Malta grows despite global pressures

In its annual report the Malta Financial Services Authority reviews the market

Despite further worsening in the economic environment towards the
end of 2008, the financial services sector generally continued to experience the
same rates of growth as in recentinternational years.
The Labour Force Survey for the period October 2007 to September 2008 published
by the National Statistics Office showed an increase in employment in financial
intermediation services of nearly 1,000 bringing the total number of employees in
the sector to 6,190. This represents 3.8% of the national workforce.

The figures released are for financial intermediation services only and do not
include increased employment in related professional services and business
activities which have also been expanding significantly over the same period.
The number of licensed companies continued to grow. As reported further on,
substantial increases have been registered in the number of Professional Investor
Funds and insurance companies. Growth in intermediation services particularly in
the number of fund administrators and trustees has also been significant, while
insurance management services continued to consolidate with the arrival of
another global player. Another credit institution and two financial institutions have
been added on the banking side.

The World Economic Forum’s Competitiveness Index 2008-2009 (published
in September) ranked Malta 34th (out of 134 countries) for financial market
sophistication, while the banking system was reported to be the 10th soundest
in the world.

BANKING

The international capital markets have been affected by a significant re-pricing
of credit risk and a liquidity squeeze since the second half of 2007. Huge losses
suffered by the banking industry worldwide have led to extraordinary state
intervention measures aimed at shoring up institutional and consumer confidence
and re-establishing liquidity in the market. The effects that this state of affairs
had on the local banking sector by the end of the year have been relatively limited.

Despite this, government has followed eurozone guidelines and increased the
level of protection under the relevant deposit protection scheme to €100,000.
Maltese banks have a strong capital base. The fact that their local deposit base
is also strong has moreover shielded them from liquidity pressures as they do
not have to rely on loans sourced on the international market to finance their
operations. On the other hand the fall in the value of assets on the financial
markets has had a negative impact on the investment portfolios of some banks.
This may in turn lead to lower profits which, however, their capital base should
be able to withstand.

As at the end of 2008, the aggregate banking sector’s Capital Requirements Ratio,
which is a percentage of the bank’s total own funds to its total risk-weighted
assets was 18.05 per cent. During 2008 risk-weighted assets increased at a
faster pace than total own funds. The aggregate ratio of original own funds to
total risk-weighted assets was 16.33 per cent as at the end of 2008. Original own
funds of the majority of banks in Malta is composed of ordinary share capital,
retained earnings and other eligible reserves.

Credit Institutions, Branch Network and Electronic delivery channels
The Maltese banking sector consists of 221 credit institutions authorised to
conduct business in Malta, three of these are Maltese-owned while 19 are
foreign credit institutions having a physical presence in Malta. 12 of the foreign
credit institutions are from EU countries, five from non-EU countries and two are
branches from non-EU countries (Table 1).

There has been a significant growth in the volume and value of financial transactions
during the past decade as a result of technological advances, financial innovation,
deregulation and competition. The majority of client transactions with banks are
still carried out in cash although the proportion is falling steadily. Technology
has become increasingly important for transactions which include cheques,
automated payments and plastic cards.

At the end of 2008 there were a total of 129 bank offices and branches throughout
Malta. The number of ATMs totalled 163 and the number of cards with a cash
function reached a total of 562,220.

The assets of the aggregate banking sector2 in Malta totalled €41.9 billion at the
end of 2008, up by 10.5 per cent from the previous year and nearly double the
total in 2004. Assets of the domestic banking sector3 totalled €14.6 billion (35
per cent of the total assets) at the end of the year, an increase of 3.3 per cent
over 2007.

Net loans of the aggregate banking sector increased by €4.8 billion or 18.7 per
cent over 2007 - after having already increased by €6.1 billion (29.2 per cent)
in the preceding year. The amount of purchase, resale agreements and term
deposits decreased by €555.5 million (21.6 per cent) in 2008. The corresponding
figures for 2007 had shown an increase of €385.2 million (54 per cent) over
2006.

In the domestic banking sector, net loans contributed to 55.4 per cent of the asset
distribution of the sector, followed by net securities at 23.4 per cent and money
market assets at 12 per cent.

