Author: George Mangion
Published on Business Today on 18 February 2021

Retooling the MFSA will enable it to assess the full product financial lifecycle from design to distribution with the real-time power to ban scams as it deems appropriate.

The current MFSA structure as a super-regulator has worked fine in the early days of the financial services industry but over the years a number of cracks have appeared that point towards a need for reform.

Regrettably, there were a number of bad apples such as Pilatus bank, Satabank, Nemea Bank, the BOV La Vallette fund, Settanta Insurance, Falcon Funds, Price Club, Electrogas. These all point to a shaky structure that has also been tested by other instances of poor governance, some of which were mentioned in the latest MoneyVal inspection.

The EU’s banking regulator had “serious concerns” on the adequacy and effectiveness of the MFSA’s supervision of financial institutions as reported in the European Banking Authority’s 2018 annual report, which gives an overview of its inquiries into the MFSA and the Financial Intelligence Analysis Unit. Since then, it is fair to mention that both MFSA and FIAU have been allocated vast sums of capital to meet expanded responsibilities.

In the meantime, this article is advocating that an ideal solution to strengthen control and regulation at MFSA is to split it into two authorities – one harnessing the prudential regulatory function and another entity having separate management to oversee the financial conduct of regulated bodies.

Having all the eggs in one basket comes at a heavy price. Just consider the onerous responsibility the MFSA has for the direct supervision of all regulated firms (including banks, funds, Fintech, trusts, insurance, listed entities and SICAVs). This includes both prudential and conduct of business and, at the same time, carries an onerous duty to take remedial and timely enforcement action against firms wherever it identifies regulatory infringements.

Such restructuring has unique advantages since it extends the authority’s power to make judgments over whether banks, listed funds or financial products pose a risk to financial stability or are likely to cause detriment to consumers.

For example, the UK previously had a single regulator − the so-called FSA. The monolithic structure was split into two entities: the Prudential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility.

The PRA is responsible for this prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It aims to establish and maintain published policy material that is consistent with set objectives, clear in intent, straightforward in presentation and as concise as possible. Taken as a whole, the set of published policy material is intended to set out clearly and concisely what outcomes any regulator can expect, so that firms can meet these expectations through their actions.

Can MFSA in the light of the scandal associated with the resignation of its CEO Joe Cushieri, take the cue to change its age-old style of regulation that has served us well for the past 20 years?

Sensing the winds of change, A number of countries (South Africa, UK, Australia, Belgium, Netherlands and possibly China) have adopted a diversified approach towards regulation and consumer protection.

Nevertheless, one needs to give due credit towards a recent MFSA reform as published in its supervision priorities document. This proudly sets out where it is going concerning supervisory engagements.  It is interesting to observe that its current interim CEO Chris Buttigieg identified five cross-sectoral priorities namely: corporate governance and culture; financial crime compliance; the impact of COVID-19; ICT risk and cybersecurity; and fintech and innovation.

The financial regulator aims to become financially independent from the government by 2024 and its five-year business plan includes the introduction of new fees to cover the enhanced cost of supervision and recruitment of new talent. Undoubtedly, in the past two years, MFSA saw a number of its top supervisors retiring creating a brain drain. In the past three years MFSA has stretched the limit of its talent pool during the Blockchain and DLT euphoria.  It was given marching orders from Castille to design new regulations to be the first in Europe to regulate such concepts. These laws were introduced at breakneck speed and undoubtedly came at a priority to other aspects of supervision.

The next question to ask is: Is the private investor adequately protected under the “super-regulator” model?

The answer to this question is subjective taking into account the plethora of supervisory rules that the EU has introduced to ensure deposit holders and private investors enjoy a higher level of protection. The flavour of the month is a more “judgment-based” approach. This is advisable for supervision based on the external environment, business risk, management and governance, risk management and controls, and capital and liquidity.

Past experience reveals that some countries have frequently retooled their regulatory structures, particularly in response to unprecedented financial collapse post the 2007/8 crisis. Since it was originally pioneered in Australia in 1998, the “twin peaks” structure has been adopted by countries such as Netherlands, Belgium, New Zealand and the United Kingdom. South Africa is currently in the process of changing to this structure, and it has also been considered by the US.

However, no matter how many local practitioners recommend to MFSA the potential qualities of a Twin Peak structure, now is the time to strike given the recent structuring of the Board of Governors. If the new board finds the stamina to face the challenge, then regulatory judgements will follow the FCA-proven risk framework. The “twin peak” model can use a risk tolerance framework to set priorities thus understanding trends in the risk of harm and threats to statutory objectives. The risk framework thus underpins the decision-making framework by enabling the FCA to focus on potential harm, through real-time analysis of trends.

Creating, an independent ‘Financial Conduct Authority’ (FCA) has a number of advantages more so in the shadow of the observations made by the Moneyval team during their recent visit. Thus a separate regulator each responsible for the conduct of business and market issues for all firms coterminous with prudential regulation of small firms, like insurance brokerages.  Fintech and financial advisory firms will go a long way to raise the bar.

This would put the MFSA in a better position to take remedial action armed with greater prowess for early detection of transgressions thereby enhancing both investor and consumer protection. Retooling the MFSA will enable it to assess the full product financial lifecycle from design to distribution with the real-time power to ban scams as it deems appropriate.

Author: George Mangion
Published on Business Today on 18 February 2021
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