MFSA Newsletter - April 2013

MFSA Annual Report 2012

Economic stability and political consensus have been central to the industry's continuing growth and to Malta's success in attracting new financial services activities. MFSA Chairman Professor Joseph Bannister said this in the Annual Report tabled in Parliament.

"Malta's political, economic and regulatory stability has taken on greater importance to the continuing growth of the finance industry than prior to the financial crisis of 2008," says Professor Bannister. He cites the fact that the country is leading the EU in the creation of new monetary financial institutions, the strong rankings Malta's finance sector achieved for bank soundness and financial market development in the World Economic Forum's competiveness index and the steady flow of new licenses granted by the MFSA to local and incoming financial concerns.

Prof Bannister commented: "What has happened in Cyprus is a tragedy and shows just how damaging a collapse of confidence in a financial system can be for families, businesses and national reputations. There have been and will continue to be great efforts made by all concerned to keep Malta a stable and dependable financial services hub. The behaviour of our banks in Malta is fundamental to our worldwide reputation for stability. It would not be a surprise if we witnessed increased capital flows into Malta, as people seek prudent banking behaviours."

"The Authority is fully engaged with the government of Malta, other public institutions and international organisations and regulatory bodies in continuing to improve mechanisms to help safeguard financial sector stability in the country."

Professor Bannister says that Malta's finance industry has built a solid mass of skills, knowledge and products and has a proven regulatory system and a trusted legal system, which he says are all essential pillars of our national success.

Malta's success consolidated in 2012

2012 consolidated Malta's standing as a successful, stable, skilled and reliable financial services economy, according to the Malta Financial Services Authority's Annual Report for 2012, tabled in Parliament yesterday.

Malta's financial services sector remained buoyant, despite the surrounding adversities, particularly in the Eurozone. New licences were issued in all areas, with electronic money and payment services, pension fund activity, non-life insurance business and trustee services all registering above average rates of growth.

The investment services sector performed well. The number of firms licensed in the field increased and, while servicing funds mainly domiciled in Malta, the sector also increased its tally of non-Maltese domiciled funds being administered in Malta. There were 144 of these in 2012. These funds increased in value by 21% in 2012.

The majority of all funds, including those managed and administered in Malta grew in value in 2012. For example, the net asset value of Professional Investor Funds reached €6.5 billion in December 2012, representing an increase of nearly 12 per cent from the previous year. UCITS funds reported a surge of almost 40 per cent over the same period, reporting a net asset value of €2.3 billion at the end of 2012.

Insurance too is a highly internationalised part of the finance economy, particularly in the non-life and pensions side. Malta's relatively new pensions legislation is attracting a growing international following. Last year, four new schemes came into being; bringing the total to 17 and asset value reached €306 million. This is an excellent performance by a sector that is just over two years old.

The total investment assets of all insurance undertakings expanded by almost seven per cent over the period, from nearly €8.8 billion in 2011 to €9.4 billion in 2012. The total gross premiums written in the insurance sector (long-term and general business) increased by almost five per cent (or €100 million) over the period, from €2.21 billion in 2011 up to €2.31 billion in 2012.

The number of new companies registered in Malta in 2012 was one of the highest on record and nearly three quarters of all registrations came from outside the EU.

Serious challenges

Whilst confirming the robustness of the financial services sector in Malta and remarking on the country's economic stability in recent times, Professor Bannister warns that the next few years will bring serious challenges. He also points out that the finance industry faces operational and cost implications in understanding and managing differing regulatory approaches, citing the new regulatory structures recently introduced in the UK, the EU and the US.

"Navigating Malta's way through the next five or more years will require a great deal of cooperation between the MFSA, the government, the Central Bank, the industry and all other parties that want to ensure that we can continue to benefit from an expanding finance sector. We also have to build on our reputation for dependability, skill and expertise in a stable environment."

