Competing in Global Markets

Kenneth Farrugia

“The continued growth of our finance sector is being driven by new fund set-ups and redomiciliations from non- EU jurisdictions”, Mr. Farrugia stated in welcoming the 265 participants on behalf of FinanceMalta. “We are seeing the development of a cluster with 581 Funds (Net Asset Value totalling € 9.79 billion), 113 Investment Services Licences have been issued, there are 26 Fund Administrators and six Custodians Funds domiciled here. Between 2004 and 2012 the number of insurance operators has grown from 8 to 59, while the number of trusts and trustees have increased from 98 to 131 since 2008.” Mr. Farrugia cited a series of creditable rankings for the sector, in accordance with the Global Competitiveness Index 2012 – 2013. Out of 144 Countries Malta ranked 15th in financial market development, 13th in soundness of banks, 12th in regulation of securities exchanges 16th in strength o auditing and reporting standards, 16th in quality of the education system and 15th in the quality of maths and science education.

“Last year we carried out 29 national and international initiatives,which included participation in events in France, Italy, Luxemburg, UK, Sweden, Switzerland, Hong Kong and South Africa while the sector was featured in topline financial publications. Between March 2012 and April 2013, we contacted 116,392 people, conducted 132 email campaigns while 61.9% of the hits on our website were new visitors, 5.6 million visits were logged on our Facebook page and over 494,000 contacts on Twitter.” “Our critical success factor are human resources, cost competitivity, our legal and regulatory framework and accessibility to the regulator. Our two imperatives for the future are to remain nimble, managing challenges in a timely manner and fostering innovation by further strengthening collaboration between the the industry, the regulator and the government.” “We have launched a 3-year roadmap starting this year, will build on past initiatives, conduct micromarketing, and continue to leverage technology in particular through social media, webinars and podcasts and our new website which has just gone online.”

Kenneth Farrugia is chairman of FinanceMalta

Edward Scicluna

Malta resisted strong pressures from Russian banks in the 1990s to operate here, which were supported by an official visit from the speaker of the Duma ( parliament) and a group of legislators, Professor Scicluna, Malta's Minister for Finance stated in answer to a question from the floor. “We were taking advice from top experts in New York and London who warned us not to touch them, so we refused – thus taking a different path from Cyprus” ”Against the backdrop of a severe economic crisis Malta's economy has continued to grow although at a moderate rate,“ he indicated in his speech. ”Our debt is higher than the 60% we are committed to as members of the Eurozone, but not yet anywhere near the unsustainable levels seen in Greece, Italy or many other European countries and is set to be reduced. The rate of unemployment in Malta is just 6.5%. Inflation is under control at 2.4%.” ”One of the factors which have contributed to our success so far is the stability of Malta’s banks, which continued to apply sound banking practices and maintained a healthy capital reserve ratio, allowing them to ride the storm that has brought many of their counterparts in other countries to their knees.

They went into the crisis with strong balance sheets, with capital ratios well above regulatory minima and strong loans to deposits ratios. This translated into stability for the banks themselves and, importantly, for the businesses that relied upon them for operating credit and thus for the economy as a whole. ” The current situation was a reflection of the growing international trust in Malta as a sound and reputable financial services jurisdiction the sector maintaining, for the most part, a high level of integrity and service quality; well-regulated, yet the regulator remained approachable and in touch with the industry. “Malta's high standard of corporate governance must be maintained and is now being recognised by the rating agencies that in the span of one week each came out with reasoned opinion why Malta’s financial centre cannot and should not be compared with that of Cyprus. The basic message to us all is that we can easily lose the stability we have enjoyed so far if we depart from these basic principles.” “Discussions on the best way to compensate financial services operators, investment managers and advisors and others needs to take place within the industry itself and not just between legislators.

The objective is not just the maintenance of Malta’s prosperity in isolation; in an interconnected world, even more so in a currency union, full realisation of our potential in Malta means that all our neighbours need to be pulled out of crisis as well.” Malta was actively participating in the process of reforming the European regulatory regime which included new regulations on alternative investment fund managers as well the banking union – one part of the move towards a more coordinated approach to financial regulation - .the necessary counterpart to the completion of a single European market for financial services. Parliamentary approval would shortly be sought for the ratification of the EU Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, known as the Fiscal Compact. The government would also introduce a series of measures to improve the functioning of the economy such as promoting private investment in the energy infrastructure, boosting female employment by providing free child care centres for all, cutting the numbers of early school leavers and addressing the pension problem in consultation with social partners and the financial industry.

