Interview with Joseph Cuschieri, CEO, Malta Financial Services Authority (MFSA)

A Changing Risk Appetite

In April 2018, you took over the CEO position with the aim of implementing a root and branch reform of the MFSA. How would you describe your experience so far?

The past months were very challenging but very rewarding. My initial goal was to identify the challenges which the MFSA and Malta as a jurisdiction are facing and draw up a new vision and strategy that would align the expectations of both local and European stakeholders. Our ambition is to become a top-tier regulator in Europe, a regulator that is efficient, pragmatic but, most importantly, evidence-based and data-driven so that the quality of decision-making is improved. I believe that this is possible because the basics for it to materialise are all there; hence it is all about building a sustainable regulatory system that will pass the test of time. Vision 2021 marks the beginning of our reform agenda, outlining our plans and priorities to position the MFSA as a forward-looking, proactive and trustworthy supervisory authority. We also launched a detailed FinTech strategy, and by the end of September 2019, we aim to publish our three-year strategic plan and business plan, which will chart, in much more detail, our areas of priority as part of our reform and change programme to strengthen the MFSA in preparation for the next generation of financial services.

What would you single out as the three biggest achievements over this period?

We now know what we want, we know where we need to be, and we know how to get there. Malta’s financial services sector has grown significantly in recent years, and we need to right-size the MFSA to effectively supervise and regulate the industry, which grew by 9.5% in 2018. We currently have a workforce of 377 employees, but we are projecting that, within the next three years, we will need to add 100 staff to reach a complement of 480 by the end of 2021. We are also investing heavily in technology, an area that has not received much attention in previous years. We are going to invest €12 million between 2019 and 2022 for the implementation of technological platforms, which will assist us in the automation of authorisation and supervisory processes, making the MFSA a more efficient and dynamic regulator. This will be underpinned by investment in the latest supervisory technology, business intelligence and knowledge management tools. We have strengthened our financial crime compliance setup, and our current resources have been augmented by a team of experts provided by the US-based consultancy firm FTI Consulting. The team has been entirely integrated within the MFSA’s structures and provides on-the-job coaching and hiring support, which will help create a stronger permanent Financial Crime setup at the MFSA.

Financial services regulation and supervision seem to have moved from a principle- and risk-based approach and to a more prescription-based model. What can you tell us about the MFSA’s strategic approach to regulation and supervision for the coming years?

We still follow a principle- and risk-based approach but would like to move towards a more data-driven and evidence-based approach to regulation. Our risk appetite has also changed and, certain business models that may have a higher risk profile than others will not be accepted. We have adopted a new risk management framework, and risk has been placed at the core of our decision-making process, which keeps the Authority in check in terms of the established risk appetite and ensures that the actual decisions taken are in line with that risk appetite. During Q4 2019, we will publish our formal risk-appetite statement so that everyone knows what the risk appetite of the Authority is and the basis of it. We want to improve our communication with industry stakeholders and communicate very clearly what we expect from the companies that we regulate.

What are the biggest issues facing Malta’s International Finance Centre?

Although we have already invested significantly in the area of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) compliance, we need to further up our game. Money laundering is a very sophisticated business: Europol cites sources saying that between 2 and 5% of global GDP is laundered each year, that’s between €715 billion and €1.87 trillion each year. So, it is clear that institutions actively engaged in stepping up this fight need to have very advanced tools, as well as very specialised people to prevent laundered money from entering our financial system. The MFSA, Malta’s Financial Intelligence Analysis Unit (FIAU) and the Economic Crimes Unit of the Malta Police Force are all increasing their resources and turning to the latest technologies available to bridge any gaps that may have existed. We are also working more closely together.

However, I would like to stress that AML/CFT is not just a task of regulators and supervisors. It is also the responsibility of practitioners, licence holders, service providers and anyone who brings business to Malta; they also need to strengthen KYC and customer due diligence, and ultimately AML/CFT compliance, to help protect our financial system from bad actors. It is our objective to keep the industry alive, dynamic and competitive. Therefore, we expect that firms which we regulate establish proportionate and efficient financial crime controls.

In terms of Malta’s operating environment, practitioners mention that banks’ de-risking exercises mean banks are not as open for business as they were in the past, which is impeding the finance centre’s ability to grow operations across the entire financial business spectrum. What can be done to ease this challenge?

While it is true that banks – in Malta and in other jurisdictions – are de-risking, this doesn’t mean that they won’t accept and service good business. As I already said, it is a clear indication that certain business models, which may have been accepted in the past, are not being serviced anymore because they fall outside of the banks’ risk appetite. So, in reality, executives and corporate service providers who are critical of the fact that it takes a long time to open a bank account, should reconsider the quality and type of business that they want to bring to Malta. If the business model and the profile of the customer fall in the high-risk category or outside banks’ risk appetite, they may refuse the business, or, at the very minimum, decide to perform enhanced due diligence checks, which obviously prolong the process of opening an account. However, I acknowledge that there is a need for more banks because Malta is underbanked, and we need to have more banks active in Malta’s vibrant economy. I am hoping that we will have an additional three banks operating in Malta by the end of 2020.

You mentioned the MFSA’s changing risk appetite earlier. What exactly does this mean for companies operating in the financial sector?

It means that our expectations on governance and compliance standards have increased substantially, and as a result we will be increasing the number of on-site inspections but also the quality and the depth of these inspections. We have built the necessary resources and expertise to increase the intensity of inspections through the adoption of a more sophisticated risk management framework. We are increasing resources in our Enforcement directorate and also considering increasing our fine and penalty structures. Going forward, we will also make sure that the quality of Boards of licensed entities and the standards expected from Corporate Services Providers are aligned with those found in the UK, for example. Standards have to improve, not just at the MFSA but also within the practitioner and licence holder community.

Are there any particular sectors that might gain in importance in Malta in the near future?

One sector that is very much on our radar is FinTech – it is going to revolutionise the financial services industry, and we want Malta to be a trailblazer and a leader in this space. But unless the MFSA walks the talk and applies the latest technologies and knowledge management tools, we will simply not be credible to develop Malta as a FinTech innovation hub. The other area that is gaining importance globally is sustainable finance. We are closely following developments in this field as we believe this will be a growth area of the future.

How will your FinTech vision materialise?

As part of our investment in this area, we are planning to set up a financial innovation hub and a regulatory sandbox for FinTech start-ups at the MFSA. The regulatory sandbox will provide a controlled environment wherein firms can test innovative products and services for a specified period of time, while the innovation hub will provide firms with guidance with respect to the regulatory framework, as well as the possibility of sharing resources, such as operational infrastructure. Here we are not only looking at start-ups but also established financial companies that are ready to fully embrace the digital world. I firmly believe that the digitalisation of the financial services industry will disrupt and impact all sectors, ranging from banking to asset management and from insurance to the capital markets. It will open up various avenues and opportunities for companies to operate more effectively and efficiently, as well as to develop new financial products. We think that creating the right environment for a digital financial ecosystem is crucial in attracting new entrants and bringing innovative products and business models to market. We have started our journey in the Blockchain and DLT space, and we are ready to move further along this road. FinTech companies not only require adequate infrastructure and regulatory frameworks but also a supervisory authority that speaks the same language.

Looking to the future, what kind of finance centre would you want Malta to be known for?

My vision of Malta as a financial services centre hinges on having an edge in digital finance. I believe that Malta can be a thought-leader in financial technology and the regulatory infrastructure needed to supervise financial services in an advanced technological environment. Malta can be a respected international financial services centre, and I am confident that with the investments being made in our regulatory system, we will get there soon.