Introduction
The launch of the Strategic Statement (2023-2025) has reaffirmed the continued commitment of the Malta Financial Services Authority ('MFSA' or 'the Authority') to its objectives - protecting the consumer of financial services and safeguarding the integrity and stability of the market over the long term. The strategic direction outlined by the Authority was designed to address an increasingly complex financial landscape characterized by evolving regulatory demands. The strategic statement identified 27 strategic priorities, which have been thematically grouped under five core pillars:
On an international level, the financial services sector has faced unprecedented challenges over the past few years, including the disruptive impact of the COVID-19 pandemic. Although the immediate effects of the pandemic have subsided, the broader macroeconomic environment remains marked by heightened uncertainty. Persistent issues such as rising inflation, volatile energy markets, and geopolitical tensions continue to pose challenges for national economies and financial systems alike. Within this context, the MFSA has made it a priority to ensure the resilience of Malta's financial services sector.
This document seeks to provide an interim review of the achievements and ongoing initiatives under the strategic statement, as at June 2024. This Strategic Update (2024) marks the halfway point of our strategic term and demonstrates the MFSA's commitment to maintaining the momentum required to meet its strategic objectives whilst addressing evolving industry dynamics, stakeholder needs, and regulatory developments on both the local and global scale.
Achieving the strategic priorities outlined under each pillar requires a concerted focus on capacity-building and the digitalisation of processes – these are two critical drivers that enable the Authority to be proactive in the face of emerging challenges whilst delivering on its mandate.
Ongoing collaboration with both national and international stakeholders remains central to the MFSA's strategy. By engaging with European and global regulatory counterparts, financial institutions, and the wider public, the MFSA ensures that its regulatory approach is not only compliant with international standards but also tailored to the unique characteristics of Malta's financial system.
Defining the Context
The Economic Landscape
The period between the great financial crisis and the onset of the COVID-19 pandemic was characterised by loose unconventional monetary policies implemented to combat stagnant economic growth and deflation in the USA and the Eurozone, in particular. The resulting ultra-low interest rates, along with a build-up of underutilised liquidity, pushed digitalisation, product innovation, margin compression and more aggressive risk appetites, with these becoming the main transformative forces within the financial services sector. This environment changed rapidly after 2021, as aggressive inflationary forces arose due to conflict, trade disputes, geopolitical tensions and worsening supply chain bottlenecks. This brought about sustained interest rate hikes and the tightening of monetary policy by central banks. This tightening would only begin to abate in June 2024, with the European Central Bank (ECB) cutting its three key rates ahead of the Federal Reserve.
Within the Euro area, this shift in the financial ecosystem increased interest rate margins and profitability for credit institutions. On the other hand, however, it led to higher borrowing costs for governments, businesses and households. The higher borrowing costs negatively impacted public finances, and influenced the increase in operating profits seen by financial institutions (as a result of higher interest rates), as loan serviceability worsened, whilst the value of safe assets fell. Despite these headwinds, the exacting macroprudential regulations implemented within the Eurosystem prevented contagion from the March 2023 USA banking turmoil from spilling over into the European Union (EU) and Euro Area banking systems.
The entrenched phenomenon of subdued interest rate pass-through in Malta lessened the impact on debt servicing costs due to the ECB's monetary policy tightening, whilst the relative quality of Maltese sovereign debt shielded local retail and institutional investors from the rapid price swings seen elsewhere.
Malta's economy persisted in its growth during the first half of 2024. Real Gross Domestic Product grew by 4.4% when compared to June 2023, driven by strong private consumption and exports, and supported by elevated immigration and tourism activity as well as strong private investment.
Employment in the Maltese financial services sector saw sustained annual growth since 2014. Relative to the whole economy, this remained stable at around the 5.0% level, for a number of years. Since 2014, the Maltese financial services sector has contributed an average of 8.7% of the total Gross Value Added (GVA) to the economy, having been as high as 9.9% whilst not falling below 7.4%. In June 2024, this contribution stood at €471.2 million, or 9.3% of the total GVA generated throughout the economy.
The Financial Services Sector
The advent of technologically sophisticated financial products and services, such as virtual financial assets, blockchain, and cryptocurrencies, as well as the digitalisation of banking, has driven the continued evolution of the MFSA as a regulator that is ahead of the curve of EU Bloc level regulations, such as MiCA1 and DORA2, thereby solidifying Malta's outlook as a prime ecosystem for the financial business of the future.
