Issue link: https://maltatoday.uberflip.com/i/620229
maltatoday, SUNDAY, 27 DECEMBER 2015 II Finance Regulating Malta's financial II Finance How has the role of the MFSA changed over the last ten years? As a result of the financial crises, the MFSA continued to consolidate its position as the regulator and supervisor of the financial sector. Following the crises, the De Larossiere Report stated that supervi- sors have to concentrate more time on supervision and this led to the setting up of the Authorisation Unit to issue new licences. The crises, however, also led to a separation of prudential supervision and conduct supervision i.e. consumer protection - the way companies conduct business with consumers. Some people are questioning why the MFSA is doing all this. The answer lies in the Directives such as Solvency II, CRD IV and MiFID II, which now totally govern the way the MFSA carries out its supervision. The correct transposition of these Directives into Maltese legislation is overseen by the European Commission. Also, the MFSA is subject to reviews by the European Super- visory Authorities and the IMF who ensure that these Directives are being correctly implemented. Last year as part of the Banking Union, the MFSA became part of the Single Supervisory Mechanism within the ECB. This has necessitated changes in not only the way the MFSA supervises banks but also various internal changes particularly to our IT operations among others. During 2015, the MFSA became the Resolution Authority and in 2016, we are introducing the Internal Audit Function together with Quality Assurance. These are necessary changes under the SSM. All these changes are having effects on the human and financial resources of the MFSA, however, we are so far coping with the situation. There is still more legislation to be implemented and this means that we have to keep monitoring the level of our human resources and continuously moni- tor our expenditure. What steps has the MFSA taken to prepare investors and encourage financial advisors to provide a thorough assessment of investment benefits and risks? It is first important to distinguish be- tween the expectations of investors when receiving an investment service (such as advice), and the obligations of financial advisors when providing such a service. When providing financial advice, a financial advisor is required to understand a prospective investor's needs and cir- cumstances to enable him to recommend the right investment (or investment mix) for the investor. Financial advisors are therefore required to compile a Suitability Test, where the financial advisor asks the investor a number of questions to enable him to reach an understanding of the types of investments suitable for the investor's requirements. As part of the suitability test, the financial advisor will ask a series of questions to establish the investor's: Investment objectives - which may include questions about the investor's risk appetite and profile, and whether he wishes to invest for income or growth; Financial situation - which may include questions about the investor's financial situation, source and extent of income, as- sets, and financial commitments and Knowledge and experience - questions about the types of services and products the investor is familiar with, the nature, volume and frequency of previous transac- tions; as well as level of education, profes- sion or former profession. When carrying out educational cam- paigns, the MFSA emphasises the importance and relevance of this advisory process. Investors should provide clear and full answers during the process as this is the only manner for a financial advisor to be able to assess and give an objective and personalised recommendation to the investor. Prior to investing, investors expect to be given a thorough explanation of the risks and benefits that apply to the different investment securities and products that the financial advisor may recommend. Risks and potential returns vary greatly from investment to investment. For ex- ample, shares offer investors growth, but they can be volatile. Bonds provide fixed income although they come with varying risks. Collective investment schemes can provide growth, income or both but are also subject to volatility in the value of the underlying investments and lower potential earnings. The ultimate aim of the whole process is to ensure that the investor, with the financial advisor's assistance, builds a diversified portfolio of investments. Care- ful investing involves building a diverse portfolio—one in which the investor's investments are spread over a range of in- vestment choices, commensurate with the investor's risk appetitive and objectives. The MFSA had announced that it had embarked on reviewing the conduct of business frameworks for financial intermediaries, and launched improved alternative company listing rules. How far has this been implemented? In 2015, the MFSA established the Con- duct Supervisory Unit with a view to su- pervise the conduct of business of various regulated persons and to place more focus on ensuring the fair treatment of custom- ers by regulated entities. The MFSA has decided to adopt a staggered approach and the remit of the Unit will initially be limited to investment services licence holders, insurance companies, insurance intermediaries and credit institutions to the extent that these offer structured deposits as a product. To date, the main focus of the Unit has been the finalisation of a Con- duct of Business Rulebook, which would apply to the abovementioned entities. In this regard, a draft of the Rulebook has been prepared and the Authority has also consulted with the industry