Deposits

Deposits in the banking sector continued to grow during 2008, reaching €21.3
billion at the end of December, an increase of €2 billion or 10.5 per cent over
2007. This figure also represents an increase of €10 billion over 2004.
The domestic banking sector’s share of total deposits was €10.3 billion or 48
per cent of total deposit liabilities. Aggregate deposits for the domestic banking
sector increased by 1.3 per cent over 2007 and by 26.4 per cent over 2004.
78.7 per cent of the aggregate banking sector’s deposits were time deposits,
14.9 per cent were savings accounts while current accounts amounted to 6.4 per
cent of total aggregate deposits. On the other hand the composition of deposits
in the domestic banking sector was as follows: 58.8 per cent time deposits; 29.8
per cent savings and 11.5 per cent being current deposits (Chart 2 - Trends in
deposit liabilities).

The prevalence of the traditional banking model in Malta, where banks fund their
lending activities mainly from deposit taking, became more pronounced in 2008
as it became increasingly difficult to tap liquidity from the international markets
and inter-bank lending dropped by 13.2 per cent.

Loans and adva nces by sector

A sectoral analysis of bank lending in Malta shows that 21.3 per cent of loans in the
aggregate banking sector in 2008 were advanced to the financial intermediation
sector. This was followed by the manufacturing sector (16.8%) and households
and individuals (11.3%). Total aggregate bank lending as at the end of
2008 was €26 billion, more than twice the level in 2004.

In contrast to the aggregate banking sector, households and individuals accounted
for 35.6 per cent of lending in the domestic banking sector; followed by real
estate, renting and business activities (14 per cent); wholesale and retail trade
(9.6 per cent) and the construction industry (9.2 per cent) (Chart 4). Overall
lending in the domestic sector increased by 26.4 per cent over 2004.

Chart 5 shows that the majority of the loans advanced to individuals and
households within the aggregate banking sector, is attributed to the domestic
banks. The high percentage of loans advanced to the financial intermediation
sector, as resulted from the aggregate banking figures, refers to intra-bank loans
within foreign banking groups.

SECURITIES AND INVESTMENT SERVICES

The aggregate Net Asset Value (NAV) of investment funds (retail and professional
investor funds) in 2008 remained stable at around €9 billion for most of the year.
The NAV figure reported in December, however, showed a fall in value in line with
the fall in the value of assets on the financial markets. A net increase of 102
Collective Investment Schemes (including sub-funds) were registered at the end
of the year bringing the total number of funds to 398. A significant amount of nondomiciled
funds also started being serviced by Malta based fund management
and administration companies in 2008.

The fund servicing infrastructure continued to consolidate and expand with the
establishment of more international services providers during the year. In the
Professional Investor Funds (PIFs) sector - where Malta-based funds may use the
services of managers and administrators based in other recognised jurisdictions
– Ireland followed by Malta are the domiciles where Maltese funds normally
source their fund administration (Chart 9).

During May, Custom House Global Fund Services Ltd. (“Custom House”) and Equity
Trust announced the formal merger of Equity Trusts Fund Services Business and
that of Custom House. The merger received regulatory approval in the various
jurisdictions in which Custom House and its subsidiaries operate and became
effective on 2 September 2008. The merged businesses now operate through
“Custom House Global Fund Services Limited”, a Malta based Category 4 licensed
company. In addition to the Maltese office, Custom House Global Fund Services
Limited will operate through Custom House offices in Dublin, Luxembourg,
Chicago and Singapore, as well as offices in Guernsey and the Netherlands.

Before the merger Custom House had been servicing a growing number of
Malta based funds from Dublin and the Group looks set to start providing fund
administration and custodial services in Malta.

Other well known groups which have obtained Recognition Certificates to carry
out fund administration in Malta this year include SGGG Fexco Fund Services
(Malta) Limited and Praxis Fund Services (Malta) Limited with the latter quoting
the quality and availability of employees and the strength of professional services
as key elements in the framework provided by Malta.

The asset management industry also registered important gains with the arrival
of established names such as Liongate, Oceanwood, Blue Planet and Fortelus.

INSURANCE

Between 2004 and 2008 the insurance sector grew from 12 domestic insurance
companies servicing the local market to 41 insurance companies providing
insurance services across 27 EU countries and beyond. In 2008 the number of
newly licensed (re)insurance companies was 11. Protected Cell Company (PCCs)
services also took off in 2008, with three PCCs operating ten cells by the end of
the year.