As at the end of June 2024, the Maltese banking sector consisted of 19 credit institutions and two EU branches of third country credit institutions. The total assets of the banking sector stood at €49.2 billion at the end of June 2024, an increase of 6.2% from the end of 2023. The total loans and advances issued by the banking sector remained stable at €30.2 billion, whilst total deposits with the Maltese banking sector stood at €42.4 billion as of the end of June 2024, representing an increase of 8.0% when compared to the end of the previous year. Overall, the Maltese banking sector remains robust, with the banks therein exhibiting a diverse array of business models. The sector has continued to grow steadily in asset size whilst being supported by a secure base of deposits combined with judicious lending strategies. The sector weathered the headwinds of the COVID-19 pandemic and Malta's grey listing well, exhibiting a resilience evidenced by sound capital ratios, healthy liquidity positions, and declining non-performing loan ratios.
The financial institutions sector has grown steadily in recent years and is almost entirely geared towards providing online payment and electronic money services on a cross-border basis. The sector is made up of 56 institutions (as at June 2024) and is heavily reliant on technology-based infrastructures. The same applies in the area of virtual financial assets, chiefly made up of 15 VFA service providers which are currently transitioning to the new regulatory framework provided by MiCA and the wider EU Digital Finance Package
As of June 2024, 503 investment funds were domiciled in Malta, reflecting a 1.9% decrease compared to the end of 2023. Despite this decrease in the number of funds licenced, the total net asset value (NAV) of Maltadomiciled funds grew by 8.9%, reaching €21.5 billion, driven by strong revaluation gains and a significant rise in NAV reported by Notified Alternative Investment Funds (NAIFs). Overall, the sector demonstrated resilience amid challenges.
The Maltese insurance sector boasts a mature domestic market, mainly consisting of life and non-life insurance companies, as well as a thriving international sector, including captives, direct underwriters and reinsurers. As at June 2024, 66 insurance undertakings were authorised to carry on business activities in terms of the Insurance Business Act, including 7 insurance undertakings which are authorised to carry on affiliated business and 13 authorised as Protected Cell Companies (PCCs). Total assets of insurance undertakings amounted to €17.5 billion in June 2024, with a moderate shift in aggregate assets from reinsurance to direct insurance undertakings seen over the preceding year. The insurance companies' overall solvency position remains strong, well above the 100% threshold.
From a financial stability and macroprudential perspective, Malta's financial services sector is not immune to risks and challenges. One area that requires particular attention is the banking sector's credit risk concentration in the real estate market, particularly in residential mortgages, as in a worst-case scenario, this concentration could amplify the impact of a downturn in the housing market. Among licenced funds and insurer undertakings, retaining and attracting new investors remains one of the main issues, although heterogeneity in these sectors is present. In addition, certain specific business models in insurance segments (e.g. life business) exhibit possible market environment and profitability pressures. The open nature of Malta's economy and its reliance on external financial flows make it susceptible to global shocks and shifts in investor sentiment. At this juncture, added uncertainty arises from intensified geopolitical risks in the Middle East. While these risks are generally considered manageable within the financial system, they necessitate proactive monitoring and resolution planning to safeguard against potential instability, a task which the MFSA is now well-equipped for.
The EU Policy Environment
The EU is currently at a crucial juncture as it prepares for the 2025-2029 EU cycle, marked by the formation of a new European Commission and the inauguration of a newly elected European Parliament. Given the current geopolitical climate, Europe is faced with major challenges, including immigration pressures, an ageing population, and persistent competitiveness issues amid an underperforming economy. In addition, the unsustainable rise in Eurozone public debt demands urgent attention. The complexity of these challenges continues to grow, and they cannot be resolved swiftly, especially when considering the slow pace of co-decisionmaking within EU institutions. As a new European cycle begins, there is a clear need for greater political resolve to effectively address the pressing issues facing the EU.
Emphasis on the impact of Artificial Intelligence (AI) and technology on the EU has taken centre stage. Digital policy focused on AI aims to strike a balance between the EU's drive to be a leader in innovation, and the establishment of safeguards for the sector. Due consideration was also given to the environmental transition. To the EU, curbing climate change and environmental degradation is not only a legal and moral obligation, but it is also a significant opportunity. If the green transition is executed well, it will enhance the Union's competitiveness.
Despite significant progress, a single and competitive Capital Market Union (CMU) remains high on the EU political agenda. Regulatory and other barriers continue to hamper the smooth movement of investments and related services. While considerable progress has been achieved on a number of legislative measures, further work is required to strengthen the Union's financial and capital markets to meet the Union's evolving economic needs, channel private funding towards investment and the green transition, foster innovation and growth, and improve access to capital funding for EU companies and SMEs3. The recent Draghi and Letta Reports provide further insights in this respect.
