The news that shook the finance services sector last week was the self-suspension of MFSA CEO Joe Cuschieri and general legal counsel Edwina Licari. Mr Cuschieri is temporally replaced by Chris Buttigieg as acting CEO. This action was taken so that the board of Governors can look into revelations 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 assignation of a journalist. Dr Licari also resigned as a member of the board of the Financial Intelligence 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 the 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 regulation, but one cannot sit on his laurels as since the onset of the global recession there has been a number of regulatory pressures that have challenged the role of a super-regulator.
Regrettably, there was a number 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 has since stepped up to tighten inspections and now appointed ahead of AML to carry out AML supervisory units on CSPs with a particular focus.
In the meantime, this article is advocating that the ideal solution to strengthen control and regulation is to split the MFSA into two authorities – one harnessing the prudential regulatory 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 regulated firms (including banks, funds, trusts, insurance and SICAVs).
This 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 identifies regulatory failures. Such restructuring has unique advantages since it extends power to make judgments over whether banks’ or listed funds’ or financial 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.
The monolithic structure was split into two entities: the Prudential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility. Starting with one side of the peak that is the Prudential Regulation Authority (PRA) in the UK. This is responsible for this prudential regulation and supervision of banks, building societies, credit unions, insurers 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 expectations through their actions. Here, one may ask why should Malta change a style of regulation that served us well for the past twenty years?
The 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 required closer supervision. Locally, we witnessed the issuing of substantial fines by FIAU to medium tier banks which were unthinkable in the past.
The tightening of regulation across Europe is now overseen by the European System of Financial Supervision. This is made up of three European Supervisory Authorities:
- The European Banking Authority
- The European Securities and Markets Authority
- The European Insurance and Occupational Pensions Authority.
The 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 supervisors 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.
These were introduced at breakneck speed. The next question to ask: is the private investor well protected under the “super-regulator” model? The answer to this question is subjective as one needs to take into account the complexity of supervisory rules that the EU has introduced to assure deposit holders and private investors a higher level of protection.
A more “judgment-based” approach is advisable for supervision 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 frequently changed regulatory structures, particularly in response to unprecedented financial collapse. Significantly, however, no country has yet changed from a “twin peaks” structure to another structure. Since it was originally 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 currently in the process of changing to this structure, and it has also been considered by the US.
However, simply identifying its potential qualities does not necessarily mean that local government distracted by a pandemic will find enough scope to act. If it finds the stamina to face the challenge, then regulatory judgements will follow the FCA proven risk framework. The “twin peak” model can use a risk tolerance framework to set priorities thus understanding trends in the risk of harm and threats to statutory objectives.
The risk framework thus underpins the decision-making framework by enabling the FCA to focus on potential harm, through real-time analysis of trends. Creating, an independent “Financial Conduct Authority (FCA)” has a number of advantages more so in the shadow of the observations made by the MoneyVal team during their recent visit.
Thus a separate regulator each responsible for the 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.
This gives an advantage in taking remedial action during the early detection of transgressions, that is before consumer detriment sets in. Retooling MFSA will be able to review the full product financial lifecycle from design to distribution with the power to ban products where necessary.
In conclusion, in life nothing is perfect. There is a perceived disadvantage of the Twin Peaks model in that it may create a regulatory overlap with dual regulated entities. Its critics say that it is inevitable that two separate regulators would have two separate rule books and two separate systems. In my opinion, such a problem pales by comparison to the advantages reaped by “Twin Peaks’ model ushering better supervision and consumer protection.