Malta’s economy was the second fastest growing in the EU last year, its financial sector is healthy and diversified, and it is about to play a leading lead role in Brussels, writes Michael Imeson.

Malta's starring role embedded

All eyes will be on the tiny island of Malta when it takes over the six-month presidency of the council of the EU on January 1, 2017. Preparations are well under way, spearheaded by Ian Borg, the country’s parliamentary secretary for the EU presidency in 2017 and EU funds.

It is the first time that Malta has performed this role, so nerves will be jangling at the scale of the job. It is the EU’s smallest member state by land (316 square kilometres) and population (429,000), yet the most densely populated, with 1358 people per square kilometre, compared with the next most populous country (the Netherlands, with 406 per square kilometre).

Setting the agenda

There is no denying that Malta will be stretched to carry out the presidency tasks. Its main duty is to chair about 1700 meetings at every level of the council, some 200 of which will be local. The purpose of these is for Malta to carry forward the council’s work on EU legislation and foster co-operation between member states, while also acting as a neutral broker. A specific issue the country is keen to address is illegal migration into the EU, as it is only 290 kilometres north of Libya and one of the first places African migrants land when they arrive in Europe.

Malta looks set to cope well with the unprecedented administrative workload the EU presidency demands. Mr Borg’s EU Secretariat has embarked on an extensive training exercise for government employees and private sector experts, who will preside over the meetings. Some training is being provided by the French National School of Administration, which has helped thousands of civil servants in other countries cope with the complexities of the rotating presidency.

The country has been a clear beneficiary of EU membership since it joined in 2003. Its economy, including the financial sector, has grown considerably since then. Several factors have made it an attractive base from which financial firms and other companies can conduct business throughout the EU and beyond. Those factors include a deep talent pool, a sophisticated financial ecosystem, a legal system based on English law, English as the language of business, and relatively low rates of corporation tax and personal income tax – all within an EU-compliant regulatory framework.

Good economics

Malta’s gross domestic product (GDP) grew by 6.3% in 2015. In the EU only Ireland did better, with 7.8%. Malta’s GDP should grow by 4.1% in 2016 and 3.5% in 2017, according to the European Commission’s latest European Economic Forecast

By contrast, the same GDP growth figures for the EU as a whole in 2015, 2016 and 2017 are 2%, 1.8% and 1.9%, respectively. Unemployment in Malta, at 5.4% in 2015, was well below the EU average of 9.4%.

Tourism is still the mainstay of the economy, making up 28% of GDP, but financial services has steadily grown to now account for 13%. Professor Joe Bannister, chairman of the Malta Financial Services Authority (MFSA), makes the point that 90% of foreign direct investment is in the financial sector, which has been expanding by about 25% a year in recent times.

“The World Economic Forum Competitiveness Report 2015-2016 ranks Malta highly,” he says. “It places Malta 15th out of 148 for soundness of the banking system, 20th for strength of auditing and reporting standards and 25th for the regulation of stock exchanges.”

Financial services

There are 29 banks in Malta but the banking market is close to saturation point, which is why the country is putting more effort into promoting other financial sectors. Kenneth Farrugia, chairman of Finance Malta, the public-private foundation that promotes the country as a financial centre, says the focus is on three segments: funds and fund management (Undertakings for Collective Investments in Transferable Securities – or Units – funds, hedge funds and pension funds), private wealth management and insurance.

“Financial services in Malta has come a long way in 10 years, from humble beginnings and a plain vanilla service offerings to something that is much more diverse and sophisticated,” says Mr Farrugia, who is also chief business development officer at Bank of Valletta, one of the country’s two biggest banks – the other is HSBC Bank Malta. Between them they hold 90% of the domestic banking market.

“The financial services industry today is a healthy ecosystem of providers operating in legacy and new sectors, particularly asset management and private wealth,” he says. At the end of 2015 there were 149 licensed investment services companies (fund managers, fund administrators and investment advisers) in Malta, up from 14 in 2014.

Asset management boost

Asset management was given a boost following the implementation of the EU’s Alternative Investment Fund Managers Directive (AIFMD), which has helped make Malta an even more attractive place for AIFs to be domiciled, and for AIFMs to be based to manage both Maltese and non-Maltese domiciled AIFs.

In 2015, the MFSA licensed 109 new funds of all kinds, eight down on 2014. Of these, 11 were AIFs; 78 were professional investor funds (PIFs), which are hedge funds that fall below the minimum threshold to be compulsorily categorised as AIFs under the AIFMD; and 20 were Ucits funds (EU retail collective investment funds).

The MFSA accepted a surrender of licence last year from 97 funds, 26 down on 2014. Of these, three were AIFs, 92 were PIFs, and two were Ucits. Overall, therefore, the number of licensed funds in operation rose in 2015 by 12 (109 new licences, minus 97 surrendered), and the total now stands at about 600. Funds domiciled in Malta had a net asset value of €10.3bn at the end of 2015, up 5.4% on 2014.

Malta has been a beneficiary of changes in UK pensions laws that allow UK pensioners living abroad to transfer their pension funds to another country without incurring tax penalties. It is also taking advantage of changes in EU legislation on Institutions for Occupational Retirement Provision, which are part of an EU plan to encourage the creation of pan-European occupational pension funds that can be set up in one EU state and passported to other EU states.

Largely as a result of these UK and EU legislative developments, the number of retirement pension schemes registered in Malta has risen from zero in 2009, to six in 2010 and to 36 at the end of 2015. Assets under management held by retirement pension schemes reached €2.9bn at the end of 2015, up 36% on 2014.

Growing pains

Prime minister Joseph Muscat says Malta is experiencing good times. “This is the result of hard work, effective policies, a vibrant financial sector and an economic community that is working closely with the government,” he says.

