Updating the Rulebooks: Product Driven and Fintech Ready

Kenneth Farrugia, long-serving Chairman of FinanceMalta, shares his thoughts and opinions on the future of Malta’s finance sector.

How would you describe the current level of activity within Malta’s International Finance Centre? What is its particular niche? 

From very humble beginnings in the mid-1990s, Malta’s financial services industry has come a long way and transformed itself from one serving the domestic market into an important pillar of the economy. This transformation has been predominantly driven by the onset of international financial services operators that have set up in Malta to conduct business in and from Malta following the introduction of the appropriate legal and regulatory frameworks to support such businesses. The industry today consists of well-defined clusters of service providers operating in the asset management, insurance, banking and fintech sectors, while comprising a number of family offices and family businesses. The drive towards a digital-led economy has also brought about a number of fintech companies as well as significant interest in Malta’s recently launched legal and regulatory framework in support of blockchain technology and virtual financial assets. 

On the back of the success achieved so far and to ensure the industry’s sustainability going forward, I firmly believe that, at this juncture, the jurisdiction needs to conduct a strategic review of its offering. The ultimate aim should be to identify the key strategic thrusts required to support the existing financial services pillars, but equally so to launch new innovation-led initiatives to enable the development of new sectors. 


How is Malta’s asset management sector performing and what areas for improvement have you already identified? 

In the asset management sector, we are seeing that Malta still holds strong appeal as a base for asset managers as evidenced by the well over one hundred asset management companies already operating from Malta. On the other hand, albeit the jurisdiction is still attracting the set-up of new funds, a slowdown is being experienced when it comes to new fund launches. Clearly, the current capital market conditions coupled with the introduction of new fund regulations have in no small part contributed to this slowdown as new managers and existing small-to-medium ones are struggling to attract investor interest. 

Consequently, there is scope to revisit the current regulatory architecture to develop asset-driven fund regimes and supporting rulebooks catering for the different fund typologies. There are equally opportunities to revisit our proposition in the venture capital and private equity space; these are growing markets, where our offering needs to be more compelling. 

When it comes to alternative investment funds (AIFs), the new requirements brought about by the AIFMD have made it very challenging for start-up managers. On the other hand, the introduction of the Notified AIF, which allows for the launch of these funds within 10 days from the notification to the regulator, is gaining traction as evidenced by the new licences that were issued last year. 


What do you think will be next for the insurance industry and for the banking sector?

We are still seeing new insurance companies moving in; however, I believe that our insurance proposition also needs to be revisited. The Protected Cell Company (PCC) has served Malta very well, but it has been around for a long time, and I believe there is room and strong scope for further innovation in this sector.

When it comes to banking, it is my view that Malta is clearly underbanked in the specialist niche finance segments, such as the maritime and aviation sectors which are ironically very strong economic pillars in Malta. This presents an excellent opportunity for international financing institutions to form part of the existing ecosystem to support operators in these sectors.  

The key challenge that remains is related to the provision of depositary services in Malta, which has always been the Achilles heel of this sector. While the industry is supported by the presence of depositary service providers, the consolidation that this sector is going through internationally, is also being experienced in Malta, particularly following the withdrawal of the larger depositaries from this market. This state of play requires Malta to lobby in a stronger manner for the ability of funds to appoint depositaries that are not necessarily based in the same jurisdiction as the fund.


Service providers are commenting that they are having difficulties to open bank accounts for their clients. What’s the reason for this? 

The requirements on banks across the globe, but particularly in Europe, especially with regards to Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations, when opening accounts have increased significantly. Banks are today clearly defining what business they accept, and this definition is driven by a de-risking mindset. However, banks are still opening bank accounts and service the business that falls within their customer acceptance policy and risk appetite framework. 

It is however the case that the risk appetite of the bank and the risk profile of the companies wanting to open a bank account do not always match. One has to bear in mind that the banks in Malta form part of a wider chain of correspondent banks, and the risk appetite of the local bank needs to be equally aligned to that of their correspondent bank. While a Maltese bank might understand the business of the client and might be willing to put in place appropriate policies to manage the associated risk, the local bank also needs to bear in mind the customer acceptance policy and the risk appetite framework of the correspondent banks they work with. 

