Malta has been building a reputation for itself as an attractive finance centre and has been proactive in expanding its regulatory framework. How would you appraise Malta’s journey as a financial centre?
For the past years, our financial sector has shown consistent growth, always accounting for some 10% of GDP and growing in tandem with the rest of the economy. This is also pretty much in line with the GDP contribution in London and Dublin. Last year, we recorded an annual growth rate of 18%, and the only reason why the sector’s GDP contribution has not increased is because all the other economic sectors grew, too. We are very happy with this situation, as we believe that in any economy, one sector should not dominate the rest.
We obviously want growth to continue and are currently looking at the digital economy, where blockchain technology and cryptocurrencies are the dominant themes. Whether virtual currencies should be considered legal tender is not up to the MFSA to decide, as this falls under the remit of the Central Bank and the European Central Bank (ECB), but we are currently looking into classifying virtual currencies as an investable asset for the investment industry. We have already communicated this to the asset management industry and just need a little bit more time to tidy up some loose ends. On a national level, we are also looking into developing an entire blockchain framework, and this could prove to be a golden opportunity for our financial services sector.
Can you give us a brief overview on the performance of Malta’s financial services sector?
The insurance industry is performing very well, and in particular our regime for Protected Cell Companies is a big attraction. We are currently seeing insurance companies using the PCC regime to capitalise on run-off opportunities. The big insurance managers – AON, Marsh and Willis – already have offices in Malta, and we expect them to strengthen their operations further in the near future. We also hope to see more traction in the field of Reinsurance Special Purpose Vehicles and insurance-linked securities.
The number of investment funds in Malta has remained relatively flat in recent years, however Malta has become an attractive domicile for fund managers. Ten years ago I was told that Malta would become the place to be for fund managers. At that time, I was not so sure but today we are seeing this becoming a reality. More fund managers are setting up here; most of them are creating and managing funds outside of Malta, for instance in Luxembourg and Dublin but also outside of Europe, in Hong Kong and in the Cayman Islands.
What do you believe is the main reason for this development?
These managers still wish to have a European licence and see Malta as a cost-effective alternative to the more established centres. Our cost-effectiveness is also the main reason why Malta is still attractive and competitive as a location for start-up and smaller funds. However, there is no denying that the main stumbling block remains the lack of custodians when it comes to the set-up of larger funds in Malta. The custody industry in itself is going through a process of de-risking and consolidation. Custodians are facing many new regulatory obligations and require high volume business to be profitable. This is making it all the more difficult to convince a custodian to set up in a small market such as Malta, but we still hope to see some movement in this area.
Malta had negotiated derogation from the requirement to have a local custodian up to July 2017. Do you see this option being renewed or custody passporting being introduced?
No, I don’t think this will happen, at least not under the Alternative Investment Fund Manager (AIFM) Directive. It is a very political issue. We might see some movements under the Capital Requirements Directives (CRD), but this is the long-term view.
Beyond the custody issue, there is a massive demand for banking services in Malta. How easy or how hard is it these days to get a banking licence?
It has become very onerous to set up a bank, not only in Malta but in Europe. It is not just a question of having the €5 million that’s required as capital; one also has to factor in the costs of compliance, which have risen significantly in recent years. We know that even established banks find the level of compliance challenging. We, at the MFSA, try to be helpful, but we have to abide by the single rulebook, and there are certain checks that we cannot simply ignore. This means start-up banks will find it harder these days, no question. Having said that, we are in discussions with credit institutions that are looking at Malta. But one also has to keep in mind that the final decision in granting a banking licence in the eurozone is taken by the ECB, which looks at the strength of a bank's capital as well as that of its management when it comes to granting approval.
What other sectors are growing at the moment and what sectors are facing a more challenging time?
We are seeing strong growth in the payments sector, where we already licensed more than 40 institutions. The family office sector is also growing, but many wealth managers are keeping a low profile. There also seems to be rising interest in Malta as a listing location, and we have received a request for another exchange to be opened in Malta. In my opinion there is no harm in having more than one exchange as other finance centres have.
On the other hand, some sectors are declining. Forex for instance, where we – similar to other European countries – had to introduce strict rules around leverage. Islamic finance also hasn’t fulfilled its potential. There are many Islamic finance products that can be structured in Malta, however we have yet to see any significant business coming in.
Malta Stock Exchange
Do you see Malta playing a greater role as a post-Brexit destination?
Yes, we are seeing encouraging interest from the insurance sector. I expect we will end up with some 10 to 15 insurance companies from the UK setting up operations in Malta. We also expect the QROPS pension market to remain stable after Brexit, although this will largely depend on the UK’s decision on who will be allowed to transfer pensions. I also believe that there are great opportunities in financial services related to the aviation and maritime industries. Then there is a great opportunity when it comes to education.
A shortage of talent is an issue that is being highlighted by many operators. What can be done to tackle this challenge?
We should focus on attracting more UK universities to open branch campuses in Malta. The finance sector – as with many other sectors of the economy – is finding it challenging to fill open positions due to the low unemployment rate. While we have already attracted professionals from inside and outside the EU, we need to do more. Increasing the number of educational institutions could help in this regard.
What would you highlight as the key trends influencing Malta’s financial services sector and the MFSA at the moment?
We are becoming more integrated with the European system, whether we like it or not. As I have already mentioned, the Single Supervisory Mechanism has given the ECB a supervisory role to monitor the financial stability of banks, which has obviously affected our work. While Malta’s three largest banks are under direct control of the European Central Bank, the ECB has taken on a more holistic view in terms of Malta’s other banks, and we are talking today of joint supervision. I believe the same will happen in the fields of securities and insurance, where we will see more powers transferred from national authorities to the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA).
Do you believe that the model of a single regulator for all financial services is still relevant or should we look at different supervisory authorities for the key sectors?
No, our model is still working. Malta’s finance sector is too small for different authorities to work effectively and efficiently. I don’t think it makes sense to break up the MFSA, especially keeping in mind the increased oversight from a European level that I just mentioned.
Many operators would like to see the MFSA being much faster in processing and issuing licences. What steps are you taking to speed up the licensing process?
We are currently reviewing our business processes, and the goal is to improve efficiency and productivity. We are looking at introducing new technologies that can automate processes and introduce virtual manpower given the current shortage of workers. Technology will in fact help overcome this bottleneck.
There have been reports that you will step down as MFSA chairman at the end of this 2017. Can you comment on this?
I don’t know where this came from. While I have seen the media reports, there has been no official discussion with the Prime Minister on this issue. I have an official contract until the end of 2018.
What is your future outlook for the industry in Malta?
I am very positive about the future, but we have to keep in mind that the financial sector has radically changed in recent years due to a raft of new legislation. I think we need to look at what made us successful in the first place. We need to address any speed to market issues while we keep on finding niches that are not being serviced in other finance centres.
Now more than ever we need to remain one step ahead and create sound and innovative regulation that attracts business. Some sectors will disappear, but new opportunities will emerge that we can take advantage of. I like to stress that Malta will remain a boutique finance centre; we don’t want to grow the finance sector to 20 or 25% of GDP as is the case in some other finance centres. We wish our economy to be well diversified, and we will keep moving forward on this path.