“On the fiscal front we intend to continue, in spite of a one-time pre-electoral fiscal slippage last year, to consolidate our public finances by 0.6% each year including this one, so that we not only continue keeping our deficit with the 3% threshold but aim to reduce this figure until it turns into a surplus. Only this way can we be seriously addressing our national debt problem.“

Professor Scicluna is Minister of Finance of Malta.

Chris Cardona

“Over the years Malta has gained a reputation as a robust regime with a highly approachable regulatory authority,” Malta's Minister for the Economy, Investment and Small Business said.

“There is international recognition that the Maltese regulatory framework provides a secure and stable structure, with prudent supervision, consumer protection, market surveillance and prevention of money laundering. The model underlying our success is the robustness and adaptability of our regulatory framework that allows managers and promoters to innovate, developing new products to meet the changing needs of industry. We must ensure that this framework keeps functioning the way it has, allowing enterprise to flourish.“ “It is the Prime Minister’s as well as my intention to build on the success achieved, keeping up the momentum.

During the Prime Minister's visit to France this week, President Hollande speaking to international media endorsed Malta's economic and banking systems – a testimony of the high standing that our jurisdiction holds internationally and of the diplomatic effort that is being undertaken by the Prime Minister to ensure that our credibility and reputation are safeguarded. “ Malta had the necessary infrastructure in place for the continued expansion of the finance industry, now employing 10,000 people and contributing up to 12% of Malta’s GDP, (including direct and indirect contributions). The overall capital adequacy ratio is above 50%, exceeding significantly the minimum regulatory requirement of 8% under the Capital Requirement Directive. In January the International Monetary Fund had confirmed the health of Malta’s banking and insurance companies with relatively sound capital and liquidity ratios. “It is within the parameters of this framework that we will further promote Malta as a destination and jurisdiction where the finance services industry can flourish,”

Dr. Cardona indicated. “Within this legislature I shall be working with the Minister for Education and others to ensure that we have the right talent and skills mix to reach and service our target markets.” “The government is committed to doing away with unnecessary red tape that burdens business. And it will be helping companies to control costs by reducing their energy bills. We will promote synergies for innovation between government, the regulators and operators so as to develop new products and services that respond to international market requirements. These include payment development, electronic money institutions and captive insurance business. The accessibility and availability of our embassies as centres and facilitators for the promotion of Malta as an investment and financial services destination is also important. “ “As Minister responsible for the economy, I want to reiterate my government’s open door policy and pledge my accessibility so as to work with you making Malta an ever better financial services centre. Together, we must spread the word – Malta is secure and stable, it is a fantastic place to build a business and innovate, it has a skilled workforce, is open to the world – with the English language, good communications and a vast European market.”

Chris Cardona is the Minister for the Economy, Investment and Small Business of Malta.

David Powell

“Comparisons between the dangers posed by the banking systems of Cyprus and Malta appear to be misplaced,” Mr. Powell asserted, “though the rapid expansion of the Maltese financial sector has the potential to someday become a problem.” “Cyprus was also more indebted before the bailout than Malta - respective gross government debt-to-GDP ratios standing at 84 percent compared to 73.1 percent at the end of 2012. In addition, as far as peripheral bonds are concerned, the Governor of Malta”s Central Bank, Professor Josef Bonnici has stated that Maltese domestic banks have limited exposure to securities issued by the programme countries.” Malta, along with Austria, Germany and Slovakia has seen far more robust economic momentum in recent years, than other EU member states, according to Mr. Powell.

The European Advisory Group Report on the European Economy 2013 found that these nations had benefited from the relatively solid condition of their public and private finances, as well as their high level of international competitiveness. “While Ireland could be described as 'good' along with Malta, Italy, which remained vulnerable to external shocks, as well as France to a lesser extent are the 'bad' while Spain, Slovenia, Portugal and Greece are the 'ugly'.Thus for example the new International Monetary Fund (IMF) forecasts for Spain suggest the organization’s economists find its sovereign debt to be unsustainable seeing it rise to 110.6 percent in 2018 from 84.1 percent at the end of last year with no peak in sight.” !The worst-case scenario reported by the IMF for Slovenia would still leave the sovereign debt of Slovenia low relative to many euro-area countries. The debt-to-GDP ratio would rise to 66.9 percent by the end of 2017 from 53.2 percent at the end of 2012 using those assumptions. However, there is no peak to the debt-to-GDP ratio while recapitalisation needs may be underestimated.”