These challenges are even more intense considering that Malta is a frontrunner in the development of legal and regulatory frameworks for emerging sectors such as blockchain, virtual financial assets and medical cannabis that have not as yet gained global recognition, which clearly poses banking challenges in the process.   

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Corporate Service Providers (CSPs) are key business introducers to Malta’s IFC. With AML and CFT compliance becoming ever more important, do you feel stricter supervision of CSPs is required? 

In my opinion, CSPs should be regulated. While they are already required to register with the MFSA, I do believe that regulation – irrespective of whether they are self-regulated or fall under a regulatory framework of an authority or body – would undoubtedly contribute to further strengthening the professional standing of this sector.  


Do you believe fintech innovation will ease any of the current banking challenges? 

I am of the firm conviction that technology will induce operational efficiency and bring about significant improvements in customer experience. Fintechs, for example Revolut and others, have already made significant inroads in markets around the world due to the ease of processing instructions and transferring funds from one person to another, as well as their simplified onboarding process and the greater consumer empowerment in terms of the functionalities of the product or service being offered. 

I also believe there are ample opportunities for banks and fintech companies to work together. Banks need to innovate and adapt to the new financial landscape that is emerging, where consumers expect instant real-time payments and ease of managing their financial affairs. Within this context, banks are currently heavily investing in technology in an effort to match what is being offered by fintechs, not only in terms of payment processing functionality but also to digitalise their lending and investment services. In effect, we are actually seeing fintechs being bought up by banking institutions or collaborating with them, white labelling their solutions in the process. I am quite confident that in three to five years’ time, the banking servicing landscape will have changed significantly. Those banks that fail to adapt to the new client realities will become irrelevant. 


Malta wants to become a hub for digital finance. Do you think the island has all the elements in place to turn this vision into a reality? 

While Malta has been successful in launching a regulatory framework for Distributed Ledger Technologies (DLTs), we equally need to focus on creating the ecosystem that fintechs require. Let me give you an example. We are currently in the process of introducing a regulatory sandbox for fintech companies to develop and scale products. However, it is evidently the case that although regulation is an important enabler, fintechs testing new innovations require other forms of support. They have basic requirements that need to be met and will ask questions such as where am I going to operate from? Who is going to bank me? Where can I source different rounds of funding? These are critical needs of fintech innovators for which solutions need to be developed in parallel to the key thrusts on the regulatory front.   

It is also pertinent to point out that once these companies succeed and are ready to move out of the sandbox, the existing regulatory framework needs to cater for these new businesses. It is one thing to allow them to operate in a controlled environment, and another when these companies develop new business models that are not captured by our traditional frameworks. Consequently, we need to plan ahead in this regard to ensure a seamless transition from the confines of a sandbox to the wider marketplace.  


Can you explain your thinking a bit more? 

I feel that there is a strong opportunity to develop our legal and regulatory framework to cater for the new digitalised financial services world. The onset of robo-advisory and other digitalised financial services platforms needs to be governed by bespoke regulation. For instance, there might be issues when companies seek to license robo-advisory products, but the regulation requires a “human” financial advisor. To tackle this challenge, in my opinion, we don’t need to write new digital regulations for every sector and sub-sector. We can build on the existing regulatory architecture and ensure that the rulebooks provide absolute clarity when it comes to digital products or digitally driven service providers. 


On the global financial centre’s map, where are you positioning Malta as a finance centre at the moment and what’s your future outlook?

While Malta is recognised as a European financial centre alongside the more established centres Dublin and Luxembourg, our key differentiator is that geographically Malta is uniquely placed and well positioned as a gateway to the African continent. When talking about Africa, I am not only referring to North Africa, but also to other markets such as Ghana, Ethiopia and South Africa. In light of the increasing affluence, population growth and urbanisation rates, Africa’s emerging economies present some of the most exciting business opportunities. In terms of sectors, while the traditional sectors remain important for the industry, digital permutations of the existing sectors and new digital-led sectors are well lined up to experience significant growth going forward.   


Published: 22 August 2019


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