“But with growth comes the pain of growth. Right now we are experiencing problems, albeit the right kind of problems, where service providers come to my office and complain that they cannot find enough people or work space. They also complain that the government is not acting quickly enough.”

A dramatic step in the right direction was the introduction in 2014 of free childcare for families, where both parents (or just one parent in the case of single-parent families) are in work or education. “Malta is now the only country in Europe, probably in the world, providing universal free childcare to whoever enters the labour market,” says Mr Muscat. “That has liberated a huge number of females to enter the labour market or return to the labour market after an absence of a few years. It is not cheap but its return is so evident.”

Healthy banking sector 

The MFSA Annual Report for 2015 notes that the country’s “banking sector remained adequately capitalised, retaining healthy liquidity, solvency and profitability levels in compliance with banking legislative frameworks and prudent domestic banking models”.

Its 29 banks fall into three categories: core domestic banks, which are Bank of Valletta, HSBC Bank Malta, Mediterranean Bank, APS Bank, Lombard Bank and Banif Bank (Malta); non-core domestic banks, which are Bawag Malta Bank, FCM Bank, FIMBank, IIG Bank (Malta), Izola Bank and Sparkasse Bank Malta; and 'others', which include Akbank, Credorax Bank and Deutsche Bank (Malta). However, the latter is in the process of closing down as part of its parent’s wider strategy of terminating numerous country operations around the world.

Banking sector assets fell to €46.7bn at the end of 2015, 10.3% down on 2014. The assets of the core domestic banks increased by 22% (mainly due to the reclassification of Mediterranean Bank from non-core to core), while the assets of non-core banks fell by 61% and other banks fell by 18%.

The SSM in Malta

The MFSA as the banking supervisor for Malta is part of the EU’s single supervisory mechanism (SSM) for eurozone banks, with the European Central Bank (ECB) being lead supervisor.

Malta’s three ‘significant’ banks, to use SSM terminology, are Bank of Valletta, HSBC Bank Malta and Mediterranean Bank, which are therefore directly supervised by the ECB, not the MFSA. However, the MFSA is still involved, as is the case with national supervisors elsewhere. First, because there is a joint supervisory team (JST) for each bank, made up of ECB and MFSA supervisors; and second, because the MFSA is one of the 25 members of the ECB’s supervisory board, which makes all the SSM decisions.

All the other banks in Malta are termed ‘less significant’ and are directly supervised by the MFSA, though the ECB has indirect supervisory powers and can step in directly at any time to supervise them.  

So how has Malta adjusted to the SSM? “The supervisory unit at the MFSA had to be completely revamped, and the banks had to do the same thing with their compliance departments,” says the MFSA's Mr Bannister. “The ECB is multicultural and multilingual so we have to deal with people who have a different approach from what we are used to. This is not easy but I believe we are making headway.”

Central bank role

Like other central banks in the eurozone, the Central Bank of Malta plays a role in the SSM, even though it is not a supervisor. This is because the central bank governors sit on the governing council of the ECB, and the council endorses, and can reject, SSM decisions made by the ECB’s supervisory board. But how much influence does Malta’s central bank governor, professor Josef Bonnici, have compared with the central bank governors of much larger countries, such as France and Italy?

“In terms of votes, we each have one vote,” says Mr Bonnici, who feels he is able to exert the influence he needs. “The governing council also tries to form a unanimous position and it does that most of the time, though it cannot be done every time. There is a continuous exchange of views from the smallest to the largest members."

Joyce Grech, chief risk officer at HSBC Bank Malta, describes the SSM as “intrusive”, though she adds that is “not necessarily a bad thing”.

“We have experienced a really big shift in the way we are supervised now by the JST, as opposed to by the MFSA,” she says. “In practical terms it means we have a lot of work to do. The demands on us are far greater in respect of reporting and the interactions we have with the JST.

“From a human resources aspect it is a challenge to find, train and retain the right people to met the demands of the JST. But it is working reasonably well considering where we started from a year and a half ago.”

Mark Watson, CEO of Mediterranean Bank, agrees there has been a major change in the supervisory experience. “Stylistically it is different from the experience we had before," he says. “It is a much more formalised approach. There are monthly meetings with fixed agendas, there is a big demand for data, which is a challenge for a small growing institution such as ourselves.

“For us, the SSM is going to be helpful in the long run. We operate not only in Malta but also have a bank in Belgium [online bank MeDirect] and work on a cross-border basis, so theoretically having one supervisor is actually very helpful.”

Looming threats

While Malta’s financial sector is doing well, a note of caution is sounded by its finance minister, professor Edward Scicluna. “We are in a more fortunate situation than many other countries in Europe, but we have to be careful to manage that growth and not let it develop into a boom,” he says.

He is also worried about too much financial regulation, especially anti-money laundering rules that are preventing banks from engaging in certain lines of business. “Many European banks, not just in Malta, are losing their correspondent banks in the US who just don’t want to touch them if they are dealing with north African and Middle Eastern clients,” he says.

Steps being taken by the European Commission and various EU member states to prevent legal tax avoidance by multinational companies are also a threat to Malta’s business model, where the effective corporation tax rate for foreign companies can be as low as 5%. Income tax for foreign professionals in the financial sector is levied at a flat rate of 15% on the first €5m earned, and income above that is tax-free.

Mr Scicluna fears the days of legitimate tax competition between EU states are numbered and that minimum corporation tax levels will be set by Brussels. Some European governments are now challenging these tax incentives, and in certain cases putting the onus on companies to prove they are not trying to avoid tax.

“If we carry on like this we will discourage investment. We are making Europe uncompetitive. It’s very important that Europe applies common sense and does not harmonise tax rates for the sake of harmonisation,” he says.


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