MFSA chief warns solution needed to court rulings striking down dissuasive fines
The Malta Financial Services Authority annual report for 2023 is tabled in parliament • Authority carried out 77 enforcement actions, issued €444,800 in penalties
The financial services watchdog carried out 77 enforcement actions, issued €444,800 in penalties and cancelled three licences last year, its annual report for 2023 shows.
The Malta Financial Services Authority dished out 60 administrative penalties and reached four settlement agreements with operators that fell afoul of regulations.
The annual report was tabled in parliament on Wednesday afternoon by Finance Minister Clyde Caruana.
But the enforcement statistics also came with a warning from MFSA CEO Kenneth Farrugia, who urged parliament to find a solution to the ongoing saga which has seen the Constitutional Court strike down dissuasive fines applied by financial services regulators.
During a media briefing on the annual report, Farrugia warned that the enforcement function of financial services watchdogs is being undermined and appealed to legislators to make the necessary legal changes.
“Penalties had been adjusted upwards in line with recommendations made by the European Banking Authority, the European Commission, Moneyval and FATF; penalties are proportional but at the same time dissuasive and now as a result of the court rulings, which we respect, we are seeing some operators adopting a cavalier attitude and telling us that they do not mind being fined because they will go to court,” Farrugia said.
He insisted that regulators such as the MFSA need to operate in a system that takes decisions in a short timeframe with the ability to issue penalties that are dissuasive.
“It seems that legislators have no appetite to change the current impasse and this can weaken our effectiveness in enforcement that risks creating problems with our foreign assessors at Moneyval and FATF, among others,” he warned.
There have been several cases in which operators have won court challenges to fines issued by the Financial Intelligence and Analysis Unit (FIAU). The Constitutional court has decreed that hefty fines prospected at law are akin to a criminal sanction and thus the rights of operators to a fair hearing were breached. As a general rule, the courts have been applying a 90% discount on fines dished out by the FIAU, which would pale into insignificance when compared to the volume of funds the entity would be processing.
READ ALSO: Judge declares law regulating FIAU penalties unconstitutional
When asked by MaltaToday whether the court decisions have had an impact on the MFSA’s enforcement ability, Farrugia said the authority was not immune to the development.
“So far, we have had no court cases that have been decided but there are three pending appeals and the situation is unlikely to be any different for the MFSA than it is for the FIAU,” he said.
The annual report for 2023 shows that enforcement actions taken by the MFSA included the suspension of a licence in one case, the appointment of a competent person to run the company under the spotlight in another case and preventing individuals not deemed to be fit and proper from occupying key roles in two cases.
The MFSA said none of the 77 enforcement actions taken last year were appealed before the Financial Services Tribunal.
The authority carried out 474 investigations in 2023 of which almost 60% were related to late submissions by licenced operators. The timely submission of reports required at law is essential for the authority to be able to monitor the industry.
The authority carried out 73 complex investigations while another 125 cases were deemed to be non-complex.
The authority regulates a sector that grew by almost 12% between 2022 and 2023, contributing significantly to the country’s Gross Value Added (GVA). In 2023, the financial services sector generated €1.3 billion in GVA. Between 2019 and 2023, employment in the sector grew by 6,500 people.
In 2023, the MFSA received 352 applications for new licences across all sectors, 84% of which were approved and 16% withdrawn.
During the year, the authority set benchmarks in several regulatory areas, including the Virtual Financial Assets (VFA) Framework, which aligns closely with the EU’s Markets in Crypto-Assets (MiCA) regulation. The VFA has put Malta at the forefront of digital finance despite initial criticism that the regulatory framework introduced in 2019 was too rigid and had stymied the flurry of interest it had attracted.
“The crypto regime we introduced meant that only 11 entities were licensed; despite the criticism at the time, we insisted on quality and this has helped us to be at the forefront of regulation now that even the EU has laid down its own rules,” Farrugia said during the briefing.
Asked about the MFSA’s idea floated in the past to achieve a self-financing model to ensure total independence from government, MFSA chairperson Jesmond Gatt said the authority is working on a revised fee and licence structure that it will present to government but insisted State subventions would still be required.
“We will be presenting a proposal to raise licence fees to enable us to be less dependent on government subventions but in doing so we have to keep in mind the sector’s competitiveness. We cannot outprice ourselves from the market, especially given the size of our jurisdiction when compared to other financial centres like Luxembourg, Ireland and London,” Gatt said.
He added that a regulatory authority like the MFSA cannot be fully self-financed, especially in an international competitive market.
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