The participants
Professor Joseph Bannister - Chairman of the Malta Financial Services Authority
Michael Imeson - Contributing editor, The Banker
What are Malta's defining characteristics as a financial centre? What really makes it excel?
Our hallmark is that we apply what you might call an Anglo-Saxon style of business with Mediterranean characteristics in our approach to financial regulation. We noticed that in other jurisdictions there was little regular contact between the regulators and the licensed companies. So, as a matter of policy we decided the regulators must meet all companies, at the pre-application stage, application stage and post-application stage. This level of service has become our hallmark.
We are also open and transparent as a regulator. Internal and external audits are carried out to ensure we are adhering to core principles. As we demand more transparency from companies, the regulator should become more transparent.
How big is the financial sector in Malta?
It contributes about 6% to 7% of our gross domestic product. This is all direct intermediation, without taking into account the contribution from accountancy firms, law firms and others, which we estimate accounts for an equivalent amount. About 7000 to 7500 people are employed in the financial sector.
There are about 25 banks doing domestic and international business. There is a developing insurance sector with about 50 companies, some of them multinationals establishing their European operations here in Malta. There is a significant number of asset managers here and we're seeing quite a number of funds being established.
Ten years ago the country was preparing to join the EU, which we did in 2004. In those days there were about five foreign banks and four local banks. Since then the banking sector has grown and the most important factor was that Malta became better known as a finance centre once we joined the EU. Foreign banks here include HSBC, Banif and Deutsche Bank.
Apart from your approach to regulation and your EU membership, what attracts financial firms to Malta?
The quality of trained people, and salaries are relatively low compared to the rest of the EU. Office costs are about one-third to one-half of the rest of Europe. What is also important is connectivity: Malta is easily reachable from other parts of Europe; there are four flights a day from London, flights from Zurich, Frankfurt, Paris, Brussels and elsewhere.
You describe the regulatory regime as "firm yet flexible". Isn't that a contradiction in terms?
No. The regulation is European regulation and it is up to European standards. But we look for certain flexibilities that are allowed within the European system. For example, most jurisdictions require the fund and the fund administrator to be in the same jurisdiction. We don't require that. We allow the administrator to be based in another jurisdiction, with certain provisos. That is flexibility.
What recent regulatory developments have made Malta more attractive?
The MFSA was restructured at the beginning of the year to strengthen supervision. We pulled out authorisation and regulatory development from each supervisory unit. So today we have a separate authorisation unit, a separate regulatory development unit and then we have the three supervisory units for securities and markets, banking and insurance and occupational pensions.
What are the tax benefits for companies located here?
We have an imputation system of taxation. There is no distinction between resident companies and non-resident companies. Basically, every company pays tax at 35%. Then, on declaration of a dividend, the part of the tax paid is imputed in the hands of the shareholder and they get six-sevenths of the 35% back. So if you have 100, 35 is tax, 65 is dividend and then out of the 35 tax paid, you get 30 back, six-sevenths of 35. The shareholder therefore gets 95 out of the 100. So the effective rate of tax from the shareholder point of view is 5%.
Now, what happens next varies depending on the residency of the shareholder. If you are a resident shareholder, then obviously you re-declare that in your income tax return. If you are a non-resident shareholder, you have no further tax to pay. But there is a qualification to that: no further tax to pay in Malta. When you repatriate the funds, then obviously the treatment depends on your country of residence. The UK taxes directly, Germany taxes later, so there are variations between different countries.
It should be emphasised also that under the multilateral agreements within the EU we are exchanging information so there's nothing hidden, nothing ring-fenced, so everything is open. All the transparency clauses required under the Organisation for Economic Co-operation and Development model are being introduced.
Can you tell us about the structure of the MFSA and how you are organised?
The MFSA is an independent authority. We are also financially independent so we get no funding from the government. We collect fees from licence holders and we also manage the Registry of Companies, the equivalent of Company House in the UK, so we collect fees from that.
Our regulations have the force of law, but at the same time any decision we take can be challenged in the courts. There is a special Financial Services Tribunal and we can be challenged. The governor of Malta's central bank is nominated to sit on the board of the MFSA and there is a tripartite arrangement with the Ministry of Finance for crisis situations. We are a member of all the European regulatory organisations, including the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors and the Committee of European Securities Regulators.
What effect did the global financial crisis have on Malta's financial sector?
By and large, I would say it had no effect, nil. The foreign banks here are mainly subsidiaries of large institutions. The local banks are very conservative and largely do not borrow to lend. Obviously they have investments and the value of those investments went down as they did everywhere. Now, fortunately, they are recovering.
In the case of the funds business, we had no major shake-ups. Obviously net asset values went down, but no funds collapsed or had to close, as happened in other jurisdictions. There was some reconstruction in terms of costs and funds amalgamating, but this is what we would call a normal process.
The wider economy, linked as it is to our major trading partners, the UK, Germany and Italy, suffered. The government has created restructuring programmes based on training, so when Europe comes out of recession, we will be ready, leaner and fitter. Tourism, which suffered because of the unemployment situation in other countries, now seems to be coming back.
What financial market and regulatory developments is Europe likely to witness in the near future and how will that affect Malta?
We are going to see more rationalisation and more deepening of the markets and the markets will continue bouncing up and down. Whether the regulatory burden will increase without being properly functional is still unclear. What is very clear is that there is going to be better control of cross-border activities. I am a firm believer in cross-border activities, and the provision of services from one country to the other, particularly financial services. But at the same time, I think we need a different regulatory approach. Although I have seen on paper what has been proposed legislatively, the practical approach still needs to be determined.
With tougher regulation in Europe, how is Malta going to maintain its firm yet flexible approach? Will you have to backtrack and be less flexible?
No, I don't think so. When I use the word 'flexibility', I don't mean that we are bending or stretching current regulations. That doesn't happen. Flexibility means making it easier for the operators to operate, but the baseline remains the same.
The issues
- Malta's role as a regional financial centre
- Malta's financial regulation system
- The impact of the financial crisis and recession
- Market and regulatory developments in Europe
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