A chartered insurance risk manager, James is a Fellow of the Chartered Insurance Institute and a Fellow of the UK Institute of Risk Management and also holds an MSc in Risk Management from Glasgow Caledonian University. He started his career in banking in 1986, moving to insurance with Middlesea Insurance plc (now Mapfre Middlesea) in Malta later worked in London, Central Europe , the Middle East (Bahrain, UAE and Qatar) and East Africa with a career spanning commercial and industrial insurance underwriting, distribution, outward reinsurance, broking, risk management, captive management, consulting and training. He is now an non-executive chairman and director on a portfolio of insurance companies in Malta operating across Europe by virtue of the EU Freedom of Services Directive. He is also active in consulting with Cutts-Watson Consulting and as a visting unversity lecturer locally and overseas. James is the President of the Malta Insurance Institute. views expressed are personal [james@mii.mt]
I start this piece with a ‘caveat’. Living in a country with two main political parties that, notwithstanding that they are both highly polarized to the centre (even more so, with a clearly capitalist Labour Party and relatively left-wing Conservatives), whatever one opines ends up being relegated in the minds of many as politically charged drivel. But I’ll say it anyway. There is no red, blue, green or orange this story. There is only grey in this story. Possibly more than fifty shades of it; but it’s all grey.
Citing the A, B and C fundamentals of risk management, one needs to identify a risk, evaluate it in economic terms and, based, on the prognosis, control it through avoidance, transfer, controlled retention or financing. At macro-level, the same rules apply.
Clearly in the political roadmap of the government contenders of nearly a decade ago, proper risk management protocol was not necessarily high on their agenda. And, in doing so, they relied on perceived misgivings that occurred during the government administration incumbent prior to 2013. I say this so that this statement is not spun by either of the large parties to pathetically earn brownie points against the other. Although there is seemingly an uncanny resemblance, in ludicrous petty bickering, with the Gaulish village of Uderzo, Goscinny and Ferri, we are still talking about an actual sovereign state.
In one example, Central Bank directives regarding licensing of banks involving singularly large, possibly non-financial shareholders were relaxed by the local regulatory authorities whereby the requirement of a bank of repute being within the group shareholding structure was relaxed from an explicit to a discretionary requirement. If this had not happened, regulatory authorities in Malta may have subsequently been precluded by regulation from authorizing the likes of SATA and Pilatus. This is, now, all water under the bridge since in 2015 the ECB took a more visible role in banking authorization and supervision across Europe by virtue of EU’s Single Supervisory Mechanism. But by then the horses had bolted. There are some interesting studies touching on the topic, some alluding to international debacles even pre-dating the above local example. So, it was a mistake we could have prevented 20 years ago and an after-the-event lacuna we should not have exploited
The above is not the only example of lack of risk management foresight coming back to bite our jurisdiction in the rear. A few days ago a local independent daily newspaper ran an article about, “€60 billion in cryptocurrency and other virtual assets moved through Malta after it first announced itself as the ‘blockchain island’, when controls were still considered lax.”
In any situation where the proverbial hits the fan, those closest to the aisle generally hope that they can convince those around them that there was some extraneous factor that caused the chaos. They’d like us to miss the wood for the trees, but in all major corporate failures, globally, the root cause is always the same, i.e. moral hazard. Nothing drives this point home more than Gillian Tett’s book, “Fools Gold” which provides the inside story, from an anthropological perspective, of how unchecked greed culminated in the global financial crisis of 2008. Not unlike Malta, a contributing factor to the global financial crisis was the infamous “soft-touch” legislation.
Those in the insurance industry familiar with fidelity, cyber-crime and similar insurance products appreciate the term “discovery period” underlining the time it generally takes for criminal activity to translate into a financial loss.
The words that, perhaps, best capture how these situations unfold are Hemmingway’s, “Gradually, then suddenly.”
Therefore, for a country to state that grey-listing is (quoting the Prime Minister of Malta), “unfair” because the country was now able to demonstrate a raft of anti-money laundering reforms on paper is tantamount to judging an iceberg by its tip. That the previous Prime Minister concurs with the current one comes as no surprise. The transgressions that prompted the attention of institutions such as FATF happened, first gradually, under his watch and then culminated, fast, into the situation we are in today under the current Prime Minister.
Once we missed the boat in the A, B and C of risk management and the proverbial has hit the fan, the country should have gone into containment and recovery mode (again basic risk management principles).
Denial is nowhere close to the first steps of containment and recovery. Denial, in fact, shifts the gear in reverse mode!
One of the lasting, positive legacies of Nelson Mandela is the founding of the Truth and Reconciliation Commission that advocates restorative justice. It is conceptually successful because the foundation of justice lies first in the pursuit and admission of truth.
Translating this to the government’s response to FATF’s grey-listing decision, it’s somewhat infuriating to note that at no point has the government owned up to the possibility of there having been potential transgressions and insufficient enforcement. The road to recovery has to start from there because those who find it convenient to hide, forget or gloss over history are condemned to repeat it. A government owes this to its people. While members of parliament can serve for a minimum of 2 legislatures and are guaranteed uncapped pensions after that, the person in the street at all echelons of society has to live with the fallout. No amount of philosophical spiel on classical Sparta and Athens by a sitting, senior member of cabinet will address this fact or serve to allay concerns.
