INTERVIEW | Joseph Cuschieri: ‘The MFSA will be in a better place by 2021’

We know that there have been some issues with banks, and, since most local banks have a low risk appetite, this puts them in situations which don’t quite tally with the financial services environment of a small territory like Malta. What are your thoughts on this?

It is true that banks currently have a low risk appetite, and yet, the banking sector in Malta keeps growing. One has to keep in mind that when it comes to key performance indicators, it is evident that local banks are robust with a strong capital base and liquidity. This was one of the key reasons why Malta managed to stay away from trouble during the financial crisis of 2008 where governments had to inject money into their banks to keep them going. On the other hand, the banking sector needs to de-risk which means that certain business models which may have a higher risk profile can become un-bankable.

What is the solution to this, in your view?

One solution would be to have more banks servicing the economy. In Malta, we have 25 banks which are licensed by the MFSA, but only six are really servicing the economy at the retail level. The other licensees are international banks which are very niche-oriented. These banks don’t carry out any retail activity but are limited to corporate banking. Seeing this dynamic within the banking sector, my conclusion is that we need more banks. I would like to see more innovation from banks when it comes to technology and the provision of online services to clients. One way in which we can unlock that innovation is to bring on board new banks which are able to service new economic and digital sectors with technology platforms, delivering a sophisticated control environment, hence keeping risk exposures at a low level.

Such technology requires an understanding of the fact that they are new and don’t have a history - so is there an element of risk involved?

Yes, there is an element of risk. To be clear, we don’t blame banks for their risk averse approach, because no bank wants to suffer any reputational damage.  We are in no position to tell banks what to do in terms of their risk appetite. As the regulator, we are insisting that banks need to have proper governance and financial crime controls including other prudential and conduct controls. However, I think one should avoid the one-size-fits-all approach. Most of the complaints we hear are connected to either a licence being denied, a licence holder not managing to open a bank account, or there being huge delays in opening a bank account. This brings me to my earlier point, in that, there needs to be more innovation - the way banks take on board customers has to be more sophisticated, so that they can really take a risk-based approach and differentiate between the different customer segments.

A very simplistic question about this particular point: let’s consider there was an element of trust between the established traditional banks and the MFSA with regards to the due diligence and supervisory protocol, to the extent that it is so robust that the banks would basically take it for granted that a company has been licensed and is a bona fide company which can proceed with banking services, and so on. Don’t you think there should be a point in the future when this should happen – that there is a certain element of trust in place so that once an entity has passed through the strengthened due diligence process, it follows suit that banks should take this as a green card for offering certain services?

Yes, I would say. Still, I don’t think that the banks are adopting their [low risk appetite] approach due to the lack of trust in the MFSA. In reality, even if there was in place the most 100% fool-proof system, banks would still need to do their own checks. I wouldn’t assume that the banks would reason that since an entity was licensed by the MFSA, the risk would be zero. They would still need to do their own checks. But if we show that we’ve strengthened our first line of defence that would probably help the situation.

You’ve already delved into a number of things which transpired because of geopolitical decisions, such as Brexit. If you had to go beyond this and look into the future, where are you seeing growth for the MFSA in terms of operational growth that would increase the number of clients and customers?

I would see growth in all areas; insurance and fund management are two of them. Banks are also an area which I’m giving a lot of attention to. In my opinion Malta is under-banked and needs more banks to service the industry, with all the load of the economic activity currently being spread out on a few significant banks.

And how would Joseph Cuschieri inform this important sector that foreign banks could have a base in Malta?

There are a number of things which can be done. We need to show that we are a more efficient, pro-active regulator with high standards of supervision. This is an area which we need to improve upon, and with the plans we have in place, and the strategy which will be published this month, we will show exactly what our plans are for the MFSA.

It’s not just about what the MFSA does, but it’s what we do as a jurisdiction. I believe that with the improvements we are implementing we are going to prove to the world that the MFSA is as good as its European peers. We are not there yet, but we are steadily improving. Malta is a small country where resources are limited. Having said this, there is a solution to this – importing talent and expertise from abroad particularly in financial crime compliance. But there is the commitment, the will and the drive to put in place the necessary investment so that the MFSA becomes an efficient regulator which takes quick enforcement action.

On a jurisdictional level, I think that if we improve our infrastructure and implement the needed legislatory reforms, we can get there. Even the laws regulating the MFSA need to be tweaked, and we’ll be looking at this in the future. If we implement these things, Malta has a bright future in the sector.

There has been a relatively pungent international press response in terms of reports on Malta’s financial services reputation, apart from the fact that there have been several misconstrued facts and ideas. In what ways are you working to address this issue, especially when it comes to media players who aren’t the easiest of animals  to confront?

First of all, I would say that if you look throughout the years and see the reports by the Financial Times and other international media sources, you will see that there have always been regulatory issues in any jurisdiction. History has shown us that improvements in regulatory frameworks have occurred, or were triggered, as a result of certain incidents.

