Controversy follows MFSA after it comes under fire for poor regulatory oversight

The Malta Financial Services Authority (MFSA) has come under fire for lacklustre regulatory supervision after the publication of its 2015 Annual Report.

The report revealed that the MFSA contacted just 77 of the 875 regulated firms in Malta for an on-site compliance visit last year, equal to just 9% of regulated firms.

And that figure has remained steady for the past three years. In fact, the MFSA has failed to visit more than 10% of regulated firms in each of the past six years.

This is much lower than the 22% of firms visited in 2008, and the 16% visited in 2009.

This means that over the last eight years, the MFSA has visited an average of just 10% of Maltese regulated financial institutions every year.

The investment services sector received the highest number of on-site compliance visits in 2015, with 18% of firms being contacted by the regulator over the year.

Only two insurance companies, however, were visited over that same period equating to market coverage of just 3% despite the high risk nature of providing insurance cover for customers.

And the results that were conducted found some serious shortcomings in the Maltese financial services market. Common failings found on the compliance visits included poor conflict of interest policies, infrequent board meetings and a lack of proper due diligence and procedural oversight.

Two high profile failures have also highlighted the deficiencies of MFSA regulation.

Nemea Bank, which operated solely online, was forced into administration on 27 April 2016 after joint on-site inspections from the MFSA and European Central Bank found serious regulatory shortcomings.

The MFSA, however, had been made aware of potential problems at the bank as far back as April 2015, with the European Central Bank informing the Maltese regulator about problems at Nemea after it targeted Dutch and Belgian customers with unusually high interest rates on its savings accounts in order to secure funding to be able to offer consumer loans.

Meanwhile, in 2014 motor insurer Setanta Insurance collapsed putting 75,000 Irish motorists at risk and without cover.

The insurance company had been established in 2007 by chief executive Mike Matthews, with Malta chosen as the location of the company due to its less onerous regulatory requirements and its ability to trade in the Republic of Ireland under EU law without Irish regulatory approval.

The MFSA, however, once again failed to act in time to save the insurer despite warnings from other regulators, leading German MEP Sven Giegold, a member of the Banking Union Working Group, to say: “This again indicates that the MFSA supervision is weak, particularly because the authority reacted too late to the warnings of the Irish Central Bank.”

‘A serious breach of international standards’

MFSA chairman Joseph Bannister has also been criticised for potential conflicts of interest at the regulator amidst his involvement on collective investment services in the Cayman Islands.

In 2012, it was revealed that Bannister was a non-executive director of Kairos Fund and was accused of favouring a co-director’s company for consultancies worth €463,000 with the MFSA.

The allegations are a serious matter for the MFSA, as regulatory heads are not supposed to be directly involved with any financial institutions due to the conflict of interest that could arise from such situations.

Giegold was once again the source of the criticism, writing a strongly worded letter to European regulators in June 2016 regarding claims about Bannister’s involvement in collective investment schemes based in the Cayman Islands.

In his letter, published in The Malta Independent in June, Giegold wrote: “I have recently been informed about the suspected breach of standards on operational independence of financial supervisors by Malta, as a result of serious conflicts of interest of the chairman of the Malta Financial Services Authority, Professor Joseph V. Bannister.

“It has been claimed on several occasions that the Chairman of the MFSA is a director on several collective investment schemes in the Cayman Islands. The Chairman of the MFSA has not denied this allegation and has instead indicated that this conflict was cleared by Malta’s Prime Minister in 2012.

“I regard Professor Bannister’s directorships as a serious breach of international standards on operational independence of financial supervisors, set by the Basel Committee of Banking Supervision, the International Organisation of Securities Commissioners and the International Association of Insurance Supervisors.”

Giegold continued by calling for a peer review of the regulator’s independence.

Bannister has also come in for criticism for his part in the award of a €950,000 direct order to accountancy firm Mazars Malta, a business which he has close ties to, for advice and assistance relating to Malta’s upcoming EU presidency.

Speaking in response to a parliamentary question from independent MP Marlene Farrugia, finance minister Edward Scicluna said that the direct order was handed out on the basis of ‘the expertise and the particular credentials of the major representative of the company in question’.

Scicluna was also asked to reveal which other firms had been considered for the direct order and whether the Prime Minister had been consulted, but he refused to provide an answer.

Maltese education minister Evarist Bartolo, a longtime critic of Bannister, has also called for the MFSA chairman to step down from his position.

“I’m not saying this because I am supporting anyone else but because it is simply unacceptable that a regulator spends more than 10 years in his position,” he said. “It is simply not healthy.”

“I have criticised Bannister because he’s a public person with huge responsibilities and I believe that he has failed in fulfilling his duties.”