on certain parts of this draft. It is envisaged that the other parts will also be issued for consultation in the first quarter of 2016. This Rulebook will mainly involve the transposition of the MIFID II Directive as well as the Insurance Distribution Directive (which will eventually replace the Insurance Mediation Directive). In this regard, it is to be kept in mind that the Insurance Distribution Directive has not yet been formally published (although a political agreement has been reached on the text). Furthermore, it also appears that the implementation of the MIFID II Directive at EU level will be delayed. The MFSA is closely following these develop- ments at EU level, prior to determining the implementation date of the Rulebook. The Conduct Supervisory Unit is also undertaking informal discussions with a number of stakeholders including various associations representing the industry. The Unit is also considering the Feedback received from the industry with respect to the first Consultation with respect to the draft Rulebook as mentioned above. Meanwhile, a recruitment process is un- derway for the Conduct Supervisory Unit to have the necessary resources in place and once this is completed, the intention is for the Conduct Supervisory Unit to take on the responsibility for the supervision of the conduct of business of the abovemen- tioned regulated persons on the basis of the Rules which are currently applicable until such time as the new Conduct of Business Rulebook will be brought into force. Financial services have grown exponentially in Malta. What are the new challenges facing this sector? The financial crisis has not affected the growth of the sector. Growth in itself brings challenges and everybody – the politi- cal parties, the industry and the regulator have to respond to these challenges. This is a highly mobile sector and we have to respond quickly. We have had political consensus on financial services and it is important that this remains cast in stone. It is one of the major attractions and it is not only impor- tant that this continues but also the political parties approve necessary legislation quickly. The sector has to respond to the main important challenges, which are the intro- duction of new regulations and investment in training. The response from industry to a consultation process is, if anything, very weak and it only comes from the same promoters. The response tends to come after implementation and then there is little the MFSA can do. Industry must understand that investment in training of staff is an asset for the future and not to expect the MFSA to carry out this training. The MFSA invests in training when new directives are being introduced but it can only give direction where training of staff such as risk managers and actuaries is involved. The MFSA operates an open door policy. We have so far managed to meet compa- nies at the pre- and during the application stage. We now find that other regulators in major jurisdictions are doing the same thing so we have to keep this initiative go- ing. However, very often we are criticised for not doing enough. This is true for vari- ous reasons. Applications are continuously increasing in numbers that current staff levels cannot handle. We are continu- ously recruiting but staff has to be trained. Our salary structure is not attractive and unfortunately we are losing trained staff to industry. Furthermore more we now have an acute shortage of space to accom- modate new recruits. These are not easy problems and we ask industry to co-op- erate with us particularly where issues of substance and due diligence are involved. The requirements of the MFSA need to be followed in order to protect the reputation of the country and the industry. There is no bending or going round the rules. Last October, the MFSA issued two letters addressed to the Directors and Compliance Officers of Investment Services License Holders, regarding the Market Abuse Regulation and the Market Abuse Directive. What do the Market Abuse Regulations aim to achieve? Market abuse is a concept that encom- passes unlawful behaviour in financial markets and is understood to consist of insider dealing, disclosure of unpublished inside information and market manipula- tion. The success of financial markets depends on the extent to which such mar- kets benefit from a high degree of investor confidence. Investors put their savings at risk because they trust that market players are honest. Market abuse on the other hand tells everybody that financial markets are manipulated and that only investors who are wealthy and have access to direc- tors of listed companies can make money by investing through financial markets. Such behaviour damages the integrity of financial markets and investor confidence in general. The Market Abuse Regulation prohibits market abuse, requires listed companies to make inside information public and grants National Competent Authorities, such as the MFSA, with the powers to monitor the financial markets, investigate suspicious transactions and take enforcement action where this is deemed necessary. The MFSA has a market monitoring function in place. It also has a team of officials whose supervisory work focuses on achieving market integrity. As reported in the Author- ity's annual reports, the MFSA carries out various reviews and investigations of The Malta Financial Services Authority is the island's financial regulator and, just like the financial sector, is evolving to meet continuously changing circumstances. Prof. Joe V. Bannister, chairman of the MFSA, talks to MaltaToday about the authority's work and the dynamic face of financial services regulation