope of Agreement
Isle of Man
Insurance and Pensions Authority
Insurance and Pensions
Isle of Man
Financial Services Commission
Banking, Investment Services and Corporate Services Providers
Italy
Commissione Nazionale per le Societa’ e la Borsa (CONSOB)
Securities
Jersey
Jersey Financial Services Commission
Banking, Securities and Insurance
Mauritius
Financial Services Commission
Securities, Insurance and Pensions
Netherlands
De Nederlandsche Bank N.V. (DNB)
Banking, Insurance, Pension Funds and Securities
Portugal
Banco de Portugal
Credit Institutions
Portugal
Commissão de Mercado de Valores Mobiliários
Securities
Slovakia
National Bank of Slovakia
Banking
South Africa
Financial Services Board
Securities, Insurance and Pension Funds
Switzerland
Swiss Financial Market Supervisory Authority (FINMA) [previously the Swiss Federal Banking Commission (SFBC)]
Banking, Securities and Insurance
Turkey
Banking Regulation and Supervision Agency
Banking
Turkey
Capital Markets Board of Turkey (Semaye Piyasasi Kurulu)
Securities
United Kingdom
Financial Services Authority
Banking, Insurance, Investment Services
International
CEIOPS
Insurance and Occupational Pensions
CESR
Securities
Financial Supervisory Authorities, Central Banks and Finance Ministries of the EU
Cross-border financial stability
International Association of Insurance Supervisors (IAIS)
Exchange of information in insurance, regulatory and supervisory matters
IOSCO
Securities
Bilateral MoUs with local authorities
Central Bank of Malta
Payment and Securities settlement systems, and on the exchange of information in the fields of financial services
Ministry of Finance, the Economy and Investment and Central Bank of Malta
Co-operation in the management of financial crisis situations
Office For Fair Competition
Competition
Strategic Plan 2011 – 2014
47
The importance and wish of a number of countries to be recognised as a world player suggests that Malta should mobilise on a number of fronts – business, regulatory, political and diplomatic. A number of the countries that the MFSA is looking to establish an MoU are becoming recognized as future economic powers. In particular there are the BRIC countries, Brazil, Russia, India and China. Of particular interest is Brazil. The country has opened its economy, allowing foreign goods, services and institutions to enter and operate on a non-discriminatory basis. Foreign financial institutions, including the most important global players have come to Brazil and operate on an equal basis with their domestic competitors. Brazil is regarded as having a high degree of transparency (e.g. onshore funds have to supply daily liquidity reports) Brazil has 87 fund management companies (about 25% foreign owned), many associated with banks and there is a significant hedge fund sector. Brazilian investment funds have cUS$510 billion under management, 80% in fixed income assets, 41% of which is in government bonds. Maltese fund managers could look at setting up Brazilian emerging market funds to give EU investors access to Brazil’s high growth economy and companies (though of course some of these already exist in the EU). Equally if Brazil’s biggest banks and corporate sector grow at forecast rates, the banks may seek international expansion for their own ends and to service Brazilian companies overseas. Malta could provide a first domicile for the banks or Maltese banks could seek joint ventures to allow Brazilian banks an EU entry point as also Malta could provide EU access and expertise. As already noted earlier, the MFSA’s focus has been towards MoUs. In 2006 it underwent the formal process to sign a multilateral MoU with IOSCO. The Authority has recently negotiated an entry into a multilateral MoU with the IAIS. Market Accessibility The difficult economic conditions provide a real opportunity for businesses to differentiate. The marketplace is changing quickly because of the advances in technology and communications. The advent of the Internet as a ubiquitous means of communication for consumer and business alike is heralding a 24X7 culture and resulting in much more of a global outlook. This is being spurred by the credit crunch and the international expanding into developing countries such as Brazil, Russia, India and China. The traditionally slow-moving insurance marketplace has fared reasonably well so far through the credit crunch. Regulatory pressures are, however, likely to increase because of the banking crisis despite the industry’s continuing message that insurers are not banks and that the insurance industry has not suffered during the crisis. Progress has been made on Solvency II in Europe but the cross-border group supervision requirement favoured by the bigger insurers has been put on the back burner. Solvency II and other insurance regulatory requirements are increasingly being considered as potentially having a worldwide application. Despite the turmoil in the global economy, companies should plan to grow outside of their traditional market and undertake profitable international expansion in the current economic and financial turmoil. In the long term, they face the twin issues of a more transparent and demanding regulatory scenario and the future multi-channel distribution environment involving the Internet. To address these forces, insurers must be able to react quickly and with greater certainty in a market that is gathering speed and where consolidation and competition will inevitably increase. Meanwhile, markets and technology move on and more solutions become available to address increasing regulatory compliance, a 24X7 global environment, wider distribution options and the changing customer mindset.
