EBA closes MFSA-Pilatus case but serious concerns remain

The European Banking Authority (EBA) has closed its case against the Malta Financial Services Authority (MFSA) but flagged serious concerns over its handling of Pilatus Bank.

In a letter written to MEPs, EBA chairman Andrea Enria said:

“The EBA’s preliminary enquiries have raised significant concerns concerning the MFSA’s authorisation and supervisory practices in relation to Pilatus Bank. However, in the light of the requirements set out in Union law for prudential supervisors which make it difficult to conclude that there have been breaches of clear and unconditional obligations established in Union law, and especially in light of the significant supervisory actions taken by the MFSA in relation to Pilatus Bank, I have decided to close the case without opening a breach of Union law investigation.

“Notwithstanding the decision not to open an investigation, there are a number of areas where we believe the MFSA’s practices should be improved. The MFSA has informed us of a number of measures which it is implementing to improve its authorisation and supervisory processes and the EBA intends to monitor this, including through an on-site visit which we currently propose to carry out in mid-2019.

“In particular, as a result of our enquiries, I have expressed concerns to the MFSA about its supervisory practices in four key areas: Engagement between the MFSA and the Financial Intelligence Analysis Unit during the authorisation process; Robustness of due diligence checks conducted as part of the authorisation process; Prudential supervisory response to concerns about effectiveness of AML/CFT systems and controls; Resources and risk prioritisation given to credit institutions pursuing a private banking business model with predominantly nonresident customers.

“I have therefore asked the MFSA to update the EBA on a quarterly basis on the measures adopted to strengthen its supervision and the state of play of its implementation in these areas. EBA staff will also carry out a further on-site visit to the MFSA, which is currently scheduled for mid-2019, to assess progress in the implementation of these measures and the EBA will then review what further measures, if any, it considers need to be taken.”

Commenting on the situation, MEP David Casa said that by commencing the procedure for Pilatus Bank to have its license revoked, the MFSA had very narrowly escaped a formal investigation by the European Banking Authority.

“The EBA has, nevertheless, identified serious concerns with the manner in which Pilatus Bank was handled, and which must be addressed,” he said.

Reacting to the EBA’s findings, Parliamentary Secretary Silvio Schembri remarked that the decision “comes at a time when there is a lot of destructive criticism going on, especially domestically, in order to undermine the financial services sector just for the sake of partisan antics.”

The EBA, he said, had noted Malta’s commitment to implementing the Anti-Money Laundering Directive and the MFSA’s regulatory actions with respect to Pilatus Bank.

“This is, for sure, an important statement,” he said, without making any reference to the lingering concerns raised by the EBA chairman.

PS Schembri instead remarked that Malta’s financial services sector was of vital importance as a major contributor to the economy, and that it was crucial that the government nurtured it.

The government, he said, had enacted changes to how the MFSA operated, giving the regulatory authority more tools with which to carry out its work efficiently and effectively.

“The government is also fully committed to investing further in the MFSA through the engagement of more employees, investment in IT, modernisation of processes, and improved working conditions.”

Moreover, the work being carried out in the sphere of emerging technologies, he said, was being done with the full comprehension of the importance of regulation and the safeguarding of consumers and the financial system.

The EBA’s preliminary enquiries have raised significant concerns concerning the MFSA’s authorisation and supervisory practices in relation to Pilatus Bank... however it is difficult to conclude that there have been breaches of clear and unconditional obligations