"We need to demonstrate to the world that Malta adds value, that what its finance industry does here not only benefits Malta but also benefits the wider world by building capital and assets that help to fuel growth, jobs and recovery in many places."

Stronger consumer protection blueprint on way

The report says that in 2012 the overwhelming majority of businesses operated to the very high standards expected in Malta. Those that fell short were handled with full impartiality and fair penalties imposed as appropriate to each case. Details are given in the report of the compliance and supervision work undertaken by the MFSA and its work on consumer com-plaints arbitration and consumer finance education.

It notes that Malta has an excellent record in consumer education and says that greater protection for consumers of financial services products is on the way. The Authority began work in 2012 on a plan to introduce upgraded consumer protection measures and has given a commitment to the International Monetary Fund to produce a blueprint of an enhanced consumer protection regime for Malta.

Report highlights:

• New licenses issued in all areas of financial services
• Bank assets grew to €52.9 billion, up 4.3%
• Local lending by domestic banks rose slightly, at just under 2%
• Expansion in investment services licenses. There are now 113 licenses, up 4 on 2011
• Growth in the value of all categories of funds under management
• Good growth in gross premiums written and in new licenses issued
• €1.31 billion of insurance business was written, a 10% increase
• Four new Retirement Schemes licenses granted, with 17 schemes now operating
• Assets managed by retirement schemes reached nearly €533 million in 2012
• 73.4% of new company registrations were from outside the EU

Wide ranging consultation has begun with consumer and industry bodies, Authority experts are examining systems in other countries and advice taken on a wide range of legal issues. A final report of recommendations is forecast for the first part of 2014.

"We will listen to all voices and take advice from expert quarters. We have embarked on a necessarily complex road that has implications for future consumer and investor confidence, finance industry costs and Malta's competitiveness and reputation," says Professor Bannister.

The full report can be accessed at the MFSA Website.

European Commission and Credit Rating Agencies provide positive certifications for Maltese banking sector

In three reports published in April by the European Commission, and credit rating agencies Fitch and Strandard & Poors, the Maltese banking sector was given a generally clean bill of health, and any comparisons with the situation in Cyprus were ditched.

In accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances, the European Commission also carried out an in-depth analysis of the financial sector vulnerability. The Commission noted that the financial sector expanded very rapidly after EU accession, with total liabilities, excluding equity, reaching around 850% of GDP. The majority, over 600% of GDP, belong to the banking sector. However, it remarked that core domestic banks do not appear to be exposed to the volatility on international financial markets. It added that core banks exercise a rather conservative business model that relies mainly on resident deposits for their funding, and have low loan-to-deposit ratios, at around 70%. This, combined with a stable deposit base, thanks to the high propensity to save by Maltese households, helped the core domestic banks cope with the financial crisis.

The Report does remark that core domestic banks, despite being profitable, have relatively low provisioning against loan losses, since about two-thirds of private sector loans are secured with real estate collateral. Positively, however, the banks apply a rather cautious valuation of collateral, applying a significant discount on its value, which value is regularly monitored through third-party valuation. This practice, added to an increasing but still conservative loan-to-value ratio mitigates the risks from the high exposure to the real estate sector.

Turning on to the group of international banks, the report finds a high degree of profitability and capitalisation. "The international banks have assets of over 500% of GDP and they fund themselves mainly though the wholesale market or through the parent banks and deal mainly with intragroup activities." It concludes that their risk-weighted assets are fully covered by Tier 1 capital. Furthermore, the banks have strong liquidity as evidenced by the very high ratio of liquid assets to short-term liabilities. In this context, the Commission refers to Malta's regulatory environment as 'trustworthy'. Additionally, the Report adds that even though registered in Malta, the internationally-oriented banks hardly do any business in Malta, which limits the potential risk to domestic financial stability that they carry.

Finally, in the evaluation of non-core domestic banks, it is found that despite investment in riskier assets, these also display healthy financial soundness indicators.