A number of EU legislative dossiers were recently finalised, including the Banking Package (CRD VI/CRR II), the Solvency II Directive, the Insurance Recovery and Resolution Directive, the Listing Package, the ESG Ratings Regulation, the Alternative Investment Fund Managers Directive (AIFMD) II, MIFID III, and the EU Green Bonds Regulation4.
Negotiations will continue with the European Parliament on other legislative dossiers, including the Retail Investment Strategy (RIS), the Crisis Management and Deposit Insurance (CMDI), and the Benchmark and Reporting Requirements Regulations, with the ultimate aim of reaching a political agreement in the short term.
Discussions will also continue on the Financial Data Access (FIDA) and Payment Services Packages. The Banking Union is another important initiative for the single market, and it remains high on the EU political agenda. The EU banking sector is one of the most integrated and harmonised sectors, with the level of integration and harmonisation being very high when compared to both other EU policy areas and international policy.
A sound regulatory framework is crucial for the proper functioning of the EU's financial market. The fast-paced revolution in the economic landscape, driven by technology as well as political and societal forces, calls for a stronger push to complete the remaining EU legislative dossiers. The MFSA's Strategy continues to be aligned with Europe's ambitious financial services reforms, which remain essential to fostering sustainable and inclusive growth. This offers major potential for benefits in terms of jobs, growth and financial resilience. In the coming years, financing the green and digital transitions will require increased levels of capital to support innovation. The completion of the CMU plays a crucial role in leveraging capital markets and investors to scale up and accelerate the green transition. Moreover, the rapid development and deployment of digital technologies, and the entry of new, highly innovative FinTech firms, are expected to continue changing the way the traditional financial ecosystem operates.
Progress on the Strategic Objectives
Pillar I - Delivering agile and proactive regulation
The Authority remains committed to promoting a regulatory environment that is agile, proactive, and responsive to the rapidly changing financial landscape. To this end, the Authority has been investing significantly in information technology and the professional development of its staff complement whilst enhancing efficiencies across its core functions — supervision, enforcement and regulation. Central to these efforts is a focus on capacity building, particularly in human resources and digital transformation, ensuring the MFSA is well-equipped to swiftly detect, investigate, and address critical regulatory concerns.
The Authority has also embarked on a project to strengthen financial and operational independence through further efficiency gains, and proposed changes to its institutional funding structure. In this respect, the revision of authorisation and supervisory fees is crucial.
Furthermore, the MFSA is committed to reducing bureaucracy, enhancing the regulatory framework, and improving authorisation and supervisory processes. Ongoing efforts to promote transparency and accountability aim to make regulatory, operational, and enforcement policies more visible and accessible. In parallel, the MFSA also continues to deepen collaboration with both local and international regulatory bodies. Through these initiatives, the MFSA seeks to safeguard financial stability, tackle emerging risks, and support the sustainable development of Malta's financial services sector.
A. Streamlining supervision
The Authority continuously seeks ways on how to become more efficient through the harmonisation and streamlining of its authorisation and supervisory processes. Various initiatives have been implemented to ensure that the Authorisation Charter is adhered to whilst ensuring that the process remains robust. The introduction of the Delegation of Authorisation Framework aims to reduce the pressure on certain aspects of the authorisation process by empowering supervisory functions to authorise certain types of licenses on a risk-based approach. The application by a single entity for multiple licenses is managed through a lead function, intended to reduce duplication of requests for documentation. Moreover, the ongoing initiative to implement a new Supervisory Cycle Management System (SCMS) for the Authority will further align, automate and improve the authorisation process.
The supervisory process is also being further streamlined to harmonise supervisory expectations across the financial sector. An internal onsite re-engineering project has been successfully implemented, using an internal digital platform to communicate with supervised entities and at the same time serve as a repository for the documentation required. This interim process will serve as a business requirement to the SCMS in the next phases of its design and implementation. Furthermore, desk-based reviews are also undergoing a streamlining exercise to seek commonalities and define a standardised workflow.
Similarly, the MFSA digitisation and digitalisation programmes aim to enable more streamlined and automated supervisory processes. Through these programmes, the MFSA has already achieved the centralisation of its most critical data and records together with an increased ability to analyse data more reliably and efficiently. A series of tactical initiatives and upskilling of staff has enabled improved data quality and analytics.
At the core of these programmes is data governance. A formal framework has been successfully launched, a data architecture blueprint for streamlining both externally and internally collected supervisory data was designed, and work is currently underway on its implementation within a licensing and onboarding context.
Notably, towards the beginning of this year, the Authority started shifting its supervisory approach towards an Outcomes-Based Supervision model as outlined in the Supervisory Priorities 2024. The MFSA has embarked on a pilot project involving three supervisory functions, setting supervisory programmes based on specific outcomes with the aim of testing specific areas of the supervisory landscape and aligning and assessing the impact with the Authority's statutory objectives. The Authority is utilising various supervisory tools in its assessments and will have a more defined picture of whether the MFSA's expectations are being complied with by the end of 2024.
