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8 OPINION 18.2.2021 THE current MFSA structure as a super-regulator has worked fine in the early days of the fi- nancial services industry but over the years a number of cracks have appeared that point towards a need for reform. Regrettably there were a num- ber of bad apples such as Pilatus bank, Satabank, Nemea Bank, the BOV La Vallette fund, Set- tanta Insurance, Falcon Funds, Price Club, Electrogas. ese all point to a shaky structure that has also been tested by other instances of poor governance, some of which were mentioned in the latest MoneyVal inspec- tion. e EU's banking regulator had "serious concerns" on the adequacy and effectiveness of the MFSA's supervision of fi- nancial institutions as reported in the European Banking Au- thority's 2018 annual report, which gives an overview of its inquiries into the MFSA and the Financial Intelligence Anal- ysis Unit. Since then, it is fair to mention that both MFSA and FIAU have been allocated vast sums of capital to meet expand- ed responsibilities. In the meantime, this article is advocating that an ideal solu- tion to strengthen control and regulation at MFSA is to split it 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 bas- ket comes at a heavy price. Just consider the onerous responsi- bility the MFSA has for the di- rect supervision of all regulated firms (including banks, funds, Fintech, trusts, insurance, list- ed entities and SICAVs). is includes both prudential and conduct of business and, at the same time, carries an onerous duty to take remedial and time- ly enforcement action against firms wherever it identifies reg- ulatory infringements. Such a restructuring has unique advantages since it ex- tends the authority's power to make judgments over whether banks, listed funds or financial products pose a risk to financial stability or are likely to cause detriment to consumers. For example, the UK, previ- ously had a single regulator − the so-called FSA. e mon- olithic structure was split into two entities: the Prudential Reg- ulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility. e PRA is responsible for this prudential regulation and supervision of banks, building societies, credit unions, insur- ers and major investment firms. It aims to establish and main- tain published policy material that is consistent with set objec- tives, clear in intent, straight- forward in presentation and as concise as possible. Taken as a whole, the set of published pol- icy material is intended to set out clearly and concisely what outcomes any regulator can expect, so that firms can meet these expectations through their actions. Can MFSA in the light of the scandal associated with the resignation of its CEO Joe Cushieri, take the cue to change its age-old style of regulation that has served us well for the past 20 years? Sensing the winds of change, A number of countries (South Africa, UK, Australia, Belgium, Netherlands and possibly Chi- na) have adopted a diversified approach towards regulation and consumer protection. Nevertheless, one needs to give due credit towards a re- cent MFSA reform as published in its supervision priorities document. is proudly sets out where it is going concern- ing supervisory engagements. It is interesting to observe that its current interim CEO Chris Buttigieg identified five cross-sectoral priorities name- ly: corporate governance and culture; financial crime compli- ance; the impact of COVID-19; ICT risk and cybersecurity; and fintech and innovation. e financial regulator aims to become financially independ- ent from the government by 2024 and its five-year business plan includes the introduction of new fees to cover enhanced cost of supervision and recruit- ment of new talent. Undoubt- edly, in the past two years, MFSA saw a number of its top supervisors retiring creating a brain drain. In the past three years MFSA has stretched the limit of its talent pool during the Blockchain and DLT eupho- ria. It was given marching or- ders from Castille to design new regulations to be the first in Eu- rope to regulate such concepts. ese laws were introduced at breakneck speed and undoubt- edly came at a priority to other aspects of supervision. e next question to ask is: Is the private investor adequately protected under the "super-reg- ulator" model? e answer to this question is subjective taking into account the plethora of supervisory rules that the EU has introduced to ensure deposit holders and private investors enjoy a higher level of protection. e flavour of the month is a more "judg- ment-based" approach. is is advisable for supervision based on the external environment, business risk, management and governance, risk management and controls, and capital and liquidity. Past experience reveals that some countries have frequently retooled their regulatory struc- tures, particularly in response to unprecedented financial collapse post the 2007/8 cri- sis. Since it was originally pi- oneered in Australia in 1998, the "twin peaks" structure has been adopted by countries such as Netherlands, Belgium, New Zealand and the United King- dom. South Africa is currently in the process of changing to this structure, and it has also been considered by the US. However, no matter how many local practitioners recommend to MFSA the potential qualities of a Twin Peak structure, now is the time to strike given the recent structuring of the Board of Governors. If the new board 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 tol- erance framework to set prior- ities thus understanding trends in the risk of harm and threats to statutory objectives. e risk framework thus underpins the decision-making framework by enabling the FCA to focus on potential harm, through re- al-time analysis of trends. Creating, an independent 'Fi- nancial Conduct Authority' (FCA) has a number of advan- tages more so in the shadow of the observations made by the Moneyval team during their recent 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 bro- kerages. Fintech and financial advisory firms will go a long way to raise the bar. is would put the MFSA in a better position to take reme- dial action armed with greater prowess for early detection of transgressions thereby enhanc- ing both investor and consum- er protection. Retooling the MFSA will enable it to assess the full product financial lifecy- cle from design to distribution with the real-time power to ban scams as it deems appropriate. MFSA: Retooling, not old wine in new bottles 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

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