In its conclusion, the Commission insists that risks to domestic financial stability appear small but continued monitoring appears warranted, particularly through ensuring the proper function of the real estate market, given its strong link with the banking sector.

The report was welcomed by the Maltese Government. "The Commission's report reaffirms the confidence that Malta's banks and finance sector have enjoyed for many years," said Finance Minister, Professor Edward Scicluna in a DOI Press Statement.

The full report is available on European Commission website.

Malta does not face same bank system risks as Cyprus - Fitch

In a separate report , Fitch Ratings concluded that Malta Does Not Face Same Bank System Risks as Cyprus. In this Report, Fitch highlights the main differences between the Maltese and Cypriot banking systems. Fitch concludes that such differences far outweigh the similarities, and that the Maltese banking sector does not present the same level of risk that was seen in Cyprus.

According to Fitch, while both Malta and Cyprus seemingly have large banking sectors that substantially exceed the size of their economies and that rely to some degree on funding from non-resident depositors, a closer examination reveals substantial differences. Malta's whole banking sector has assets worth 789% of GDP, making it the eurozone's second largest (after Luxembourg) and outstripping Cyprus, where total banking assets accounted for 672% of GDP.

However, using the Central Bank of Malta's categorisations, "international banks" with negligible links to the domestic economy have assets worth 494% of GDP. "Core domestic banks" that have strong links with the domestic economy and are considered systemically important account for 218% of GDP. "Non-core domestic banks" with smaller operations and links with the domestic economy account for 77% of GDP.

Fitch argues that the contingent liability that potential bank support places on the Maltese sovereign - around 128% of GDP - is significantly lower than in Cyprus, where the domestic banking sector, accounting for 466% of GDP, proved too big for the sovereign to support.

The Maltese banking system is also less vulnerable to a destabilizing withdrawal of non-resident deposits than its high proportion of non-resident deposits suggests (68.8%, compared with 37% in Cyprus). The majority of these deposits are in international banks, mostly the deposits of the parent banking groups, which present a lower risk of capital flight than other types of foreign deposits (such as deposits of wealthy foreigners). Only 17% of deposits in Malta's core domestic banks are from non-residents.

Small Countries, Big Banking Systems: How Malta and Luxembourg Differ from Cyprus

In a third report, this time by Standard and Poor's, the credit rating agency concludes that the combination of factors behind Cyprus' difficulties is not currently replicated in other small, financially-focused Eurozone economy. Standard and Poor's conclude that Cypriot banks did not fail because of the provenance of the size of their customer benefits, but rather as a result of their lending decisions.

"We believe vulnerabilities in the banking systems of Malta and Luxemburg do exist. However, in contrast to Cyprus, the assets of the systemically relevant banks in both counties have retained their credit quality, and exposure to insolvent borrowers so far remain low and manageable". S&P also noted that no banks in Malta or Luxembourg currently rely on financial support from the Emergency Liquidity Assistance (ELA).

Dr Anton Bartolo elected Moneyval Chairman

Dr Anton Bartolo - Director Enforcement Unit within the Malta Financial Services Authority has been elected Chairman of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). The election took place during the 41st Plenary meeting of MONEYVAL, held in Strasbourg between the 9 – 12 April. Dr Bartolo is the head of the Maltese delegation to MONEYVAL and has formed part of the delegation ever since this committee (formerly committee PC-R-EV) was established in 1997.

MONEYVAL is an important and high profile monitoring body within the Council of Europe and is the leading FATF-style region-al body. MONEYVAL works in close cooperation with the Financial Action Task Force (FATF) and the International Monetary Fund (IMF) in assessing compliance with the principal international standards to counter money laundering and the financing of terrorism and the effectiveness of their implementation. Its aim is to ensure that member states and those states which submit to its procedures have in place effective systems to counter money laundering and terrorist financing and comply with the relevant international standards in these fields. These standards include the recommendations of the FATF; various United

Nations Conventions including those on traffic in narcotics and drugs, transnational organised crime and suppression of the financing of terrorism; the EU Directive on the prevention of money laundering and terrorist financing; and the Council of Europe Conventions on laundering, search, seizure and confiscation of the proceeds from crime. MONEYVAL assesses its members' compliance with international standards in the legal, financial and law enforcement sectors through a peer review pro-cess of mutual evaluations. Its reports provide detailed analysis and recommendations on how to improve the effectiveness of domestic regimes to combat money laundering and terrorist financing. MONEYVAL also conducts typologies studies of money laundering and terrorist financing methods, trends and techniques.

