Beyond Malta’s Financial Services Industry

There has been a lot of news lately concerning the whole #MaltaFiles incident with a number of journalists, bloggers, industry experts and others covering this topic. I do not wish to get into the merits of the whole case but would like to highlight the strategic timing of the whole incident just as the country is in election mode and following the #PanamaPapers and corruption allegation at the highest level of governance of our country.

There is no arguing that our country has suffered a reputational blow over all these incidents. Regardless of one’s political views and who one blames for all this, the fact of the matter is that we are all affected by these incidents and we all must act collectively to restore our reputation.

With this post my main aim is to show how all industries are affected by our reputational damage and this is not simply something that has to do with the financial services industry in isolation.

The Multiplier Effect

First of all it is important to recognise the interconnection of industries and the multiplier effect that an industry has on the whole economy. If we take the financial services industry, one may read how it makes up around 15% of Malta’s Gross Domestic Product (GDP) – this means that statistically the income generated by this industry is roughly 15% of all income generated by Malta’s economy. That is just the direct effect – it is estimated that the indirect effect can raise the financial services industry’s contribution to GDP to as high as 30%.

But How?

Easy – think of the residential rental income and properties bought by foreigners working in this industry. Think of the commercial premises bought or rented by companies and practitioners working in this industry. Think of the money that clients and promoters of this industry spend on dining and subsequent personal holidays to Malta. Think of the people who have relocated to Malta entirely and the amounts they contribute across the board to our economy through their spending. The cars they rent to get around or the taxis they hire while visiting, the flights they pay for and accommodation they take up while here.

Not Just Financial Services

It is also very important to keep in mind that the country’s reputation has a direct effect not just on the financial services industry but on any industry that is in some way or another linked to foreign direct investment. So this will include the manufacturing industry, the export and tourism industry, the meetings and conferencing industry, the software development and IT network servicing industry, the gaming industry and so forth. In turn, all these industries have a multiplier effect on the economy. What this means is that even the store keeper of a hotel, the maintenance man of a manufacturing company (like the large semiconductor manufacturer in Kirkop), the checkout person at the supermarket, the cleaning staff of a restaurant and so many other jobs are all affected.

One must also keep in mind the large amount of direct and indirect taxes employees and owners of these entities pay. Thanks to the collective contribution, Malta is boasting a budget surplus, low unemployment and a growing economy. These things do not develop following a short term initiative but are the fruits of medium to long term collective efforts. As many will appreciate, reputation is something that takes years to build but days to ruin. Thus, in these challenging times it is of the utmost importance to give this matter serious recognition and devote all necessary resources to maintain our good name.

The Government’s Role

Although it is true that the government of the day has a bearing on the overall progress of the country and its reputation we must not fool ourselves by thinking that it is solely the government’s role to do so. The private sector has to be proactive at its own initiative to safe guard the name and reputation of our country. One has to see beyond the political noise and mudslinging that only benefits the few and not the many. Regardless of one’s political views, having a situation where the Police Commissioner, the Attorney General, the Financial Intelligence Analysis Unit (FIAU), the Malta Financial Services Authority (MFSA) and other high ranking institutions, as well as the rule of law itself, coming into question, is highly unacceptable. Whoever is in power after June the 3rd should give this the utmost importance and work with industry experts (from the many different industries) in order to have a public-private initiative that can truly benefit the whole economy.

The Bottom Line

It must be recognised that as a country we are constantly in competition with other jurisdictions. If Germany can attract a company to open shop or expand its operation in Germany, then it will do its utmost to attract such business. To whine and complain that other jurisdictions are targeting us and playing dirty is futile. It is a competition, so one must expect the other players to be competitive and use whatever opportunity they get to make us look bad and make themselves look good. Of course this does not mean that we just sit back and accept whatever is thrown at us. We must be prepared for the competition and have strategic plans to defend our name. The current political scenario is putting us at a disadvantage for sure, but every country goes through political issues and no political system will ever be free from its drawbacks.

The upcoming general election has made the situation worse by increasing the political barrage and giving more ammunition to our competition who seek to portray us as an offshore country with shady practices. I will however end on a positive note, we all know that the allegations against us in relation to Malta being an offshore financial centre are untrue and hence we can defend our good name with the truth and with facts. Governance issues can be rectified by replacing the people who have caused the issues and the country’s reputation can be restored. One powerful tool all citizens have is their vote and they must use this tool in a conscientious way to choose the party and political representatives that they feel can best help us on our mission to continue developing our economy and restore our good name.

KD

Attracting FinTech and other new Business Models to Malta

There has been a lot of hype over the last years to attract new types of businesses to Malta such as the FinTech (Financial Technology), WealthTech (Wealth Management using Technology), Algo-trades (investing using algorithms) and more recently Investment-based Crowdfunding Platforms. Rightly so, entities such as FinanceMalta have held several seminars and initiatives to attract these types of business and in fact their 2017 annual conference will be focusing on this theme.

Through this post I would like to give a brief description of these types of entities and to also provide some thoughts on the factors which could deter these types of entities from seeking to be registered in Malta. From personal experience of being involved in a start-up Fin-tech, Wealth-Tech and Algo-trading company Novofina I would like to shed some light on the difficulties faced in attaining a suitable license and remaining compliant to rules and regulations which are based on a one size and one type fits all regime.

FinTech/WealthTech/Algo-Trading

FinTech can describe any financial services entity that uses technology to perform its service or offer its products. The technological innovation can be applied in different parts of the process from research, retail banking, investment selection and even crypto-currencies such as bitcoin. Technologies can include things like Artificial Intelligence (AI) that could be applied to investment instruments selection or to research gathering for estimating market sentiment for example.

