Industry ABCs: Financial Services in Malta – a resilient and essential economic pillar

Malta’s financial services industry is one of the country’s most attractive and lucrative economic sectors. It has grown and evolved in such a way that it put Malta on the map as a hub for financial services known for its modern regulatory framework and appetite for experimentation.

The industry consists of a number of core sectors such as asset management, investment funds, insurance, corporate services, fintech, blockchain, e-payments and more.

Malta has a comprehensive package of laws that regulate the provision of financial services and provides a favourable legal and regulatory framework for the industry. Its emergence as a domicile for financial services is also supported by its EU membership, which enables businesses in Malta to gain free access to the European market.

State of the industry

By the end of 2022, there were roughly 18,200 workers involved in financial and insurance activities, and the industry was responsible for 8.4 per cent of GDP, i.e roughly €1.33 billion, making it one of the pillars of national economy.

Malta's profile as a hub has also improved over the years. According to the latest the Global Financial Services Index, Malta ranked 67th, an improvement of 27 places over the previous year.

To date there are hundreds of entities rooted in Malta participating in the global financial services market.

The MFSA and other state entities

The Malta Financial Services Authority (MFSA) is the country’s sole financial services regulator. It was founded in 2002 and took over the supervisory functions previously carried out by the Central Bank of Malta, Malta Stock Exchange and the Malta Financial Services Centre.

The executive committee of the MFSA coordinates and manages regulatory, authorisation and supervisory matters, such as the approval of regulation, approval of and for the issuing of licenses, among other responsibilities.

The MFSA also has extensive regulatory, investigative and enforcement powers. It has the ability to issue public warnings, and even suspend or cancel an entity's licence, or restrict a licensed entity’s operations. It is also capable of issuing administrative penalties on licence holders.

Its operations are supported by a number of committees, such as the audit committee, resolution committee, enforcement decisions committee, AML/CFT coordination committee, and the risk committee.

In a recently published strategic statement, the MFSA outlined five strategic pillars for 2023 – 2025, which involved 27 strategic priorities. The five pillars are:

• Delivering agile and proactive regulation.
• Sustaining a resilient, internationally networked financial sector.
• Promoting good governance and compliance.
• Embracing innovation.
• Engagement with the public.

The MFSA also operates a financial services register, which is a public record that shows details about the firms which are licensed and regulated by the authority.

Currently, there are over 300 registered entities with more than 400 licenses between them.

Another important entity is the Office of the Arbiter for Financial Services. It was set up in 2016 and is responsible for the mediation, investigation and adjudication of complaints filed by eligible customers against financial service providers licensed by the MFSA.

Not to be forgotten, there is also the Financial Services Tribunal (MFST). It is an independent body which is responsible for the adjudication of appeals from decisions taken by the MFSA in relation to licensing, supervision, enforcement and other regulatory matters concerning financial services providers.

It behaves as an independent and impartial forum for resolving disputes and ensuring regulatory decisions are made fairly and transparently.

Lastly, there’s the Financial Intelligence Analysis Unit (FIAU)  which is the entity responsible for the prevention of money laundering and financial terrorism in Malta, and operates under the Ministry of Finance.

On a regular basis, the FIAU conducts reviews of various firms connected to the financial services industry. When they are found to be in breach of AML/CFT rules, they generally issue administrative penalties and at times, corrective and follow-up directives.

2022 witnessed a record number of fines issued by the FIAU, totalling €1.3 million.

However, a recent landmark ruling has put the capabilities of the FIAU into question. The First Hall, Civil Court found that the law which grants the FIAU to investigate and impose fines violates the applicant’s constitutional right to a fair hearing.

To that end, this ruling made certain provisions of the Prevention of Money Laundering and Funding of Terrorism Regulations and the Prevention of Money Laundering Act that deal with the imposition of administrative penalties null and void.

In other words, it means the court found that the FIAU cannot be judge, jury and executioner.

The judge overseeing the court case had ordered that the judgement is passed to Parliament to take action on the matter.

Industry stakeholders

The financial services industry envelopes a broad scope of stakeholders involved in its range of sectors.

The Institute of Financial Services Practitioners (IFSP) is an association representing workers across the entire industry and was established in the 1980s. The entity is deeply involved in various consultations related to the industry, and holds regular events and relevant educational courses.

Another notable entity is the Malta Bankers Association (MBA) which was established in 1962 and represents the interests of the banking sector operating in Malta. By the end of 2022, Malta had 21 banks, representing a mix of local banks but also foreign banks with a branch in Malta.

Then there is the Malta Institute of Accountants (MIA) and the Malta Institute of Taxation (MIT). Both entities represent practitioners of their respective fields, and are involved in consultations relevant to the financial services industry.

Other organisations include the Malta Insurance Association, Association of Insurance Brokers and the Malta Asset Servicing Association.

One of the younger organisations in the industry is FinanceMalta, a private-public partnership set up in 2007 to promote Malta as a financial services centre and brings together representatives from across the industry. It was founded by most of the aforementioned organisations, and regularly holds industry-relevant events, also visits international expos to promote Malta as a jurisdiction.

Lastly, one of the lesser-known entities which punches above its weight in recognition is the Malta Financial Services Advisory Council (MFSAC) which is chaired by Joseph Zammit Tabona and is composed of heads of the Commissioner for Revenue, FIAU, MFSA, the MBR, the Malta Stock Exchange and FinanceMalta, as well as representatives from the private sector, namely the MIA, MIT, IFSP and the MBA.