MONEYVAL currently comprises of 33 jurisdictions which are subject to its evaluation processes and procedures, including Malta which is a founding member. In addition, a number of bodies, countries and organisations have observer status. These include the Parliamentary Assembly of the Council of Europe, the Council of Europe Development Bank, the European Committee on Crime Problems, the Conference of the Parties of the Convention (CETS 198), the European Commission and the Secretariat General of the Council of the European Union, Canada, Japan, Mexico, United States of America, the Financial Action Task Force (FATF), the IMF, the World Bank, the UN Office on Drugs and Crime, the UN Counter Terrorism Committee and Interpol.

This is the second time Malta holds the Presidency of MONEYVAL, the position having also been held by the Hon. Chief Justice Dr Silvio Camilleri (who was Attorney General at the time). The Chair of MONEYVAL places Malta in an internationally visible and active role in the fight against money laundering and the financing of terrorism and continues to re-affirm Malta's commitment in this area at an international level. Malta was evaluated four times by MONEYVAL, with the most recent report published on the 6 March 2012.

ESMA finds divergence in national supervision of money market funds

The European Securities and Markets Authority (ESMA) has published a peer review report examining whether EU securities supervisors correctly apply ESMA's guidelines on money market funds (MMFs). The review compared supervisory and enforcement practices for MMFs of 30 supervisory authorities across the European Economic Area (EEA). EMSA reviewed those 20 jurisdictions that had transposed the guidelines into their national rules.

The report found that more than two thirds of the 20 jurisdictions reviewed have implemented the ESMA guidelines on MMFs nationally as mandatory provisions, while a minority have used measures which do not have the force of law. However, the general supervisory and enforcement approaches relating to MMFs vary across Member States to a significant extent.

The report covers the situation up to 30 June 2012, since that date a number of jurisdictions have taken steps to ensure that they are in compliance with the guidelines.

Steven Maijoor, ESMA Chair, said:

"In order to promote the creation of a single European securities market, ESMA must examine whether EU rules are duly applied in a consistent manner. Our mapping on money market funds has identified that there is a need for further convergence in supervisory practices, as ultimately, divergence may hamper the proper protection of investors and may result in an unlevel playing field.

"National supervisors should use the findings of this exercise to identify those areas where their national rules need to be further aligned to ESMA's MMF guidelines."

ESMA guidelines to improve investor protection

ESMA's MMF guidelines were introduced in 2010 to provide a common definition of European Money Market Funds, with the objective of improving investor protection by asking funds to label themselves as MMFs and implement certain governance rules. They apply to both UCITS and non-UCITS MMFs and distinguish between short-term MMFs and MMFs. According to the report, for 2012: 1,256 MMFs were located in the EEA, with 641 in France, 203 in Luxembourg, 102 in Ireland, 71 in Spain and 57 in Hungary.

The key findings are:

• Ten EEA Member States had not transposed the guidelines by the end of the review period (of July 2012); four of them have since transposed the guidelines;
• 20 countries included the guidelines within their national supervisory tasks during the authorisation process and/or the on-going supervision of UCITS and non-UCITS funds and their asset management companies. However, the level of implementation varied in the following areas:

Next steps

Next year ESMA, as part of its regular activities, will consider Member States' application of the guidelines, taking into account any possible legislative proposals by the European Commission regarding MMFs.

The full report is available here.

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