Focussing on challenges local and international financial markets face — including labour shortage and fintech driven new emerging risks — the Malta Financial Services Authority aims to embrace innovation and technology, while improving the efficiency and efficacy of the authority’s core functions, according to the MFSA’s three-year Strategic Plan outlining its vision until 2021.

“Our Strategic Plan is focussed on strengthening the MFSA and preparing it for the next generation of financial services,” said MFSA CEO Joseph Cuschieri.

In commitment to “openness, transparency and accountability” the authority conducted a consultation with licence holders in the form of a survey which was carried out in March 2019, enabling licence holders to rate the performance of the MFSA and provide feedback on challenges and strategic areas that should be addressed.

Hence, the authority says the Strategic Plan 2019-2021 takes on board the recommendations by international institutions, as well as standard-setters, such as the International Monetary Fund (IMF), Moneyval, the European Commission, the European Central Bank, the European Banking Authority and rating agencies, according to a press statement by the MFSA.

“This roadmap defines the specific programmes and actions we will be taking to achieve this objective, with substantial investment in our human resources, capacity building and investment in cutting-edge technologies. This reflects our commitment to provide a more agile, safe, dynamic and efficient environment to the benefit of consumers and regulated firms,” Mr Cuschieri added.

Additionally, the strategic plan also takes into consideration international regulatory developments and instances of misconduct on both a local and global level, which may have negatively impacted the trust in the financial services market worldwide.

Reform to make MFSA self-funded

In the meantime, the MFSA says it is also working on a new five-year business plan that envisages reforming the financing model of the authority to ensure its long-term sustainability and equip the watchdog with sufficient resources to fulfil its mandate.

The new business plan also aims to make the authority become self-funded by 2024, which financing model is similar to watchdogs in other European jurisdictions.

The planned reform is seen to include the introduction of new ancillary fees to cover services currently provided free of charge, accompanied by a possible revision in authorisation and supervisory fees. Therefore, the new revenue model is expected to reflect the real cost of supervision based on the risk profile/assessment of each sector supervised by the MFSA.

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The MFSA has issued the update following a consultation process which the authority held with the industry earlier this year. 

The MFSA’s update comes as a reaction to the increasing popularity of CFDs for retail clients across the European Union, who have been trading in these “inherently risky and complex products”, according to the press statement.

The permanent restrictions introduced in the rulebook include requirements that ensure that investors cannot lose more money than they have invested. The new update also adds restrictions on incentives offered to trade in CFDs. At the same time, investors must be provided with understandable risk warnings so that they are aware of the high degree of risk involved when investing in such products, under the new updates.

Moreover, the MFSA has introduced standardised warnings on the risk carried by such investments to ensure that customers are made aware of the high degree of risk involved when investing in such products, according to the press release. 

“These rules, in line with the MFSA’s vision, seek to strike a balance between the market’s need to provide fair competition and client choice, while at the same time protecting consumers of financial services, and safeguarding the integrity and stability of the financial system,” said Michelle Mizzi Buontempo, MFSA’s Head of Conduct Supervision. 

The ESMA called the MFSA’s updates “justified and proportionate”, while encouraged that national competent authorities of other EU member state should also take product intervention measures “that are at least as stringent as ESMA’s measures”, according to a formal opinion the ESMA has published.

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The workshop was held following the publication of Pillar 1 Regulations Consultation Document presented under the fintech strategy and issued by the MFSA earlier in July.

During the session, which was attended by over 120 delegates, the MFSA discussed its proposals on the Regulatory Sandbox as well as the framework for Regulatory and Supervisory Technology solutions being developed by interested parties. 

Attendees were asked to provide feedback and propose questions in relation to how the Regulatory Sandbox will operate in practice, the eligibility criteria and participation structure.

“In line with our vision to be a forward-looking financial services regulator, this consultation process is key to establish Malta as a global fintech hub. Through the proposed regulatory framework, our aim is to encourage businesses to apply new and innovative business models and give them the opportunity to test the commercial and regulatory viability of their innovations, while containing risks to consumers and the financial system,” said Christopher P. Buttigieg, Chief Officer Strategy, Policy and Innovation of MFSA.

