Regulation of Funds in Malta: A Fundamental Driver for the Industry

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As clearly pointed out by Professor Joseph Bannister, chairman of Malta Financial Services Authority (MFSA), no doubt can be raised about the fact that we are experiencing the biggest changes to financial regulation the world has known and this is happening at an exceptional speed.

Notably, over the past three years, 80% of foreign direct investment into Malta has been in financial services. Malta has enjoyed greater credibility when compared to past years through the interaction of a number of trends. Over the years, Maltese financial institutions have run their businesses using conservative policies especially with regards to lending policies and borrowing in a traditional retail funding model. These have, in turn, safeguarded the island’s financial stability for systemic events, negatively encountered in other economies.

According to Joseph Bannister, “Malta has proven itself attractive to the funds industry because it offers the range of skills and benefits the industry needs” and “it is well placed to continue to grow as a funds domicile”. Furthermore, Bannister also notes that accession to the European Union in 2004 also aided our funds industry; making Malta the best at enshrining the new EU legislation in law when compared to other EU nations.

In effect, Malta was the first jurisdiction to complete the transposition of the Alternative Investment Fund Management [AIFM] Directive which introduces new obligations on disclosure, governance, information flows and oversight.

The adoption of the euro as the national currency in 2008 was of great benefit to Malta as it removed currency exchange rate risks from investment and capital goods and export trades. Another example of a directive which will come into force in January 2016 is The Solvency II Directive. This will impact all insurance companies and is essentially a capital adequacy measure because its main aim is to decrease the potential for insolvency.

All companies seeking to establish themselves in Malta must meet personally with the regulator, an approach more formally referred to on the island as “innovation through regulation”.

By the end of 2013, the MFSA has approved around 125 investment services licences, a net increase of almost 11% on 2012. During the year, the regulator licensed 135 new Collective Investment Schemes (including sub-funds) – a slight increase over the previous year.

The Maltese jurisdiction also presses on having a reliable and flexible regulatory regime which incorporates all current EU financial regulation in order to encourage fund inflows. The new legislation and regulations coming into force will, particularly in the early years, put very considerable demands on the people and resources of the MFSA. Professor Bannister described the Maltese financial services sector with the words ‘high standards’, ‘openness’, ‘cooperation’, ‘entrepreneurship’ and ‘nimbleness’.

The current framework of conduct of business needs to take into consideration the evolving needs and expectations of financial services consumers.

Thus, the Authority has now embarked on a thorough review of such framework. It will be consulting widely on a revised code which should set out the mandatory requirements that all financial services providers are obliged to satisfy when dealing with clients.

The consultation paper – which has already been issued – addresses definitions of customer types, the management of risk and dissemination of KYC tests, standards of care, records and disclosures, professional standards among a range of questions, amongst others.