Originally FinTech referred to technological innovations applied to the back office of banks and investment firms, nowadays it refers to a wider variety of technological interventions in the retail and institutional markets. The level of technology used varies depending on the type of company and the services it seeks to offer. It can range from mobile wallet systems to robo-advisor services. Even within a category of firm types the technologies applied can be wide ranging. For example, if we take the robo-advisory firms, you could have companies that simply use online data entered by the client to determine their risk profile, financial bearability and knowledge and experience in order to offer a bundled Exchanged Trade Fund (ETF) solution. You can also have so called forth-generation robo-advisors that use algorithm based trading in combination with AI in order to trade different investment strategies on behalf of clients.

An Algo-trader would use a mathematical algorithm that would be pre-programmed with certain rules in order to trade large amounts of instruments (example shares) on the market. The algorithm would be programmed to trade a particular trading strategy and configured in a specific way relating to price, position sizing, timing and risk-mitigating techniques. Thus, not all robo-advisors are the same and even more so not all FinTech or WealthTech firms are the same. This makes it even more difficult to fit into the local financial services regulatory framework and categories of licenses.

Investment-Based Crowdfunding

Crowdfunding, as the name suggests involves the process of gathering a lot of small amounts from a lot of people in order to collectively raise a larger amount. This can range from a simple project such as raising the funds to finance the publication of a book to more complex issues such as using the funds to invest into a new FinTech start-up through an equity stake. So far in Malta investment-based crowdfunding is not really possible since the current regulatory framework dose not really provide for this form of investment. However, we have seen some progress here with a donations-based crowdfunding initiative being launched that raises money against donations and can give back certain perks. There has also been a consultation paper issued by the regulator late last year which period had closed in March 2017. So we are beginning to see some progress here. A very interesting article for anyone looking to find more information on investment-based crowd funding can be found on the latest publication of the Malta Business Bureau here.

Barriers to Entry and Operate

It is a great initiative to attract the most technologically advanced financial services companies to Malta. However, there are certain issues that are hindering their entry and once operative, their operational viability. One of the largest barriers is the regulatory issue. Our current regulatory framework was not designed for these technologically advanced firms and the current situation is that these firms either fit themselves into an existing license category or else they are not welcomed. This is a major issue since it could be forcing firms to have in place certain items which are not applicable to their business model, are costly to maintain and would lead to deterring a potential newcomer from setting up shop in Malta.

To put it more simply, if a FinTech company would like to attain a license to provide services A B and C, why does it still have to apply for a license that caters for services A to G? Although there is some flexibility in the license application process and certain derogations may be applied it is still far from being an attractive preposition balancing investor protection and the reputation of the local financial services industry on one side and attracting the right players that could take the Maltese financial sector to a whole new level attracting cutting edge, niche market firms. On the other hand, the current regulatory framework may present certain loopholes for certain types of FinTech companies since the current regulatory requirements may not fully appreciate the different risks such firms pose to investors and the financial sector in general which could be quite different compared to more traditional financial services entities. Having said that, risk management has taken a much more prominent role nowadays.

With respect to the ongoing obligations of such entities once they have been licensed it is not logical that their capital requirements should be the same as those of other more traditional firms. To put it simply, certain investment services providers are subject not only to minimum initial capital requirements but also to on-going minimum capital requirements. This capital requirement is not simply a calculation of asset less liabilities, but involved certain amendments to arrive at the regulatory capital requirement. One of the deductions from an entity’s capital figure is its intangible assets figure in its balance sheet. Given that FinTech, WealthTech, Algo-Traders, Robo-Advisors and all the rest of these firms invest heavily in software and licensing of such software, and software is an intangible asset, they are currently being penalised for doing so. So on the one hand we want to attract the most technologically advanced firms and on the other hand we are telling them that their software is worth nothing and must be deducted from their capital. To be clear, this is not simply imposed by the local regulator but comes out of the EU Capital Requirement Directive. Simply blaming the EU legislation is not a solution however and when it comes to these technologically advanced firms it is even more so that we are not simply competing just with other EU countries but the whole world. Being online based makes it even easier to setup anywhere in the world with a decent internet connection.

Another problem we are facing locally is the shortage of talent. The gaming industry has brought many benefits to Malta, however it has also created a shortage in IT developers. Administrative staff is also becoming a problem for some firms, especially since most FinTech firms are start-ups and thus have a higher risk of going bust compared to the larger players in the industry. Another problem I see locally is the lack of promotion and support for being an entrepreneur. This last obstacle may the most difficult to overcome since it could be considered a cultural issue. However, with proper incentives and moral support from a young age there is no reason why we cannot produce more students who desire to become business owners. Interestingly enough, investment-based crowdfunding could be a very good avenue where such budding entrepreneurs could find funding to start off their project until they get to a level where other sources of finance could become available to them.

The Bottom Line 

All-in-all I truly believe that Malta has the potential to become a major player in the FinTech arena. It has already proved itself in the fund industry and the online gaming industry for example and there is no reason why a market for FinTech and other technology based financial services firms should not also be successful. However, to reach such a realisation there must be more support and initiatives for such firms to choose Malta. Some barriers like certain regulatory issues are not entirely under our control. However, if our regulator decides to gold plate an EU directive this would hurt our chances of attaining success in this sector. One such example that comes to mind is the “holding and controlling” of clients’ money requirement locally, when the EU directive speaks only of “holding” clients’ money.

KD

The views expressed are the personal opinion of the writer and do not necessarily reflect the opinion of any entity the author is associated with.