INTERVIEW | Joseph Cuschieri: Delivering ‘MFSA version 2’ to meet today’s challenges

You’ve been in the role of CEO of the Malta Financial Services Authority for a number of months, and you didn’t parachute into the role just like that. You have had experience in a number of institutions, entities and agencies, but this is a completely different ball game. What were the challenges that you faced as soon as you landed in this important role?

I think there were a number of challenges. Firstly, the regulatory landscape which oversees the financial services sector in Europe and outside of the continent has changed dramatically. Since the financial crisis in 2008/2009, the way banks are managed and supervised has changed dramatically. There was also the fourth anti-money laundering directive which came into effect, and there is now the fifth anti-money laundering directive as well as many other directives which came into force over the last years, such as MiFID II. So, of course the regulatory environment is now more complex and there is additional stress and demands placed on regulators such as the MFSA, but also on banks and other financial institutions.

When I joined the MFSA, the Authority had been established for 25 years, since 1994, when it took on the role of being the single supervisor [in Malta]. However there was the need for, I would say, an “MFSA version 2”, in the sense that there are a number of reforms which needed to be done internally.

We have a current situation where we need to increase our capacity and to upscale our people for the next generation of regulation. That obviously presented a number of challenges whereby you have a large sector which needs to be supervised. The risk for the jurisdiction [of Malta] has to be kept at the lowest level possible, but at the same time you have a regulatory environment which has changed dramatically.

You referred to an “MFSA 2”. The MFSA was originally conceived in the 1990s and it served to attract numerous companies to Malta because of the country’s favourable, very agreeable and attractive regulatory environment. Since then, however, we have become a European Union member state, and obviously, as you mentioned, there have been a number of challenges with regards to regulatory mechanisms. And this has also put a lot of a burden on the MFSA. How ready are we to rise up to these challenges? … And how capable is the MFSA to adapt yourselves to all these challenges?

That is the biggest challenge which we have, in the sense that […] we know what the current environment is, but we have to cater for the future – what I call future proofing.

What we’re doing right now is that we have reorganised the way we work to make sure we have an organisation which is robust enough to really cater for all the areas we need to supervise; to have a corporate structure which really supports the entire supervisory area; and we’re investing more in technology. Moreover, we are sourcing expertise from abroad, particularly on the financial crime compliance side.

I mention financial crime compliance because now and for the future this is going to be the main plank on which supervisory authorities like the MFSA will need to focus. This doesn’t mean that conduct and prudential supervision is not important - of course it is.

But we need to fuse the three together: financial crime, conduct and prudential supervision. That requires a new set of skills and a new way of how we exercise our supervisory activities and the way we organise such activities. And we have international experts helping us.

We’re investing a lot in training our staff at the moment as well, and we are improving the quality and the efficacy of how we do on-site inspections, how we analyse, how we supervise, and how to take a risk-based approach.

How do you find the compromise between ensuring that Malta as a territory continues to offer a favourable service for companies to domicile in the country, while at the same time ensuring that you uphold the regulatory mechanisms? Often these work against each other. How do you balance this?

There are two facets to this. Firstly, there is what I would call the on-boarding process. When an application comes to the MFSA, the Authority needs to ensure that the actors involved – the shareholders, directors and the management which will run the show – are fit and proper. Here we need to, and have, strengthened our probity checks, our fit and proper checks, and also our due diligence and business model analysis. I think that’s your first line of defence – the prevention aspect, so to speak.

Secondly, throughout the life cycle of a particular operator, you need to carry out ongoing inspections. And that has to be done through the application of a risk-based approach. The higher the risk of a particular business model, the higher the scrutiny that you need to apply.

To avoid incurring any reputational risk you need to make sure that high-risk models, or perhaps activities coming into Malta from high-risk jurisdictions or riskier jurisdictions, are avoided, because they could get you into trouble, which we don’t need.

Moreover, there’s also the aspect of the practitioners. One has to keep in mind that when money laundering takes places, or wrong-doing takes place, or misbehaviour by firms takes place, usually that inadvertently, or in certain instances, intentionally, would be facilitated by company service providers.

This is because the industry is not made up only of the MFSA, or of licensed holders such as banks, payment institutions and insurance companies. There are also what I call the practitioners – the services sector, the company service providers (CSPs) which service the licence community. I would like to see an improvement in this area. Certain CSPs, before taking on board certain clients need to do their homework. It doesn’t mean that the MFSA doesn’t have to also do its homework. but if both the MFSA and the CSPs do their homework with more depth and diligence then the jurisdiction will have a much lower risk of any bad actors infiltrating the system.

It is obvious that you are giving a lot of priority to the supervision aspects of the MFSA.

Yes.