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Last year, the authority registered an additional 144 new entities, as more businesses have sought to make Malta their jurisdiction of choice, totalling the number of entities licensed by the MFSA up to over 2,300, according to the MFSA’s Annual Report and Financial Statements for the year ending on 31 December 2018.

The financial sector now contributes 11.6% to the Gross Value Added (GVA), when taking supplementary services offered by the sector into account, making it one of the highest-ranking contributors to the Maltese economy, says the press release.

The local employment share within the financial services sector went up to 5.3%, almost double that recorded from other member states of the European Union, which stands at 2.9%. The sector employed more than 12,000 people, by the end of 2018, 1,000 of which were new jobs generated last year.

Busy year behind

The MFSA had a relatively busy year in 2018, taking some major actions throughout the twelve months that constitute their financial year. The Virtual Financial Assets Act (VFA) introduced in November 2018, has given international recognition to Malta globally in terms of distributed ledger technologies and digital assets. The MFSA also carried out major restructuring exercises to strengthen the authority’s organisational capability.

The financial sector took regulatory action against Pilatus Bank and Satanbank for alleged prudential and AML/CFT breaches, the press statement notes.

A Memorandum of Understanding (MoU) was signed with the Financial Intelligence Analysis Unit (FIAU), with the aim of enhancing collaboration and improving the intensity of AML/CFL on-site inspections.

The MFSA and the International Monetary Fund (IMF) partnered up in working together on a Financial Stability Assessment Programme (FSAP) on Malta. Their findings concluded that even under severe stress scenarios, the Maltese banking system remains resilient, the press release says.

Furthermore, the authority published over 600 regulatory notifications, with the aim of guiding regulated entities and safeguarding financial services consumers. The MFSA engaged with the financial sector 15 times last year, issuing consultation documents on certain topics, such as initial coin offerings, virtual currencies and investor protection.

Mystery shopping exercises were carried out and over 11,000 hours of training to MFSA employees was delivered, 19% more than the previous year. Moreover, the authority demerged the Registry of Companies from the MFSA to better focus on its regulatory role and duties. The registry has established itself as a standalone agency and is now known as the Malta Business Registry (MBR), says the press release.

During 2018, the MFSA focused on four specific areas as part of its supervisory activity. These being: restructuring the organisational structure, in order to strengthen the authority’s governance, culture and conduct; combating money laundering and terrorist financing; embracing technological innovation; and re-positioning the authority as a leading employer, according to Joseph Cuschieri, Chief Executive Officer of the MFSA.

In view of the wide-ranging impact of money laundering and terrorist financing, “the Authority will be strengthening its 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. While supervisory engagement shall be enhanced across the board, emphasis shall be placed on AML/CFT Supervision, in line with our AML/CFT Supervisory Strategy”, said Mr Cuschieri.

The MFSA Annual Report and Financial Statements are available for public view on the authority’s website.

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Entitled “Pillar 1 – Regulatory Sandbox and Other Strategic Objectives: Briefing and Consultation”, the workshop aspires to provide an in-depth overview of the Consultation Document and to engage with the audience and stakeholders for feedback. Prospective Sandbox participants, collaborators and stakeholders from finance, law and technology are all invited to attend this workshop and communicate their views.

The MFSA launched a public consultation on the first pillar of its six-pillar Fintech Strategy earlier in July. This regulatory pillar comprises of four key areas, one of which is the creation of a testing-ground known as the Regulatory Sandbox. Such a scheme acts as an attractive option for Malta to become a hub for financial service companies to test out (almost in a controlled laboratory setting), their regulatory or commercial projects with actual financial consumers, the press statement sent to BM says.

The workshop will start with an introductory speech by Kenneth Farrugia, FinanceMalta Chairman, followed by an overview on the Pillar 1 regulations which will be delivered by Christopher Buttigieg – Chief Officer, Strategy, Policy and Innovation at MFSA.

