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Next week, Kenneth Farrugia will take to the stage to welcome delegates to the FinanceMalta conference, an annual event which brings together players from across the island’s financial services sector. At the centre of the discussions will be the role of innovation in developing the country’s finance industry, not least the Innovation Vision 2021 strategy being pursued by the Malta Financial Services Authority (MFSA).
“I believe that innovation has predominantly driven the growth of the industry in Malta and this is what the conference this year is all about,” says Farrugia, who is also chief business development officer at the Bank of Valletta.
Responding to regulation
The finance industry is vital to the wider Maltese economy, accounting for around 11 per cent of the country’s gross domestic product, and its ability to innovate in response to changing European regulations is an important skill. Among the most significant recent developments it has had to come to terms with are the rollout of the second phase of the EU’s Markets in Financial Instruments Directive – known as MiFID II – in January 2018, as well as the General Data Protection Regulation (GDPR), which has been in force since May 2018 and the Insurance Distribution Directive which has applied since October.
“The asset management and insurance sectors have faced significant regulation over this past decade,” says Farrugia. “We’ve seen a number of regulations coming in which are changing both the business and operational models.”
“Our unique selling points are cost competitiveness, innovative product-led propositions and the accessibility of the regulator.” – Kenneth Farrugia, FinanceMalta
Adapting to the evolving regulatory landscape is by its nature a work in progress, but Malta does have some advantages. As Farrugia points out, the country was a relatively late entrant into Europe’s financial services industry, with momentum only really building up after it joined the EU in 2004. It remains relatively small – its funds sector is, for example, overshadowed by EU leaders in this field such as Ireland and Luxembourg. However, its relatively small scale means it can be more nimble and responsive than some of its competitors. “I think our unique selling points are cost competitiveness, innovative product-led propositions and the accessibility of the regulator,” says Farrugia.
This has been clearly seen in regard to funds where, amid the changing landscape, the authorities have been careful to retain existing structures as well as introducing new ones. “We’ve seen a number of innovative features being introduced in our legal and regulatory framework over the years. For example, we’ve retained a professional investor fund regime rather than discard that and replace it with the alternative investment funds [AIF] regime, so that extends a lot of flexibility to fund managers to structure funds below the de minimise threshold of €100m,” says Farrugia.
And in the insurance space, Malta has introduced legislation allowing for protected cell companies, which Farrugia says is unique in Europe.
An underlying factor is the need to ensure the financial services industry is operating efficiently. In this regard, Farrugia points to the introduction of Notified AIFs – a development which has seen the processing time for licences cut from two or three months to just a couple of weeks. “This brings about significant efficiency in the process,” Farrugia adds. “Within 10 working days of submitting the documentation to the authority you can be granted the licence.”
Another example of how Malta’s responsiveness has benefitted the wider financial industry is the rapid development of rules for blockchain, with new regulations being introduced in November last year. “The regulator, government and industry worked very closely together and in 10 months we created the framework for blockchain and virtual financial assets. I think it’s very important that you have vision shared by leaders, regulators and the industry.”
“The depository market should be liberalised so that depositories can provide cross-border services in Europe, as is the case with asset management.” – Kenneth Farrugia, FinanceMalta
While all this has given a solid underpinning to the island’s financial sector, Farrugia is keen to see further changes across the EU, not least in the area of depository services. “I cannot understand why the depository market has not been liberalised so that depositories can provide cross-border services in Europe, as is the case with asset management,” he says. “If you are in Luxembourg you can provide management services to a fund in Malta, but when it comes to depository services that’s not the case, you need to be in the same domicile of the fund which in my view is restrictive and doesn’t make sense.”
Moving forward, key factors for Malta going forward are likely to include a continued drive for efficiency and maintaining a competitive position. “I think it’s all about efficiency in the delivery of service, innovation in terms of products and service and cost efficiencies,” says Farrugia.