As regards Greece the manufacturing Purchasing Managers' Indexes (PMI) survey fell to 42.1 in March from 43 in February, the 43rd consecutive reading below 50, according to Markit Economics. The forward-looking component on new orders provided little hope for a turnaround in the near future. Mr. Powell considered that the European Central Bank (ECB) was increasingly likely to ease policy – the Taylor rule suggesting it should cut the interest rate by 50 basis points. Interest rate expectations might weigh on the EUR/USD (euro to dollar) rate although this no longer appeared vulnerable to panic sell-off, nonetheless long-term trends suggested a weaker rate.

Long-term cycles fluctuating around Purchasing Power Parity (PPP) tend to last five to eight years, suggesting another one to four years of depreciation David Powell is an economist with the Bloomberg Group. Alexander Wagner Executive compensation should be kept as simple as possible, based on pay-for-performance vs. bonus limits (according to the Capital Requirements Directive (CRD) IV which came into force this Janaury ) as well as on ex-ante risk adjustment and ex-post maluses, Professor Wagner advised. "The CRD IV rules pose a challenge to European banks to retain staff while the idea that a good compensation system links managerial pay to measurable and directly controllable performance indicators is a myth. An effective compensation system establishes entrepreneurial incentives, focusing on value created for the long term. A “one-size fits all” approach is not practical given firms’ different business mixes and models while “best practice” is an illusion. Formulae do not always deliver consistent or sensible results and can lead to unintended consequences." Supervisors need to form a firm-by-firm judgment as to whether an appropriate risk culture is being embedded, while only a strong board can implement an effective total compensation system. Regarding shareholder power, stability must be ensured as tectonic shifts are taking place in the power landscape of companies, according to Professor Wagner. "The idea that enhancing shareholder rights is always good is another myth.

However, enhanced proxy access is strongly advisable, including by online voting and improved proxy advice. There is also need for more frequent, more competitive elections of boards of directors as well as Say-on-pay – last December the European Commission announced that it will issue a related directive this year." In Switzerland, the recent “Abzocker-Initiative” (Anti-Rip-Off-Initiative) adopted by referendum focused on say-on-pay, but also a broad range of measures setting tight limits and conditions on executive salaries paid by Swiss companies listed both nationally and internationally. Violation of any of the Initiative's provisions is punishable by a jail sentence of up to three years and a fine of up to six times annual compensation. “A third myth is that disclosure had no value and was just something companies had to do. "Disclosure obligations should be seen as an opportunity for value reporting, an element in the value creation chain rather than for disgruntled compliance," he emphasised. "Talk about trends, about the basis for strategic decisions.

Carefully communicate regarding confidential information, but don’t think you can get away with just claiming confidentiality." Professor Alexander Wagner is on the faculty of the Swiss Finance Institute at the University of Zurich. Richard Ogden Economic uncertainty and globalisation are the key drivers of the on-going global tax policy change, according to Mr. Ogden. "There are distinct differences in growth rates by region while by 2015/2016 emerging countries will account for 74% of all global growth. Economic influence is being rebalanced from west to east, and north to south, with the sovereign debt crisis accelerating the shift. GDP rankings are changing; China has overtaken Japan and Brazil has overtaken the UK. New consumer markets are opening – the global middle class is growing; now at 1.8 billion it is expected to reach 5 billion in 2030 with 85% of that growth coming from Asia In the next 10 years, China’s middle class will grow from 5% to 40% of its population."

Recent trends between 2009 to 2012 included falling headline corporate income tax rates but an expansion of the tax base, a marked shift towards territorial taxation, a growth of indirect taxes, interest and expense deductibility, thin capitalisation, tightening loss utilisation, taxation of immovable property and anti-abuse measures. Limitation of financial interest deduction and mandatory transfer pricing documentation were becoming common rules worldwide while there was a convergent evolution of anti-avoidance rules accompanied by a a growing use of Tax Information Exchange Agreements, "In corporate taxation tax, incentives relating to R&D and industrial property have been maintained or adopted. Several international initiatives have recently emerged or will soon do so from the Organisation for Economic Co-operation and Development, the United Nations, the g20 and g8 as well as the European Commission, in particular the December 2012 measures relating inter alia to tax havens and transparency while work in the EU Code of Conduct foreshadows additional initiatives."