The MFSAC was established by the Government in 2021 and has been instrumental in developing the country’s strategy for the financial services industry for 2023 - 2025.

Brexit, COVID-19 and the FATF greylisting

The past five years have been among the most trying for the industry, with three major events shaking up Malta as a financial services hub.

First, there was Brexit. In 2016 the UK held a referendum on whether to leave the European Union, and by a slim majority, the public voted yes. Indeed, on 29th March 2017 the UK invoked Article 50 of the EU Treaty to initiate Withdrawal from the EU.  

Following a series of negotiations, and extensions to the deadline to exit the EU, the UK’s withdrawal from the EU was ratified in January 2020, formally ending its membership.

The UK was and still is a serious global financial services hub, and its exit from the EU was a shockwave to the global financial services sector.

In 2021, this newsroom spoke to financial services expert Wayne Pisani, who said that following the referendum in 2016, Malta received a number of British businesses in the field of insurance set up shop in Malta.

Other than that, however, there has not been that much movement. To some extent, this may be in part due to the ratification of Brexit taking place in 2020, shortly before COVID-19 exploded across the world causing workers but also businesses to hunker down.

The pandemic led to a wave of digitalisation, and also remote work, with much less emphasis being put on where the office was located, and more on making sure workers were safe and able to work from wherever they were.

On a more structural issue, the pandemic also put firms’ operational resilience to the test, challenging their ability to adapt and adopt novel solutions.

The MFSA had found that more than 10 per cent of financial services firms which adopted digital transformation strategies, accelerated implementation as a result of the COVID-19 pandemic.

Lastly, there was the Financial Action Task Force (FATF) greylisting. The FATF is an intergovernmental institution which is responsible for combating money laundering and terrorism financing. It sets global standards and evaluates jurisdictions to ensure compliance. If they fall short of their obligations, jurisdictions could be put on the grey list of the black list.

Officially, being put on the grey list categorises Malta as a "Jurisdiction Under Increased Monitoring". Malta was put on the grey list in 2021 following years of domestic and international criticism over its handling of corruption cases, lack of action against Government figures who were mentioned in the Panama papers, and reports of tax evasion.

Officially, the FATF flagged concerns over Malta's regulatory infrastructure to fight tax evasion, the level of information held on ultimate beneficial ownership and the legislative framework providing for the sharing of information with local and international financial intelligence units.

Fortunately, after a year, Malta was removed from the grey list following intensive implementation of reforms in its AML/CFT regime and the manner in which it pursues tax-based money laundering.

Fortunately, worries that the FATF greylisting would lead to an exodus of firms involved in fiancial services were alleviated.

However, the effects of the greylisting were not entirely gone. The financial services industry was clearly fatigued following the Government's sprint to reform its regulatory framework, and the cost of doing business increased tremendously.

Education & events

Given the growing concentration of financial services firms coupled with a growing demand for workers, a number of educational institutions have sprouted to teach and train those interested in taking part in the industry.

The financial services strategy takes aim at the currently available education institutions and pushes for the development of accredited courses in financial services for professional development delivered through private sector academics.

It also proposes the revision of post-secondary education courses to ensure that the material is kept abreast with the current situation.

The University of Malta provides a broad range of courses on accounting, finance, banking and more, and even provides a dedicated postgraduate course on financial services.

The Malta Institute of Financial Services is another institution which is also the country’s longest established banking school providing a number of courses ranging from MQF 4 to MQF 7.

Other notable institutions include Lead Training Services and Malta Business School which host a number of relevant courses.

There are also a number of major events for the sector such as the IFSP’s annual conference, in which specialists and major stakeholders discuss the state of the sector at a domestic and international level. There is also the annual FinanceMalta annual conference which is usually held at the end of the year, and ReportingCon, an event surrounding financial and business reporting, which was held for the first time in 2022 with a number of speakers representing major players in the industry, and workshops.

Future of the industry

The financial services industry is expected to continue evolving and growing in Malta, and the only thing that seems to be holding it back is the lack of supply of workers.

In the recently published national strategy for financial services, four areas with growth opportunity were identified: fintech, aircraft leasing, family offices and employer pensions.

The MFSA has been tasked with strengthening the regulations surrounding fintech, and is expected to set up a task force to define the requirements to develop a supportive ecosystem. There are also proposals to enable venture capital and funding, and seed investment schemes to bolster the industry.

Meanwhile, family offices are a type of wealth management firm which belong to families of high net-worth and ultra high-net worth individuals.

To date Malta does not have a regulatory framework to support such firms however now the MFSAC is tasked with recommending a set of explicit proposals to support the establishment of such firms. These proposals would then be implemented by the MFSA and the Government.

The strategy also noted that Malta has a strong aviation industry that could be expanded further, and recommended the development of a specialised legal and taxation framework for aircraft leasing. With regard to employer pensions, the Government intends to minimise pressure on state pensions in the future through the creation of tax incentives for employer pension contributions, and an advantageous tax rate on pension income from private pensions.

Evidently, the opportunities for the financial services sector appear limitless, and having weathered the effects of the FATF greylisting, and the adoption of elevated due diligence requirements in regular operations, it seems like the worst is in the past and the industry is poised to grow.