Other speakers during the FinanceMalta workshop include:

• Tom Bull – Associate Partner, EY UK Fintech Leader,
• Joseph Cini – Analyst, FinTech and Innovation at MFSA,
• Leonard Bonello – Partner at GANADO Advocates,
• Ian Gusman – Analyst, FinTech and Innovation at MFSA,
• Joshua Ellul – Chairman of the Malta Digital Innovation Authority,
• Abdalla Kablan – Director at wyzer.ai & Caledo Tech,
• Luciano Brincat – Senior Analyst, FinTech and Innovation at MFSA, Stephen McCarthy – CEO of the Malta Digital Innovation Authority, and
• Ian Gauci – Managing Partner at GTG Advocates.

The event is open for registered delegates. The official website of the event carries further information about the workshop and registration process.

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“As part of its responsibility toward safeguarding consumer protection, the MFSA is providing useful and easy-to-read information on cryptocurrency investments,” the watchdog says in the public note they published on their website. In addition to numerous warnings the authority has already issued, it is committed to “further educating the public on how to identify and avoid scams, as well as the actions recommended in the event that one encounters a scheme of a dubious nature within the crypto asset sector,” the public note adds.

The MFSA says that scams are highly likely to be advertised online, with the use of “clickbait titles” to attract unsuspicious investors. The authority adds that some websites will ask for personal details, which can often be followed up by a phone pitch by a “friendly and supposedly expert salesperson whose aim is to convince victims to invest money in their scheme,” the MFSA says.

The authority says that the most common types of cryptocurrency scams include fake initial coin offerings (ICOs) and crowdfunding ventures promising high yields in short term; eventually leading to platforms closing down and operators disappearing in an impromptu manner with the investor’s money. The watchdog also warns about fake exchange platforms and fake crypto wallet applications.

The MFSA has compiled the following 11-item checklist to help investors establish whether a proposed investment scheme can be trusted or not.

• Unrealistically high rates of return which are usually higher than the market average;
• Easy withdrawals which may be made at “anytime”;
• Promises that any funds deposited are 100% guaranteed;
• The business being unregulated;
• Lack of documentation or the use of documentation which is copied from a legitimate business;
• Aggressive selling techniques which put pressure and rush you to secure a sale;
• The absence of physical local offices;
• Contradiction between documents and spoken information;
• Not answering and avoiding hard questions;
• Lack of information being provided on the website, or within the whitepaper;
• The use of buzz words such as “no risks”, “gains guaranteed, become a billionaire”, “free services just register”.

“When investing, consumers of financial services are advised to proceed with caution and always make the necessary find-outs about the company,” the watchdog says. MFSA encourages users to check whether the company is regulated, which can be verified in the authority’s online Financial Services Register. When in doubt, consumers are welcome to get in touch with the MFSA via email or through their website.

“Consumers are also urged not to be fooled by the sensation of trust which these illegitimate platforms so often allude to. More importantly, one should take heed of the advice: if it seems too good to be true, it probably is,” the MFSA concludes.

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The applications by the 14 VFA agents were submitted to the authority in November 2018. VFA agents will assist issuers and service providers under the Virtual Financial Assets Act, making applications on their behalf to the authority.

The authority expects the VFA agents to serve as the “first line of defence for market integrity and public interest”, as these players will be the ones who evaluate their clients’ business plans, fitness and properness prior to submitting an application to the MFSA. The VFA agents are also subject persons under the Prevention of Money Laundering and Funding of Terrorism Regulations, the MFSA adds.

“The issuance of these in-principle approvals is an important milestone in the MFSA’s effort at becoming a regulator of excellence in the field of the regulation of crypto assets. We have worked actively since November 2017 when we started our regulatory journey in the field of crypto assets and today we have a complete framework that caters for all key areas of risk, being inter alia the risks to consumers, market integrity, financial crime and cybersecurity. We have now, seventeen weeks after receipt of the first set of applications, started to authorise entities in this sector,” said Dr Christopher P Buttigieg, Head of Securities and Markets Supervision.