For banks to state that they do not foresee, “any significant difficulties” arising from grey-listing is also stating the obvious. They are deemed to be systemically important to an economy and bailed out at every instance without breaking a sweat. And that, in itself, is also part of the problem. It’s the rest of the economy that then has to pay for it.
How long is a piece of string? There isn’t a single objective answer to this. There are some indicative markers. For example, OECD has some reports on the impact on foreign direct investment or drop in capital inflows as a percentage of GDP arising out of grey-listing.
Similarly, but on a slightly different vein, when Ireland was downgraded by rating agencies following the global financial crisis, there is economic data to suggest that this adversely effected its rate of economic recovery.
We are now also going through a period of recovery, post Covid-19. Increased regulatory monitoring as a result of grey-listing will adversely affect foreign investment. Incentivizing local property sales overseas and continuing with the passport investment schemes will, arguably, not help our cause.
Other countries on the grey-list include Albania, the Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Romania, Syria, Uganda, Yemen, and Zimbabwe.
Putting the above into perspective, there are only two other European countries on this list and only one other (i.e. Romania) from the EU.
Malta is not the only EU jurisdiction that promotes itself as a financial centre. So do Luxembourg and Ireland. Within the wider European context there are also many others. Reputationally, grey-listing harms us. But the brunt may already have been borne prior to the event.
Despite the flurry of activity within MFSA in recent years, there was only a marginal increase in new insurance or reinsurance companies registering in Malta from 2018 to 2019 and a decrease from 2019 to 2020. There where two (and there still is one) factor contributing to (re)insurance (and captive (re)insurance) company growth within the EU, i.e. Brexit and the continuing hardening market. All jurisdictions of repute in Europe (and not just the EU) have grown and continue to grow, some significantly, mainly because of these two factors. Malta hasn’t!
It is subjective how much of this is due to reputational fallout preceding the grey-listing event or due to musical chairs and ‘early retirement’ of expertise or upheavals within MFSA for whatever reason. But it is not the last straw that breaks the camel’s back, and, in Hemmingway’s words, it first happens gradually and then fast.
Talking to local and foreign stakeholders with a locally vested financial interest, comments are very similar. Malta, on joining the EU, punched above its weight and was a market of promise. This is not a surprise, seeing some of the global heavyweights that invested in the insurance industry locally (Munich Re, PSA, Renault, Nissan, Vodafone, Fortegra, Starr, Aon, Marsh, Willis, Artex, Mapfre etc.). But something, somehow, somewhere went completely haywire over the last, say, five years or so. Even the trickle of authorizations of such entities has now stopped and the industry is now parched of the global trust that such brands bring to Malta. I am not suggesting that this is in anyway related to the FATF decision now. But I am stating that something is amiss and has been for some time. Some may argue that it is not the regulator’s job to promote the industry. And, that is a valid argument. “Where is or has been Finance Malta in all of this?” may be a valid question to ask. But, indirectly, a regulator also plays a role in promoting the industry since there is no better way of killing a bad product if not by very strong marketing (and then falling short on delivery). There is no doubt that foot-soldiers and lieutenants in the insurance and pensions supervisory units of the regulator are professional, hard-working individuals. Where, in between (or above), are we falling short?
All of this also serves to strengthen the argument at EIOPA level to “increase regulatory oversight cooperation” which, under the guise of “cooperation” seems to be heading into more of a covertly controlling position. Although in principle, this may be seen as going against the very foundation of the EU freedom of movement, it might arguably find justification in the perception of lax or differing regulatory oversight across jurisdictions. Grey listing does not help us.
Another force, acting from a new and independent source, is OCED’s tax global tax harmonization effort. One hopes fiscal sovereignty does not become a bargaining chip in the “horse-trading” exercise that inevitably ensues between the victor and the subdued after black or grey listing. This is completely extraneous to grey listing, but OECD’s cause may be aided by the FATF outcome and, wherever, the penny drops, Malta would lose out.
For existing international insurance stakeholders invested in Malta, some may experience increased regulatory scrutiny. Possibly nothing more than what we have been subjected to over the last couple of years. So, grey listing will not be necessarily cause us to lose existing companies or investment.
The case may be different for entities in pre or in application stage. Plans will possibly be reviewed in the light of recent news. Given that we do not seem to be seeing too much fresh activity other than in cells (or local tied intermediaries), at a macro level this would probably translate into negligible negative impact for the insurance industry. It’s also difficult to quantify this in respect of applications that are still on the drawing board.
As an industry one may argue that it is difficult to suffer injury when asleep. The lack of fresh insurance authorizations of substance suggests that. But, the bigger picture suggests that we need to address why we are not attracting more companies? Who is failing in the job of evangelizing the Maltese insurance brand and what can the regulator do to be more proactive at a time when fundamental reform is required?
Grey-listing pales within the context of the real woes of the Maltese international insurance industry. Sadly, it also serves to add to the complications. It is a multi-lateral problem requiring a multi-lateral solution with a tone required to be set from the top (that for the past decade has been muted by the din and distortion of crypto-currency, block-chain and recent perceived macro-regulatory short-comings).
Who will rise to challenge?