The INSIGHT Interview: Kenneth Farrugia, CEO, Malta Financial Services Authority
19th December 2023
Kenneth Farrugia was appointed CEO of the Malta Financial Services Authority (MFSA) just eight months ago and had to hit the ground running. Malta had been taken off the FATF greylist the previous summer, the Malta Financial Services Advisory Council (MFSAC) had just launched its national strategy and the MFSA had updated its Strategic Statement in February 2023. It was clearly a time for decisive action.
Picture: Kenneth Farrugia, CEO, Malta Financial Services Authority
For Mr Farrugia, who came to the MFSA from the Financial Intelligence Analysis Unit (FIAU), the most pressing issue was clear: reputation.
“We have been listening to the industry and their main issue (and ours) is reputation. We got off the FATF greylist in June 2022, but while being placed on the list was all over the media, there is less awareness about the fact that Malta was taken off the list, and about the extensive reforms that have been carried out. To address that, as Regulators we are working on different levels including meeting other regulators, licence holders and stakeholders in general to showcase our systems, controls, and achievements,” he said.
There is no shortage of interest in what Malta is up to. The MFSA, along with the FIAU, the Malta Business Registry (MBR) and other authorities have been invited by supranational organisations such as the Council of Europe, the European Commission and others, to showcase their beneficial owner and trust registries, their risk assessment tools (CASPAR for the FIAU), and their supervisory and enforcement processes to other jurisdictions. “This gives us pride and satisfaction since we see that our hard work is being recognised by the most important European organisations.”
In November, the MFSA hosted a conference about the Market in Crypto-Assets Regulation (MICA). This was an opportunity to welcome several regulators from various jurisdictions who attended, and to explain to them all that is being done to ensure that Malta is a “serious jurisdiction to work with”.
However, reputation does not depend on the regulators alone, but also on subject persons. Mr Farrugia heralded the significant change in compliance culture across all sectors. This was driven by various factors, including the increased enforcement action taken by the MFSA, the FIAU or other authorities. He explained that it was not always appreciated that 80 per cent of the cases tackled by the FIAU – where he is the Chairman – were resolved mainly by remedial action, without the need for enforcement action. Furthermore, in around half of the remaining 20%, deficiencies were addressed through enforcement action such as directives and remediation and not through pecuniary fines. The same approach is taken at the MFSA where in the past seven months, the majority of cases were concluded without fines. The emphasis is to focus on remediation to drive compliance forward.
Mr Farrugia explained that: “We are in a different situation to where we were five years ago. The compliance culture and compliance appetite of licensed entities has changed. We are getting several licensed entities themselves suggesting remedial action to achieve compliance. They perform independent checks, come up with recommendations to address their deficiencies and share them with the MFSA and, or the FIAU. They themselves suggest timelines by which they intend to complete actions to implement the required change. It is self-driven.
“Nothing fundamental has changed in our supervisory methodology since it is based on European Directives. What has changed is our approach and perspective. Our supervisory actions are more risk-based, targeting entities where we identify the highest risks. While our reviews are detailed and in-depth, we are taking enforcement action on a small percentage of entities, where it is necessary. This is the result of a change in approach by both the authorities and the licence-holders, who now focus more on effectiveness and compliance.” he said. The outcome with regards to the island’s reputation, though, depends on getting the message out there: “I think we need to promote what we have done over the past few years as otherwise the clouds will not clear.”
So much for the past. What about the present? Mr Farrugia is engaging with all the teams within the MFSA to determine which processes need to be rebalanced, and he is actively empowering people to take decisions in line with policies and procedures. Efficiency and effectiveness is paramount: “If a company or individual are not up to scratch, we should say so immediately – as happens in other jurisdictions – and not drag the process on for years! We should highlight that something is wrong and not just keep asking for documentation when it is obvious that it is a non-starter,” he stressed.
Two of the main crucial projects underway are the Supervisory Case Management System (SCMS) and the Records Management System, which have been on the cards for some time but were held up by procurement issues. The SCMS project is now at evaluation stage. Once rolled out, it will give the MFSA considerably better oversight of the sector, statistical data, risk assessment capabilities, etc. This will reduce some of the internal barriers within the authority and make the system more efficient across all levels, including for licence applicants and licence holders. It will also facilitate for example, the approval of someone who is already an ‘approved person’, for another senior position within another licensed entity. “We have been planning for this system for the past four years and this very ambitious project would not have been possible without considerable input from various teams within MFSA,” he said.
The MFSA is also taking a proactive approach towards relevant education and human resources and is working with other stakeholders for the setting up of a university post-graduate diploma course and working with MCAST on similar projects.
Another area the MFSA is exploring is the different financing models. “We get 50% of our budget from licence fees and the rest from the government allocation. We are currently discussing different financial models that can be adopted. Should the MFSA be financially fully autonomous? That was the proposal in the past but on the other hand there are other NCAs abroad that are not 100% self-financed. Fees can be revisited as they are unrealistically low, however, we must first put our house in order in terms of efficiency, and afterwards plan the way forward”.
Looking forward, the MFSA is also one of the key players in the national strategy for financial services, which was presented by the Malta Financial Services Advisory Council (MFSAC) last March. Mr Farrugia described it as an important step forward and it brought the regulators, the stakeholders and private sector representatives around one table to plan and discuss issues together and to ensure that all stakeholders are aligned.
“The strategy will cover the next 10 years, so it is not a short-term approach. All the milestones outlined in the MFSAC’s 175 action points have been assigned to different authorities – so it is clear whose responsibilities they are, although in some cases there are various entities that need to coordinate. To give an example, the MBR is leading the review of the Companies Act, with the support of the MFSA and FIAU. The MBR is also working on the Central Data Repository System. This will enable individuals doing business and, or subject persons to upload due diligence documents within the system only once. These would then be available to all relevant authorities which will have access to the system.”
Mr Farrugia explained that other important initiatives being taken by the MFSA include a regulatory framework for Notified Professional Investor Funds (PIFs); Limited Liability Partnerships (LLPs); Deminimis rules; and plans for the enhancement of the Family Offices framework,” he explained.
The MFSA launched the MFSA Stakeholder Forum, the main aim of which is to listen to stakeholders and to give updates on developments. “The first meeting gave updates about what is going on at EU level. We should be focussing more on how we can influence the drafting of a Directive by actively participating during the working discussions and providing comments and proposals. Once a Directive is finalised, we can then only debate its implementation and legislate to transpose it. But we can and should tackle this when the files are being discussed in Brussels.”
The MFSA is supporting the MFSAC on various fronts including the setting up of a national Payments Hub, which will centralise all payments through one route to achieve volumes. This is a complex project which will take some time, but Mr Farrugia said it would serve not only as a compliance check but also as a filter for efficiency. “We have to prioritise as the shopping list in the MFSAC Strategy is quite long and we cannot do everything at the same time!” he said.
He believes that the future holds many opportunities and singled out MICA, since Malta’s legislation already virtually mirrors that of the EU, giving the island and existing operators a competitive advantage. “Going forward we must not focus on short-term goals. We cannot just emulate what other jurisdictions are doing. We need to come up with our own ideas, where we can be at the forefront. That is the model we adopted with MiCA and it should be replicated in other areas, always ensuring effectiveness throughout.
“We faced challenges five years ago but now we are realising that a solid regulatory framework gives you an advantage. When we were focussing on marketing without the necessary regulatory framework being in place, we failed. When we put the regulatory framework in place, we went from 187 companies interested to operate in the crypto space to a few dozen. And these went down to 12 who eventually obtained a licence. Hopefully now we have quality and not quantity. In the long-term this will be an advantage,” he said.