Financial technology, or FinTech, has brought radical changes in the way we deal with money, including saving, borrowing and investing online. Ignoring this reality would have been at one’s peril. Rather than looking at FinTech as a threat, the MFSA has placed it as a key element within its Vision and rolled out a strategy intended to reap the benefits of this blooming new industry while seeking to address, at an early stage, associated potential pitfalls.
Malta took an early lead in this sector. The MFSA has worked actively since November 2017, and by late last year it was the first EU jurisdiction to have a complete framework which caters for all key areas of risk, these being the risks to consumers, market integrity, financial crime and cybersecurity. Such a setup resulted in a number of companies expressing interest and taking the decision to base themselves on the island. The Authority has already registered 14 VFA Agents and is now accepting applications for the registration of Whitepapers and licensing of VFA Service Providers.
Still, there is one understandable challenge to fulfill this potential. For a business to operate, access to finance and banking services are crucial. At the same time, and in light of a number of international high-profile money laundering cases which shook major financial centres such as London and Frankfurt, many banks have started to de-risk their business, in order to mitigate risks and combat financial crime. There is a worldwide trend toward de-risking of money service businesses, non-profit organisations, and correspondent banks, which has resulted in account closures and the introduction of significant challenges for new business to obtain access to accounts even in traditional financial services business. Adding to this, as a Bloomberg article succinctly put it, “for banks and money managers, FinTech is causing dramatic upheaval, possibly the most since mainframe computers first whirred to life on Wall Street in the 1960s."
This is where the MFSA, as the financial services regulator, with the support of the Financial Intelligence Analysis Unit (FIAU), is trying to bridge the gap in order to support innovation within this emergent sector, while at the same time safeguarding the integrity of the financial market. Following an extensive consultation with industry and relevant stakeholders, the two entities published a Guidance document for Institutions opening accounts for FinTechs, intended precisely to assist such institutions to acquire a better understanding of the risks of any prospective customers, active in technology reliant areas, prior to servicing them.
The MFSA has made it amply clear that banks and financial institutions would still be expected to fulfill their duties in terms of prevention of money laundering and funding of terrorism Regulations. The guidance however seeks to provide additional assistance as to how adherence thereto can be achieved when a prospective customer carries out particular activities.
It is not, however, the intention of the Authority to place all responsibility on banks and financial institutions themselves. Taking the VFA framework as an example, one of the main risks identified at the conceptual stages of the framework, was the risk that entities operating in this sphere are used for purposes of money laundering and the financing of terrorism. In this respect, Malta has sought to mitigate this risk by going beyond what is required by the EU’s Fifth Anti-Money Laundering Directive and is legislating to make all operators in this field subject persons for AML purposes. Another risk identified was that of cybersecurity, for which the Authority has also issued a set of guidelines for public consultation, particularly addressing the subject within the context of crypto assets.
The MFSA is well-aware of the need to strike a delicate balance in this area. On the one hand, new businesses operating in financial technology will not be attracted to our shores should companies not find the required banking services. At the same time, the MFSA appreciates that banks operate on risk-based priorities and need to follow strict regulatory standards. This is, after all, a key factor behind the reputation enjoyed by the Maltese banking sector.
The Authority therefore invites credit institutions, payment service providers and electronic money institutions to familiarise themselves with this Guidance document. This will go a long way in improving the expectations of all stakeholders – credit and financial institutions, FinTech businesses and regulators.
The MFSA is always ready to assist as required in order to ensure that the full potential of FinTech is harnessed.