"At 72% of GDP, Malta's gross financial liabilities are below the EU 27 average of 93%. Europe is showing a steady or decreasing corporate income tax rate, while Malta's has remained unchanged at 35%, as has its VAT at 18% whilst rates in several other member states are moving upwards." "Against the backdrop of global and EU trends, Malta faces a number of challenges on taxation such as delivery of certainty, building and maintaining reputation, designing the tax structure and defining the role of each tax, " Mr. Ogden concluded.

Richard Ogden is an executive of Ernst & Young, UK.

Anthony Fisher

“Malta was a late entrant into international and offshore finance when it established the Malta International Business Authority (MIBA), succeeded by the Malta Financial Services Authority (MFSA),” Mr. Fisher said. “Offshore was ring-fenced - excluding residents and sometimes restricted to certain locations/zones with the MIBA regime covering only offshore holding and trading companies, a system which came to put Malta's then Double Taxation Agreement network under threat and earned unfavourable listings. The solution was found by legislating comprehensive financial reform to include a new Compankes Act, new financial regulations, a new regulatory authority and a new tax code.”

“Malta's “ups” are conservatism, consultation, co-operation and community: however, as the recent Cyprus-related focus on Malta has shown, it can expect increasing international attention to the workings of its financial sector in the future.”

Anthony Fisher is an executive of Global Strategy Limited.

Fabio Recine

“The Single Resolutions Mechanism (SSM) whose related regulation is expected to be formally adopted and published in July, further to the political agreement of the European Parliament and the Council at the end of last year, will break the adverse feedback loop between sovereigns and the financial system, stop the defragmentation of the Single Market and is a pre-condition for bank recapitalization through the European Stability Mechanism (ESM)”. “It is a component of the banking, fiscal, economic and political union called for by the recently issued Van Rompuy report “Towards a genuine economic and monetary union”. “The main prudential supervisory tasks of credit institutions will include the authorisation and withdrawal of authorisation of credit institutions, assessment of applications for the acquisition and disposal of qualifying holdings, ensuring compliance with prudential requirements (own funds, large exposure limits, liquidity, leverage and disclosure etc. as well as the adequacy of internal capital and apply requirements on governance arrangements.”

“Their main powers will be to apply all relevant Union Law and national legislation implementing EU directives, conduct investigations, require information, conduct on-site inspections (subject to prior notification to the national competent authorities), apply sanctions and early intervention tools.” National authorities would remain competent to apply macro-prudential requirements (e.g. additional capital buffer). Appropriate coordination with the overall ECB role would repose on the obligation on national authorities to notify the intended decision to the ECB, which may object. If this happens, they must consider ECB’s reasons. The ECB would also have power to apply higher requirements for capital buffers and more stringent macro-prudential measures (also upon proposal of a national authority). If the national authority objects, the ECB has to consider its reasons. 2Significant credit institutions are defined as those with assets above €30 billion, with a ratio of assets to GDP over 20%,” 

Dr. Recio explained. ECB will exercise supervision of the three most significant banks in each member state with national competent authorities responsible for assistance in the preparatory and implementing activities and the related framework to be published by the ECB in consultation with these authorities (six months after the publication of the SSM regulation).” “As regards eventual disagreements raised by non-Euro Member States the ECB Governing Council will withdraw or confirm its objection. In the latter case, the state may the ECB that it will not be bound by it while the ECB may consider the possible suspension or termination of the close cooperation.

The Supervisory Board to be established will include a Steering Committee, a Mediation Panel, an Administrative Review Board, and expert committees as required, backed by establishing supervisory business areas within the ECB management structure.“ While supervisory and monetary policy functions would be separated as would staff and rules on information exchanges within the ECB, its independence would be safeguarded by ensuring financial independence (supervisory fees), personal independence of members of Supervisory Board and Steering Committee, a code of conduct for ECB staff, procedures to be established to to prevent possible conflicts of interest from subsequent employment within two years (without prejudice to stricter national rules). Dr. Recio added that “ECB accountability will also be strengthened towards the European Parliament and Council as relates to its supervisory tasks by means of an annual report, hearings of the Chair of the Supervisory Board by the Eurogroup and EP committees if requested as well as closed-doors discussions with the Chair and Vice-Chair of EP competent committees (based on agreement between the ECB and the EP on the modalities).” “In addition, national parliaments may request the ECB to reply in writing to questions and invite the Chair to participate in exchange of views. Finally, staff exchanges are important to create a truly integrated supervisory mechanism and a common supervisory culture.”

Dr. Fabio Recine is Principal at the Directorate-General for Financial Stability of the European Central Bank

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