48
Strategic Plan 2011 – 2014
Many of the world’s companies are moving toward multi-distribution models. These companies recognise that the sale of banking, insurance and investment products through multiple distribution networks is a powerful lever for growth as it is the most effective way for insurers to attract new customers and increase the wallet share from existing customers. The MFSA has researched the insurance regulations of likely markets such as Argentina, Brazil, Canada, Chile, China, Hong Kong, Republic of Korea (South Korea), Peru, Singapore, United States, Uruguay and Venezuela in order to identify whether a Maltese licensed insurer could cover the insurable risks located in these countries directly from Malta without forming a local permanent establishment i.e., a local branch or subsidiary. Whether or not a Maltese licensed insurer can insure a risk in the above mentioned countries depends on the local insurance legislation. The location (or deemed location) of the risk determines which regulatory requirements apply to the Maltese insurance company’s activities. The location of risks rules are not adequately defined in many regulations but generally follow the location of risk rules principles stipulated in Article 2(d) of the EC Second Non-Life Directive 88/357/EEC. Most if not all jurisdictions strictly prohibit an overseas licensed insurer from carrying on the business of insurance in their territory without a licence – but unfortunately do not address clearly situations where the parent company based in the EU enters into a contract of insurance with an EU insurer covering its worldwide operations, including those located in non-EU countries. An insurer licensed by the MFSA can generally cover the insurable risks located in the EU on a Freedom of Services basis. It may also be able to cover insurable risks (non-compulsory) located in countries where a local insured is allowed or not prohibited to procure insurance directly from a Maltese licensed insurer. Countries where non-admitted insurance not permitted Non-admitted insurance refers to the placing of insurance outside the regulatory system of the country in which the risk is located. A non-admitted insurance policy is one that may be issued by a Maltese insurer or the risk(s) may be included in a global master policy by that insurer that is only authorised in its host country, Malta. The regulation of certain countries are either silent on (and therefore do not prohibit) or specifically prohibit or permit local insured persons from procuring insurance coverage from overseas licensed insurers for the non-compulsory classes of risks. In certain countries, insured persons in that territory are not permitted to enter into contracts of insurance with overseas licensed insurers to cover the risks located there. Local insurable risks can only therefore be covered by resident licensed insurers. In certain countries, under certain specific circumstances, however, regulatory approval could be sought by the insured to obtain formal permission to purchase insurance from an overseas insurer. Certain countries allow the placement of certain risk classes with overseas insurers such as marine and aviation hull and related liabilities. Many countries around the globe specifically prohibit a local insured from procuring insurance for certain risk classes from overseas insurers. Insurable risks located in Argentina, Brazil, China, South Korea (Republic of Korea), Uruguay and Venezuela cannot be covered by insurers resident and licensed overseas. Only locally licensed insurers can provide cover for such risks subject to certain exceptions such as Marine and Aviation Hull and related Liability classes of risks. Therefore, a Maltese insurer cannot provide coverage to an insured that is based in and has risks located in these countries. The penalties
Strategic Plan 2011 – 2014
49
for breach of the local insurance regulations vary from country to country and can range from financial penalties to criminal prosecution for the local insured, broker or insurer. Where an EU based multinational enters into a contract of insurance with a Maltese insurer that not only covers the EU risks but also risks located in the above mentioned countries, any premium relating to those risks must not be recharged to the local entities located in these territories. The Maltese insurer will not be able to pay a claim directly to the local entities based in such territories for any loss suffered by them. Countries where non-admitted is not prohibited Insurers in Canada, Chile, Hong Kong, Peru, Singapore and United States of America are allowed to, or are not restricted from, directly procuring insurance from Maltese insurers for non-compulsory classes of risks. However, in many, if not all, instances, compulsory classes of risks such as Employer’s Liability, Motor Third Party etc must be covered by an authorised local licensed insurer. Notwithstanding this, many countries do not allow overseas licensed insurers to carry on the business of insurance in the territory without a licence. Insurers that are not registered and licensed in the jurisdiction must not solicit business in the country directly or through an intermediary, with the exception of certain classes of risks such as marine insurance. Therefore a Maltese insurer must not carry on any activity in these countries which could be construed as carrying on the business of insurance such as marketing, negotiating contracts etc in these countries. The insurers could approach the Maltese insurer directly for its insurance needs.
50
Strategic Plan 2011 – 2014
CHAPTER 4 - IMPLEMENTATION The MFSA has a very good history of implementation of its programs. The implementation of the Strategic Plan 2011 – 2014 has to be as timely as the previous Strategic Plan 2007-2009. The Strategic Plan 2011 – 2014 takes the MFSA to a higher level of activity with the important parameters being: • Training • Legislative Reviews • Expansion of Contacts with Regulatory Authorities Worldwide In order to ensure proper implementation continuous reviews will take place with staff.
Strategic Plan 2011 – 2014
51
Tel: +356 2144 1155
Notabile Road, Attard, BKR 3000, Malta. Fax: +356 2144 1189 Email:
[email protected]
mfsa.com.mt