Audited figures with respect to the volume and segmentation of business for 2008
have to be submitted to the Authority by 30 June 2009. Accordingly at the time of
presentation of this report the figures available were those received for the year
2007. The trends, however, continue to confirm the extent of business growth
that is taking place.

Between 2004 and 2007, premiums for general insurance business have grown
from €116.8m to €508.8m (or 335% in 4 years), while the life insurance sector has
practically doubled to €265.1 million. At the end of 2007, the overseas insurance
market accounted for 60% of total gross premiums written in the general and life
business sectors.

Figures for 2007 published by the MFSA in the course of the year showed an
overall expansion in insurance business of 41% over 2006. Total Gross Premiums
Written (GPW) in 2007 amounted to €764 million, a €223m increase over the
previous year. The gross technical provisions at the end of 2007 for non-life
insurance stood at €471.6 million while those for the life insurance sector stood
at €1,136 million.

General Business

In the General Business sector the insurance of risks based outside Malta
accounted for Gross Premiums Written of €418.7 million, an increase of €159.4
million over 2006. In contrast the local non-life business sector remained static
expanding by only €1 million to €90.1 million.

2007 also showed a significant increase in Life Insurance business written in
Malta which went up by €82 million to €228 million. This translates in an increase
of 56% over one year, compared to modest increases registered in previous
years. The figures for life insurance risks based outside Malta decreased by
€10 million to €37.1 million.

Over €172 million were derived from single premium policies, while €97 million
came from regular premiums. Reinsurance ceded was €6.3 million.
The classes of long term business that were active during 2007 were Life and
Annuity, Linked Long Term and Permanent Health. Table 5 provides a breakdown
of GPW in the long term sector by Class.

The largest source of business segment was that generated by tied insurance
intermediaries. This amounted to €197,845,000.
Gross Claims Paid in the General Business sector amounted to €283.9 million.
Over 86% of these claims related to risks situated outside Malta. The reinsurers’
share was of €82.4 million or 29% of the total.

The highest amount of claims paid was in the Fire and Other Damage to Property
Class which accounted for €219.4 million. Of these only €7.8 million were due in
respect of risks situated in Malta. The second largest amount of claims paid was
in the Motor Insurance Class, where a total of €31 million was paid, €26.2 million
of which was in respect of risks situated in Malta.
Total cost of claims incurred during 2007, excluding claims management costs,
were €218.8 million. Claims Management costs amounted to €8.7 million.

Long Term Business Claims   

Total long term business claims in 2007 amounted to €63.9m. Of these, reinsurance
ceded amounted to €2.4million. In relation to the greater part of these claims,
€54.4 million, Malta was the country of commitment.

Supervision and ompliance

The Supervisory Council is responsible for the processing, approval and issuing
of licences and other authorisations, and for the monitoring and supervision of
persons and other entities licensed or authorised by the Authority in the financial
services sector. (Section 10, Malta Financial Services Authority Act). During 2008,
the Council met 30 times, and approved new licences, authorisations, enrolments
and registrations to conduct financial services business as follows:

Credit institutions: 1
Financial Institutions: 2
Insurance principals: 11
Insurance Intermediaries: 10
Insurance Brokerage: 0
Insurance Management: 1
Insurance Agency: 2
Investment Services: 14
Collective Investment Schemes: 124 (including sub-funds )
Trustees & Fiduciary Services: 12
The requirements which an applicant applying for a licence must satisfy are
contained in laws and regulations specific to the various sectors of financial
services. However, when considering whether to grant or refuse a licence, the
Authority will consider factors such as:
(a) the protection of insured persons, depositors and the general public;
(b) the protection of the reputation of Malta, taking into account Malta’s
international commitments; and
(c) the promotion of competition and choice.
The Supervisory Council seeks to maintain a balance between the requirements
specific to each sector, reflecting internationally accepted core principles
and European Union Directives, and the need to ensure more consistent and
harmonised supervision.