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The new legislative amendments approved by the members of parliament aim to strengthen the authority’s governance status. They also aspire to support the watchdog’s focus on financial crime compliance, higher supervisory standards, risk alignment, and innovation. The recent changes also aim to increase efficiency by streamlining decision-making processes of leadership framework that intends to clarify responsibilities and accountability.

The restructuring the MFSA has started is in line with its Vision 2021 launched end-January. Vision 2021 comprises of the authority’s missions and strategic vision for the upcoming three years. The framework aims to strengthen the authority’s global market position by developing a forward-looking, proactive and trustworthy supervisory authority with one clear purpose: safeguarding the integrity of markets and maintaining stability within the financial sector.

“The MFSA’s Vision 2021 is the start of a transformative journey supported by an ambitious change programme focused on innovation, investment in fintech [financial technology] and regtech [management of regulatory processes within the financial industry], modernisation of supervision, and technological development,” said Joseph Cuschieri, CEO of MFSA, when announcing the vision. “Our reform agenda includes an overhaul in our organisational and governance structures to enable the authority to meet its future challenges more effectively,” he added.

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The MFSA also emphasised ensuring licenced entities can continue business with minimal disruption is one of the critical objectives for the authority. The MFSA also underlines that any communication they published should be considered “in the context of a no-deal exit scenario” otherwise the communication itself states otherwise.

“Measures taken will be of a temporary nature and remain subject to any decisions and further recommendations as may be made by the three European Supervisory Authorities,” the MFSA says in the press release.

At the same time the MFSA encourages licensed entities to continue feeding the authority with timely and accurate information on any potential consequences that might occur should the United Kingdom leave the European Union without striking a deal.

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The CipherTrace Compliance Monitoring solution continuously rates the risks of cryptocurrency businesses to protect consumers, investors and business partners, the company says. CipherTrace is a supervisory technology (suptech) tool which, through the cryptocurrency anti-money laundering, cryptocurrency forensics, and blockchain threat intelligence solutions it offers, will enable MFSA to manage the risk associated with virtual asset businesses.

“Being strongly aware of the money laundering and financing of terrorism risks associated with entities operating in this sphere, the decision has been taken to engage the services of CipherTrace in order to reduce fraud and detect transactions with illegal sources of funds. CipherTrace Compliance Monitoring will provide the MFSA with powerful oversight tools to automate regulatory processes and audit the risk management of virtual asset businesses that are licensed in Malta,” said MFSA Chief Executive Officer, Joseph Cuschieri.

CipherTrace Compliance Monitoring uses machine learning to de-anonymise transactions, which helps regulators evaluate and monitor the trustworthiness of virtual asset businesses. This solution tracks the risk exposure of virtual asset businesses including cryptocurrency exchanges, collective investment schemes and initial coin offerings (ICOs) to gauge and measure potential exposure. “This suptech will allow the MFSA to monitor the activities of crypto businesses both pre- as well as post-authorisation stage,” said Dave Jevans, CEO CipherTrace.

“Cryptocurrency businesses often have difficulty establishing trust and maintaining banking relationships because of their perceived risk. Banks and other financial institutions use the CipherTrace Compliance Monitoring solution to help decide which virtual asset businesses to trust as corporate customers. These insights help banks avoid de-risking by turning away valuable customers in this lucrative and fast-growing sector,” added Mr Jevans.

CipherTrace’s machine learning algorithms calculate risk levels for exchanges, addresses, wallets and other entities based on known associations, criminal addresses, and money laundering services. CipherTrace also profiles hundreds of global exchanges, dark markets, mixers, gambling services, high-yield investment products, and ATMs to determine risk levels of transactions based on activity related to suspicious addresses and wallets.

Regulator MFSA covers banks, insurance companies, investment services, trusts and pensions in Malta. As of last year, the MFSA became the first European regulator to develop a framework to regulate virtual financial assets. The MFSA’s mission, as enshrined in its Vision 2021, is to enhance its position as an independent, proactive and trustworthy supervisory authority with the main purpose of safeguarding the integrity of markets and maintaining stability within the financial sector, for the benefit and protection of consumers. Over 2,300 entities are licensed by the MFSA to operate in the financial services sector, which makes up 11% of the Maltese GDP.

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