Your appointment as MFSA CEO came at a period where there was an element of criticism towards the MFSA. There’s obviously the supervisory role, which you are giving a lot of importance. And this comes at a time when the Authority has rebranded its facade. Beyond the protocols, however, when you’re facing a number of players in the industry, why is it that Malta still remains an attractive territory for various companies to come to the island?

Because Malta has been, over the last 25 years, very smart in putting together legislative frameworks which are attractive. And even the European institutions, the standard-setters, always remark that we have very good and solid legislation. We’ve done this in gaming, financial services and now with blockchain and the Virtual Financial Assets Act and other laws which have placed Malta at the forefront of certain sectors, like gaming and others. Good legislation by itself is not enough, but our economic structure, our ecosystem, is, I would say, very business-friendly. For example, there are firms, lawyers, accountants and other CSPs in Malta which are world-class. We have a good IT infrastructure. We’re in the EU and you can reach the European mainland with just a two or three-hour flight. We’ve also got a very favourable economic environment and a pleasant climate. When you put together all these factors, they create an attractive and sophisticated ecosystem.

It is true that recently the MFSA has been criticised, and the challenge is always that you strengthen the institution and you keep strengthening it on an ongoing basis. And you have to keep in mind that what worked 10 or five years ago won’t necessarily work today, because the industry – particularly the financial services sector – is changing very dramatically. For instance, supervisory technology and other areas will in five years’ time be revolutionised through financial technology. The question is: do we have the skills to really re-dimensionalise how we do supervision in a highly technological environment?

Despite the reputational effect that certain headlines which were doing the rounds could have had, Malta still remains attractive. I meet investors and practitioners, locally and abroad, who remain interested in setting up shop in Malta.

For instance, in the insurance sector, with the situation concerning Brexit, we’ve been inundated [with requests] by some of the biggest captive insurance brands in the world which are coming to Malta to set up shop here.

This is also true of FinTech companies, banks, payment institutions, investments, wealth management – these are all area where we are still seeing a certain level of growth.

Our challenge, at this point, as a jurisdiction, is to strengthen our knowledge base and capacity, and to make sure that both the MFSA as well as the practitioners and stakeholders up their game.

With regards to the aim of upping your game […] can you explain to me in brief what you have done, or are planning to do, in terms of your institution when it comes to your staff and how you will improve their skills, employing people with new skills and introducing new protocols?

One of the things that we’re doing when it comes to capacity building and resourcing, is that we would like to internationalise the MFSA. I want to make sure that a substantial percentage of our employees come from abroad. Why? It’s not because the Maltese are not good enough, far from it.

But I would like to have, for instance in our banking supervision unit, individuals who worked with other foreign regulators, such as the European Central Bank (ECB), and who have experience in how banking is supervised in Europe.

The same applies to Maltese nationals – I would like to have exchange programmes, and we’re working on this. We aim to have an exchange programme with the ECB, whereby, for instance, 10 of their staff could come to Malta to work for some time at the MFSA, and a group of five Maltese could go to work at the ECB. That will cross-fertilise, up our skills and change our culture of doing things.

Furthermore, we’re employing more people and are investing more in training. Where we lack certain skills, I’m sourcing teams from abroad to work with us. Right now, we have a foreign team helping us in doing on-site inspections. We have the experts helping us, but we also have our own people doing inspections alongside the foreign team, so they can be subjected to on-the-job training.

When it comes to knowledge management, technology and information systems, we’ve just deployed a four-year plan and plan to invest €12 million in tech. If we succeed in managing data and the latest technology, then the MFSA can become even more professional and efficient in the way it carries out it work.

One of the things which attracts foreign companies and foreign investment to Malta is – apart from the fact that we are user-friendly in the way we do things – is that we are efficient. In some sectors, however, we do have certain issues. You’ve talked about not only the need to improve efficiency at the MFSA, but also to what happens beyond the Authority. I refer to two particular activities – practitioners and the banking system. What do you have to say about these particular role players in this operation?

On the practitioners’ side, most are professionals in their area, but some aren’t. So, it’s a question of raising standards, and one of the things I would like to do is raise standards [on the country’s various] boards. We are working with the Institute of Directors (IOD) to ensure that whoever is sitting on a board knows exactly what their obligations are. Sometimes I fear there could be individuals who sit on a board to receive an honorarium without knowing what their obligations are, or who the company’s shareholders are and which risks the company has.

We also need to focus on the quality of the boards and improve on things here. In fact, the MFSA in conjunction with the IOD will be publishing guidance aimed at raising boards’ standards.

CSPs – of which there are roughly 700 in the Maltese market, and which interact on an ongoing basis with the MFSA on behalf of their clients – can also have their standards raised.

We need to ensure that every CSP is assessed every year, to ascertain that they have the right skills and that they take on board their responsibilities. The MFSA has to be the institution that carries out due diligence, but if we raise the standards of CSPs we can subsequently mitigate the risks of bad actors entering the system.