The following is Godfrey Leone Ganado’s review of the 2018 annual report of the Malta Financial Services Authority. The report can be downloaded here: MFSA-Annual-Report-2018
Chairman’s Foreward – page 7
- In paragraph 2, the Chairman states ‘the Maltese financial services sector continues to be one of the fastest-growing in Europe. It also represents one of the highest-ranking contributors of the Maltese economy, estimated to contribute to 11.6% of the total Gross Value Added, and providing for almost 12,000 jobs’.
- In paragraph 3, he states ‘we aim to enhance the public value of financial services, augment trust in the local financial market and promote a healthy competitive market.
- In paragraph 4, he states ‘we expect a year of success for the financial services industry in Malta in 2019. The Authority shall step-up efforts in identifying, assessing and understanding the risks emanating from each area of financial services so as to develop further risk-based supervisory practices’.
Comment – These comments are highly welcome and are bold and appropriate statements. However, one must point out that the loss of reputation is the biggest challenge facing the financial services industry, and MFSA seem to be looking forward to developing risk-based supervisory practices when the horse has already bolted, and this may be one reason why the expectation of success in 2019, may be rather optimistic. Once reputation is lost, it is very difficult to recover it. Also, the cost and success of turning the Authority into a completely independent Institution, is not just economic, but I would say, primarily political.
Chief Executive’s Statement
In fact, following on the above statements, the Chief Executive, in his Statement on page 11, in paragraphs 4 and 5 states, ‘We are seeking to strengthen our supervisory engagement, with the purpose of achieving our statutory objectives better, and this will, in turn, safeguard the reputation of Malta as a jurisdiction of choice for financial services. Whilst supervisory engagement shall be enhanced across the board, particular emphasis shall be placed on AML/CFT Supervision, in line with our AML/CFT Supervisory Strategy.’
‘More robust supervisory engagement is a general expectation of European and supranational supervisory authorities, including the European Central Bank. The achievement of this enhanced supervisory engagement will require investment in technology, expertise and human resources. As a result, the Authority will require an increase in its revenues to cover the relevant costs’.
Given that the MFSA is expected by international standards to be operationally independent, we are currently considering launching a consultation process intended to increase authorisation and supervisory fees to reduce dependence on government funding and, in the long run, become fully self-funded’.
Comment – It is pertinent to note that the Chief Executive is conscious, that the only way forward is to run the Authority with independence. This, however, can only be achieved, if Directors and management are not populated with politically appointed persons and, also if, the directors and management, are not only of an independent mind, but also if the supervisory reports they generate are swiftly followed up by Independent Institutions to whom they are addressed, particularly the Police Commissioner and the Attorney General.
It is also very clear that the authority is financially dependent on the Government, and that fees for the market players will have to be increased substantially to achieve economic independence. This also means that our financial services jurisdiction may lose its competitiveness. In fact, this is already being eroded with increasing professional fees and operational fees, such as property rentals for the financial services companies and their expatriate employees.
It is also pertinent to highlight that whereas, in 2017, MFSA ended up with a surplus of Euro 7.4 million, in 2018 it ended up with a loss of Euro 7.9 million, a difference of Euro 15.3 million.
The main contributors to this loss, are:
- A drop of Euro 9 million in the income generated by the Registry of Companies, which has now demerged from the MFSA, and any such income will go towards its own operational budget. The income from the Registry was Euro 14 million in 2017, and Euro 5 million in 2018. This income will not feature again in 2018. (See Report page 127, note 19).
- An increase of Euro 5.2 million in Professional fees, for which there are no details. In 2017, the comparative figure was Euro 748k (See Report page 126, note 16).
- An increase of Euro 1.7 million in the Employee benefit expense. The total for 2017 was Euro 12.5 million as against Euro 10.8 million in 2017. The expense represents Salaries and social security for a complement of 326 employees in 2018 as against 304 employees in 2017. This increase reflects an increase of 15 employees at the managerial level and 7 at the Administrative level.
Included in the amount for 2018, is a payment for Euro 540k representing a Voluntary Severance Scheme which was offered in 2018 (See Report page 127 note 17). No provision has been made for potential payments to other employees who may be taking up this scheme.
It is also important that transparency is adopted in implementing the scheme, and that those taking up the scheme are not immediately re-employed by some other Government entity.
Other comments
- Payment to Government – Report Page 106 Statement of Changes in Equity and Report Page 124, note 12.
On 13 April 2017, by virtue of Act No XVl of 2017, Article 45, it has been established that the Authority’s Reserve Fund shall not at any time exceed the equivalent of the operational expenses registered in the preceding financial year as disclosed in the audited financial statements. As a result, a transfer of Euro 11 million to the Reserve Fund took place during 2017.
During 2017, a surplus of Euro 13.4 million was paid to Government in terms of Article 26 of the Malta Financial Services Authority Act, 1988 (Report Page 106, Statement of changes in equity).
The implications of this payment, is that the MFSA, reduced its Reserve Fund from Euro 27.5 million to Euro 15.1 million. As a result, the Fund was reduced further from Euro 15.1 million to Euro 7.3 million with the loss of Euro 7.8 million.
In my opinion, this Article needs to be amended, if economic independence is to be truly achieved.
I must also highlight that, if the Authority had to end up with an equivalent or higher loss in 2019, its reserves would be wiped out.
I honestly suspect that, this payment was requested by the government to achieve the desired National Budget Surplus.
If this is the case, this is absolute political irresponsibility on the part of the Prime Minister and the Minister of Finance for not exempting MFSA from making this payment.
- The Registry of Companies – The total registration of companies since the inception of the Registry during 2018, was 90,285 of which 48,638 were active. The comparative figure for 2017 was 84,503 registrations of which 55,853 were active. This points to a net decrease (registrations less liquidations) of 7,215 companies, a decrease of 13%, which, in my opinion, is worrying (Report page 142)
- Pilatus Bank/Satabank – Report page 152, lists actions which the Authority took, regarding non-compliance and other serious issues.
It is interesting that, the MFSA like the Government/Finance Minister attributes action against Pilatus Bank to the Authority and states that, ‘Further to the Authority’s proposal to the European Central Bank (ECB) to withdraw the authorisation of Pilatus Bank as a credit institution, The ECB’s Governing Council withdrew the authorisation of the bank with effect from 5 November 2018 (Report page 152)
As far as I am aware, this is incorrect, as it is the ECB which withdrew or forced the MFSA to withdraw the Bank’s operating licence.
The Report also mentions the appointment of a ‘Competent Person’ both for Pilatus Bank and Satabank, to take charge of all the assets of the banks, and to continue carrying on that business until such time as the MFSA may direct.
I must point out that the appointments were made under Article 29 (3) (e) of the Banking Act.
Under the provisions of this Article, the competent person shall submit six monthly reports of his activities and annual accounts of all transactions carried out by him in the performance of his functions, audited by an independent auditor, to the Minister who will place such reports and accounts on the table of the House of Representatives within fifteen days.
Having been appointed on 22 March 2018, the Competent Person of the Pilatus Bank, should have submitted to the Minister, reports for the period from 23 March 2018 to 22 September 2018, from 23 September 2018 to 22 March 2019, as well as the audited accounts for the period from 23 March 2018 to 22 March 2019. The Competent Person should have also ensured that the audited accounts for 2017 be submitted to the MFSA. These are still outstanding to date.
In conclusion, on this issue, I must highlight that the Opposition did not, to my knowledge, raise this issue in Parliament, and I am therefore hoping that the PD representatives will take it up themselves, immediately Parliament reconvenes.