ENFORCEMENT

There are 58 employees at the Authority directly engaged in regulation and
supervision of licensed entities. Supervision is carried out through both off-site
and on-site compliance activities. Off-site compliance staff monitor adherence
by licence holders to prudential requirements through the review of monthly and
quarterly returns as well as through the review of licence holders’ audited annual
financial statements. As part of its off-site supervisory function, the MFSA also
monitors and reviews media adverts issued by authorised persons and newspaper
articles and media coverage dealing with companies which have their financial
instruments traded on the Malta Stock Exchange.

Supervision And Compliance
MFSA Annual Report 2008 31
On-site inspections to the premises of licence holders are also carried out to
monitor the extent to which the operational activity of licence holders adheres to
the regulations. The MFSA continues to move towards the adoption of a risk-based
approach in the supervision of licensed institutions, in line with EU Directives
implemented in recent years.

A total of 87 on-site compliance visits were carried out by the MFSA inspectors
during the year with eight visits to credit institutions (including two extensive credit
risk reviews at two of the main credit institutions), three to financial institutions,
18 to persons authorised to act as trustee and provide other fiduciary services, 31
to insurance entities ( five of which were made to insurance companies and 26 to
intermediaries), 20 to investment intermediaries and regulated markets and eight
to Collective Investment Schemes including sub-funds.

A number of penalties were imposed during the year. These concerned a number
of breaches of licence conditions as well as infringements under the Banking Act,
The Investment Services Act, the Insurance Business Act, the Market Abuse Act
and the Trusts and Trustees Act.

LITIGATION BEFORE THE FINANCIAL SERVICES TRIBUNAL AND THE CIVIL COURTS

The Legal Office is responsible for representing the Authority – often in conjunction
with other Units – in a number of cases before the Financial Services Tribunal and
the Courts. The Financial Services Tribunal is an appeal mechanism established
by the MFSA Act which allows individuals or companies who feel aggrieved by a
decision taken by the Authority to appeal against the decision.
In the course of 2008 one new appeal was lodged before the Financial Services
Tribunal by an authorised trustee. The appeal was made against a penalty imposed
by the Authority. This appeal was subsequently withdrawn before the end of the
year.

 At the end of the 2008, there were three cases pending before the Tribunal and
one case before the Civil Courts.

LISTING ISSUES

The Listing Committee held seven official meetings during the year under review.
Other ad hoc meetings were held mainly to deal with enquiries from company
secretaries and/or compliance officers regarding the interpretation of the Listing
Rules and compliance issues.

A number of compliance issues arose out of the monitoring of the market carried
out throughout the year. Action was taken against companies failing to publish
financial information within the legally stipulated period. A number of requests
for dispensation from the Listing Rules were also considered according to the
particular merits of each case.

In December 2008 the Listing Committee presented a preliminary memorandum
to the Listing Authority proposing a structure for penalties to be be imposed for
non-compliance with the provisions of the Listing Rules (Section 19(i) of the
Financial Markets Act).No investigations were initiated by the Listing Committee during 2008.

PREVENTION OF FINANCIAL MARKETS ABUSE

The Prevention of Financial Markets Abuse Act (Cap. 476) (PFMA) aims to safeguard
the integrity of Maltese and European financial markets and to enhance investor
confidence in these markets. The MFSA is vested with the function of enforcing
the PFMA regime and safeguarding the integrity and reputation of the Maltese
financial market from malpractices.

On a daily basis, the Securities Unit monitors on and off-exchange trading in
financial instruments admitted to trading on the Malta Stock Exchange with the
aim of identifying suspicious trading. In addition to this, the market is also subject
to other scrutiny through the compliance team of the Malta Stock Exchange [which
monitors market activity on a real time basis] and persons authorised to arrange
transactions in financial instruments. These are in turn required to submit a report
to the Authority whenever a suspicious transaction comes to their attention.
During 2008, the Securities Unit carried out 29 reviews of suspicious market
transactions and initiated six investigations of possible market abuse.

MARKET SURVEILLANCE

The MFSA is also responsible for the promotion of the general interests and
legitimate expectations of consumers of financial services and for the promotion
of fair competition practices and consumer choice in financial services.
Financial institutions in Malta operate in a free market scenario in compliance with
the relevant laws and regulations. Nevertheless, there may be instances where
certain charges and tariffs may not be justified. Certain instances may moreover
merit investigation by the Office of Fair Competition (OFC), particularly where
institutions that enjoy a dominant position in the local market are concerned.