The results of these supervisory interactions will be published with the Supervisory Priorities for 2025, together with further statistics on the results obtained. The Authority's expectations on the level of compliance towards each outcome will also be published. Additionally, the MFSA aims to provide further guidance and allow time for remediation by the respective supervised entities before carrying out re-testing to verify the achievement of the predetermined outcomes. Moving forward, the Authority plans to implement this process throughout the entire supervisory directorate.
B. Improving regulatory processes
The MFSA has continued to strengthen its checks on the integrity of persons occupying key posts within the financial services industry. In this regard, it has employed a robust ongoing screening solution, underpinned by a structured methodology that seeks to continuously monitor approved individuals for good repute. The MFSA has also embedded new controls that will enable it to carry out deep dives into any concerns that emanate from this screening.
Operational efficiency is also envisaged to be enhanced through the upcoming implementation of the European Supervisory Authorities' Fitness & Propriety platform. This will enable the Authority to make swift enquiries about the good standing of individuals who are approved in other Member States. This platform will also allow for collaboration, information exchange and the sharing of experiences between competent authorities.
The Authority will shortly be revisiting its approach towards the collection of documentation for corporate entities in relation to new applications and changes in shareholding. This initiative will enable the Authority to achieve a consistent approach, and reduce the duplication of requests to the industry, ultimately leading to a more efficient authorisation process. A formalised plan in this respect is expected between Q4 2024 and Q1 2025.
With the aim of improving transparency vis-àvis expectations and processes, in November 2022, the MFSA issued a Settlement Policy aiming at resolving investigations in the shortest possible time to ensure efficiency and productivity. The Settlement Policy contains principles guiding the MFSA and investigated persons on the settlement process, including several exceptions which preclude the MFSA from entering into settlement discussions. The Settlement Policy also contains information on: [i] timelines to be abided by to ensure efficiency, [ii] the reduction of administrative penalties (where applicable), [iii] the publication to be issued once a settlement agreement is reached, and [iv] the termination of settlement discussions. The Settlement Policy has been published on the MFSA website. Since the issuing of the Settlement Policy, the MFSA was, on an ongoing basis, ensuring that the principles envisaged therein reach the aim of resolving investigations in an efficient manner. In fact, recently the MFSA embarked on a review process to amend the Settlement Policy based on the experience obtained during the settlement discussions which occurred these past years. The MFSA will soon be publishing the second version of the Settlement Policy, as updated.
Subsequently, in 2023, the Authority published the Administrative Measures & Penalties - Publication Policy. The main aim of this policy is to establish principles for the MFSA to adopt when publishing enforcement measures imposed on investigated persons, whilst complying with the underlying principle that such measures should not only act as a deterrent but also keep the public informed. Furthermore, the MFSA is working towards publishing the procedures it adopts in carrying out investigations and taking enforcement action.
C. Ensuring effective transpositions/ implementation and enhanced coordination
The Authority remains committed to providing all the necessary support to ensure that EU laws are transposed and implemented by Malta in a timely manner, whilst ensuring that elements of proportionality, enforceability, the interoperability of technical requirements and the identification of opportunities for the local market within the parameters of EU and national law, are duly considered.
To bolster the transposition process and to make it more effective, the Authority has been taking steps to strengthen its stakeholder outreach. In this respect, it has inter alia launched a Stakeholders Panel wherein upcoming EU laws and ongoing EU transpositions are inter alia discussed. Engagement with stakeholders also ensures a smoother transition process for those entities falling within scope by facilitating preparatory adjustments within the market.
Additionally, MFSA officials participate in the transposition workshops organised by the EU Commission. Such workshops serve as a platform through which the Commission can provide the Authority with more practical guidance on the respective EU legislative instruments. This is very often also followed up bilaterally with representatives from DG FISMA5 within the EU Commission, in order to obtain any legal clarifications that may be required in the process of transposition. Engagement with other National Competent Authorities (NCAs), with the aim of exchanging implementation best practices, is also an adopted practice of the Authority.
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Footnotes
1. Markets in Crypto-Assets Regulation – Regulation (EU) 2023/1114
2. Digital Operational Resilience Act – Regulation (EU) 2022/2554
3. In this respect, over the past year, the MFSA has contributed and provided advice on policy discussions that took place at European level (ECOFIN Council and Eurogroup) on the future of the CMU.
4. The MFSA was actively involved during the respective negotiation processes of these legislative dossiers.
5. Directorate-General for Financial Stability, Financial Services and Capital Markets Union
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