The Single Supervisory Mechanism, for example, was introduced in 2010 because of the financial crisis, as it became clear there wasn’t proper supervision of banks in Europe. The fourth anti-money laundering directive came to be because there was the need to strengthen financial crime compliance in and outside of Europe.  

There were two particular incidents which received exaggerated international media attention. If you look at what happened in other jurisdictions, our cases were very small and insignificant in the grand scheme of things. But this is by far not a consolation. We have learned from these situations and have had over the last year many detailed discussions with the European Banking Authority (EBA), the ECB and other European international standards setters with whom we have set out which improvement areas we will be working on.

An EBA investigation confirmed that we were not in breach of EU law, but of course, they gave us recommendations on areas where we need to improve. When I speak with my counterparts in Europe, I realise that all of us have the same challenges.

There are no countries which do not have such challenges. It’s all about improving, capacity-building, having the right resources and the right infrastructure. The reality is that money laundering today – which is the focus of the world when it comes to supervision – is becoming so sophisticated and elaborate that regulators really have to up their game on an ongoing basis and collaborate more.

Earlier this year I participated in the City Week conference in London on the future of regulation. One of the things I mentioned was that [...] it is useless pointing fingers at each other. Today I might have an issue, and tomorrow it is you who might face a similar problem. I think we need to work increasingly together to at least have a set of common standards which supervisors at the MFSA can apply when it comes to anti-money laundering supervision.

There needs to be better knowledge sharing, and a singular approach setting minimum standards. When the fourth anti-money laundering directive was drawn up, each country implemented it in the way it thought best. Even the institutional arrangements are not the same in every jurisdiction. In Europe there is now talk of having one single financial crime compliance supervisor - a sort of Financial Intelligence Analysis Unit of Europe - and this is precisely because the current system is still allowing bad actors to enter the system.

Do you think that the storm which we had experienced around two years ago has subsided and that Malta has basically overcome it?

I wouldn’t say it has overcome it completely; foreigners read the headlines and I also meet counterparts who mention stories they would have read about Malta. They do so however, more in terms of asking what the situation is locally. When I explain the situation, they tell me that they have had their own fair share of issues. It has, undoubtedly, put us under the spotlight, adding more pressure on us to really up our game and show that we really do our work in good faith. We need to show that we are really investing in improving the regulatory system and that we mean business when it comes to raising the standards of supervision to the same level of that of other jurisdictions.

Malta is a country in which there has been political consensus about the financial services sector since the 1990s, and it appears there is also a political brief that we need to up our game and bring the MFSA not in line with, but above, other regulatory authorities in Europe.  However, there is one issue which journalists and players in this industry are always asking about – the fact that Malta has a certain unique tax regime which is tolerated by the EU and has an influence in attracting companies to Malta. What are your views on this?

I totally disagree with the tax haven label. Malta is not a tax haven, because in tax havens, you don’t pay tax. On the contrary, in Malta you do pay tax - VAT, income and all the other taxes, just like the rest of the Maltese residents. I find the tax haven label is incorrect and misleading. Before we joined the EU in 2004, our tax regime was analysed and agreed to by the EU. [...] Malta is very transparent.

In fact, I’ll mention this point to make it even clearer: when a foreign shareholder gets the six sevenths refund on the 35% tax on dividend, and is a resident in another jurisdiction, he or she needs to declare that income in that jurisdiction. Malta is a signatory to the Organisation for Economic Co-operation and Development (OECD) agreement and to the European framework of sharing tax information. We don’t have any secrets when it comes to tax; our systems are OECD compliant and transparent. If you were to ask what would happen were we to change our tax regime, I’d say only God knows. If something is going to change [within the EU when it comes to tax], and Malta agrees to it, there should be a long transition period and one would need to see exactly what sort of changes these would be. Personally, I am against tax harmonisation at EU level.

If we had to be sincere, there are no clouds on the horizon indicating that [the EU’s tax approach] will change in the foreseeable future.

No, not at this point in time.

There are a number of reforms in your mind, and other reforms have already started. There are also several protocols in place, and you’ve talked about capacity building, upping the skill game and the internationalisation of staff. You’ve also talked about opening up to new segments of industry. What are your plans?

By the end of 2021/2022 the MFSA will be in a better place. We’ll have the right amount and quality of resources, a solid technological platform, and cutting-edge business intelligence tools. This will give us more depth and efficacy in our oversight activities. Once we achieve that quality level and are in a strong position, we’d like to engage more and strengthen our relationships with other regulators. Institutions like the MFSA can learn a lot from other foreign authorities, and we want to work further on this. My view is that in the next three years we’ll carry out the necessary investment and strengthen the Authority, however we will have to be committed to keep improving it on an ongoing basis. The moment you stop improving, you start lagging behind, and this will definitely not happen under my watch.