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8 OPINION 05.11.2020 T he news that shook the fi- nance services sector last week was the self-suspen- sion of MFSA CEO Joe Cuschieri and general legal counsel Edwina Licari. Mr Cuschieri is temporal- ly replaced by Chris Buttigieg as acting CEO (pictured). is ac- tion was taken so that the board of Governors can look into reve- lations that they travelled free as guests of Yorgen Fenech in 2018 to Las Vegas. Yorgen Fenech is a suspected mastermind allegedly involved in a horrid crime in the assig- nation of a journalist. Dr Licari, also resigned as a member of the board of the Financial Intel- ligence Analysis Unit. Reportage in the media about this alleged breach of ethics which took place two years ago has been the straw that broke the camel's back. One is aware that the current MFSA structure as a super-regular has worked fine in early days of the financial services industry but over the years a number of cracks have appeared that point towards a reform. It is fair to say that under the chairmanship of Prof Bannister (he retired and was replaced by Joe Cuschieri) the sector grew exponentially and so did the complexity of regulation. One cannot, but admire his grip on the fine aspects of internal regu- lation, but one cannot sit on his laurels as since the onset of the global recession there has been a number of regulatory pres- sures that have challenged the role of a super-regulator. Regrettably there was a num- ber of bad apples such as Pilatus bank, Satabank, Nemea bank, BOV La Valletta fund, Settanta Insurance, Falcon Funds, Price Club, Electrogas shaky structure among other matters of poor governance some mentioned in the latest MoneyVal inspection. Rumour mill has it that MFSA have since stepped up to tighten inspections and now appoint- ed a head of AML to carry out AML supervisory units on CSPs with a particular focus. In the meantime, this article is advocating that the ideal solu- tion to strengthen control and regulation is to split the MFSA into two authorities – one har- nessing the prudential regulato- ry 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 price. Just consider the onerous responsibility the MFSA has for the direct supervision of all reg- ulated firms (including banks, funds, trusts, insurance and SI- CAVs). is 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 iden- tifies regulatory failures. Such a restructuring has unique ad- vantages since it extends power to make judgments over wheth- er banks' or listed funds' or fi- nancial 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. e monolithic structure was split into two entities: the Pru- dential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of re- sponsibility. Starting with one side of the peak that is the Pru- dential Regulation Authority (PRA) in UK. is is responsible for this prudential regulation and supervision of banks, build- ing societies, credit unions, in- surers and major investment firms. PRA 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 expec- tations through their actions. Here, one may ask why should Malta change a style of regula- tion that served us well for the past twenty years? e answer is that a number of countries (South Africa, UK, Australia, Belgium, Netherlands and possibly China) seeing the winds of change, have adopted a diversified approach towards regulation. With the 2007/8 recession, a number of acute banking problems arose that re- quired closer supervision. Lo- cally, we witnessed the issuing of substantial fines by FIAU to medium tier banks which was unthinkable in the past. e tightening of regulation across Europe is now overseen by the European System of Fi- nancial Supervision. is is made up of three European Su- pervisory Authorities: • e European Banking Au- thority • e European Securities and Markets Authority • e European Insurance and Occupational Pensions Author- ity. e European Systemic Risk Board is an independent EU body responsible for macro prudential oversight of the EU financial system. Undoubtedly, in the past two years, MFSA saw a number of its top super- visors retiring and combine this to the stretching of its internal resources following marching orders from Castille to design new regulations over complex Blockchain and DLT concepts. ese were introduced at breakneck speed. e next question to ask: is the private investor well protected under the "super-regulator" model? e answer to this question is subjective as one needs to take into account the complexity of supervisory rules that EU has introduced to assure deposit holders and private investors a higher level of protection. A more "judgment based" ap- proach is advisable for super- vision focusing on: the external environment, business risk, management and governance, risk management and controls and capital and liquidity. Past experience reveals that some countries have frequent- ly changed regulatory struc- tures, particularly in response to unprecedented financial col- lapse. Significantly, however, no country has yet changed from a "twin peaks" structure to anoth- er structure. Since it was orig- inally 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 cur- rently in the process of chang- ing to this structure, and it has also been considered by the US. However, simply identifying its potential qualities does not nec- essarily mean that local govern- ment distracted by a pandemic will find enough scope to act. If, it finds the stamina to face the challenge, then regulatory judge- ments will follow the FCA prov- en risk framework. e "twin peak" model can use a risk toler- ance framework to set priorities thus understanding trends in the risk of harm and threats to statu- tory objectives. e risk framework, thus un- derpins the decision-making framework by enabling the FCA to focus on potential harm, through real-time analysis of trends. Creating, an independ- ent "Financial Conduct Author- ity (FCA)" has a number of ad- vantages more so in the shadow of the observations made by the MoneyVal team during their re- cent visit. us a separate regulator each responsible for conduct of business and market issues for all firms coterminous with prudential regulation of small firms, like insurance brokerages and financial advisory firms will go a long way to raise the bar. is gives an advantage in taking remedial action during the early detection of transgres- sions, that is before consumer detriment sets in. Retooling MFSA will be able it to review the full product financial lifecy- cle from design to distribution with the power to ban products where necessary. In conclusion, in life nothing is perfect. ere is a perceived disadvantage of the Twin Peaks model in that it may create reg- ulatory overlap with dual regu- lated entities. Its critics say that it is inevitable that two separate regulators would have two sep- arate rule books and two sepa- rate systems. In my opinion, such a prob- lem pales by comparison to the advantages reaped by "Twin Peaks' model ushering better supervision and consumer pro- tection. Retooling the MFSA George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island MFSA acting CEO Chris Buttigieg

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