During the year under review the Authority has been carrying out an examination
of a number of tariffs that were being charged by the two largest banking
institutions in Malta. Several meetings were held with these banks in which the
MFSA’s position was clearly spelt out. The banks have agreed to adopt some
of the Authority’s recommendations, although there are other recommendations
which can also be implemented for the benefit of the local retail and business
community.

The Authority also held several discussions with officials from the Office of Fair
Competition regarding tariffs charged by local banks for the transfer of funds to
or from Malta, as well as tariffs relating to the card acquiring business. These
discussions were held within the framework of the Memorandum of Understanding
(MoU) signed by the Authority and the OFC.

FINANCIAL STABILITY

In line with the obligations emanating from the 2008 Multilateral MoU on Cross
Border Financial Stability, the Central Bank and the MFSA undertook a systemic
impact analysis exercise in November 2008. Based on the data and information
already used in the crisis simulation exercise of September 2007, the authorities
analysed amongst other factors, the impact of the potential systemic implications
for the domestic financial system, as well as the specific channels of contagion
of the crisis to institutions, markets, market infrastructures and the real economy.
In December 2008, the results of this exercise were presented and discussed by the Domestic Standing Group.

The Working Group on Crisis Management set up between the MFSA, the Central
Bank and the Ministry of Finance held four meetings during 2008. The Working
Group mainly discussed crisis management issues and the Systemic Impact
Assessment Framework. The Banking Unit also liaised on a regular basis with the
Central Bank’s Financial Stability Office on areas of mutual interest.
In addition to the above the Standing Committee set up under the Memorandum
of Understanding signed between the Authority and the Central Bank of Malta in
February 2003, continued to meet regularly on a quarterly basis.

PREVENTION OF MONEY LAUNDERING

A number of remaining obligations under Directive 2005/60/EC of the European
Parliament and of the Council of 26 October 2005 on the Prevention of the Use
of the Financial System for the purposes of Money Laundering and Terrorist
Financing were transposed into legislation by Legal Notice 180 of 2008. The
new Prevention of Money Laundering and Funding Of Terrorism Regulations also
incorporated the provisions of Directive 2006/70/EC laying down implementing
measures as regards the definition of politically exposed persons; the technical
criteria for simplified customer due diligence procedures and the exemptions on
grounds of a financial activity conducted on an occasional or very limited basis.
Compliance with the rules for the prevention of money laundering and terrorist
financing is an important responsibility of all financial services licence holders. In
the course of its regulatory and supervisory function, the Authority seeks to ensure
that licence holders are fully aware of these obligations and are implementing
them correctly.

The MFSA acts as the agent of the Financial Intelligence and Analysis Unit (FIAU)
in assessing and ensuring compliance by licence holders on matters relating to
money laundering. A review of compliance with “know your customer” and record
keeping requirements, in relation to the Prevention of Money Laundering Act
(Cap. 373) and the underlying Regulations is also carried out during compliance
visits. Where breaches of applicable legislation are identified, the licence holder
is requested to provide the MFSA with an explanation of what action has been
taken or plans to take in order to rectify the breach. In the event of a breach of
the applicable anti-money laundering legislation, the MFSA reports to the FIAU the
nature of the breach identified during the visit.

The MFSA’s Money Laundering Reporting Officer also attended the meetings
of the Joint Committee for the Prevention of Money Laundering and Funding of
Terrorism held during the year. The main function of the Committee is to create a
forum between the authorities and the industry to exchange views and concerns
regarding developments in anti-money laundering and combating of terrorism
regulations and standards. The Joint Committee includes representatives of the
Financial Intelligence and Analysis Unit, the Malta Financial Services Authority, the
Central Bank of Malta, the Attorney General, the Malta Police, the Lotteries and
Gaming Authority, the Malta Stock Exchange, the Chamber of Advocates, Chamber
of Legal Procurators, the Malta Insurance Association, the College of Notaries, the
Malta Bankers’ Association, the Association of Licensed Financial Institutions, the
Malta Institute of Accountants, the Malta Funds Industry Association, the Institute
of Financial Services Practitioners, the College of Stockbrokers, the Federation of
Real Estate Agents, the Malta Institute of Taxation.