Financial services: a silent revolution

Finance Minister John Dalli addresses last Friday’s conference titled ‘Consumer Protection in Financial Services’ during which he speaks on reform in the financial services sector, the consumer aspect, building confidence in the sector and the new Malta Financial Services Authority

The past ten years have been a defining period for the financial services in Malta. Many of you are well aware of the enormous amount of changes that our corporate and financial legislation went through between 1994 and 1995. With the benefit of hindsight one can describe what followed on these reforms (that were underpinned by inter-party consensus in Parliament) as an important turning point in this vital economic sector.

Substantial reforms such as those in the banking and insurance laws, as well as in the insider dealing laws are today fully in place. 1994 had also seen the introduction of a new comprehensive framework for the development and regulation of investment services and the introduction of the concept of collective investment schemes. New laws were brought in for the first time to tackle such issues as the prevention of money-laundering and the proper regulation of a variety of financial activities collectively referred to as "financial institutions". The first ever VAT law was launched and a new Income Tax Management Act was passed.

The new Companies Act came into force during 1996 while two brand new laws governing the insurance industry were adopted during 1998.

From this perspective, it can rightly be claimed that a silent revolution had been carried out in the whole area of financial services regulation. The regulatory landscape was changed in its entirety ushering in an exciting new era of sophistication and why not, also of some complexity. The most tangible effect of all this can be seen in the variety and extent of the financial products and services that are available in our market today. Gauging by the dynamics of the sector it is also evident that innovative products will continue to come on stream in the future at a steady, if not rapid, rate.

The MFSC has today become the single regulator in this area, responsible for the licensing and supervision of banking, investment and insurance business as well as company registration and compliance. Its core function since its inception, as reflected in its regulatory guidelines and directives, has been to ensure that institutional players are competent and financially solid. Along with compliance monitoring carried out by the Centre, this ensures that institutions are well run and keep to the desired standards of operation.

Regulation , however, is continually facing new challenges reflecting the dynamism of the market both locally and internationally.

Recent events and developments in the financial world have shown that good institutions are not necessarily a guarantee of good products and acceptable selling practices. It is becoming increasingly clear the world over that even competent and solid institutions might offer inappropriate products in an aggressive manner. In addition to this, unsolicited requests for investments by unregulated companies and individuals particularly through the internet, but also through the mail and over the phone, are becoming increasingly common. These practices give rise to concerns and the regulator has to be able to react appropriately.

So where does all this leave the consumer?

The consumer aspect

At this stage, I would like to remind you that the legislative reforms carried out in and around 1994 did not only concern companies and financial services. The reforms formed part of a wider vision Government had at the time, the result of which we are seeing today in the way the economy has been liberalised and the way in which businesses compete to provide the public with choice. It is therefore useful, here today, to recall two very forward looking laws that were enacted at around the same time - two laws that were designed to provide better protection for the Maltese consumer.

One of these laws was the first ever comprehensive law governing competition in Malta. This law established the Office for Fair Competition and the Commission for Fair Trading and introduced new concepts such as abuse of dominant position, restrictive agreements and concerted practices. You may perhaps recall in this respect a full-day conference on fair trading that my Ministry had organised at the time as a first step towards the implementation of new legislation to promote fair competition practices.

The second important law was a brand new Consumer Affairs Act that enshrined a set of principles based on the fair treatment of the consumer. It was this law that established the necessary structures for the monitoring of trading practices in the supply of goods and services and the handling of consumer complaints.

That there is a synergy between the regulation of the market generally and the regulation in the market for financial services is becoming increasingly clear. In the financial services sector, competition and consumer legislation on the one hand and prudential supervision of financial companies on the other have to work in a way that is at the same time independent of and complimentary to each other to maintain and enhance consumer confidence.

Financial services are, however, a peculiar commodity. The nature of the service is such that consumers are rarely motivated to shop around much for it, as one would do for a television set, a holiday or a car. Transactions are often complex and not easy for consumers to understand, and the information is bewildering.

Moreover, for some very important types of investment products such as retirement plans and life insurance, the impact of product quality can only be felt years down the line when very little can be remedied. If the product eventually turns out not to be of the expected quality it is only natural that the consumer would be left with a sense of bitterness and distrust.

Building confidence

Faced with a complex market that many find daunting to approach, consumers rely more heavily on the license-holder for guidance and advice. This has the effect of transforming the relationship between supplier and the consumer into one of trust.

Loss of confidence in the quality of services and the credentials of suppliers is therefore the biggest damage the market could face if proper attention is not given to this important aspect. In this regard positive action to build consumer confidence is clearly as important as prudential supervision. Easy and accessible information, exposure to the essential principles of investing and availability of guiding assistance when required are clearly areas where the public sector may be of help.

One of the functions of the new Malta Financial Services Authority will therefore be the promotion of the general interests and legitimate expectations of consumers related to financial services, and to promote fair competition practices and consumer choice. This means that while enforcement and compliance will continue to form the core activity of the financial watchdog, new legislation currently before Parliament will be promoting consumer education and consumer protection to the same level of importance.

But building consumer confidence should not begin and end with the public sector. My message today is that regulation can provide a basis of protection and support but that at the end of the day it is the market that should come together to champion standards and win over consumers. You would probably agree that what consumers in this market, perhaps more than in any other, are looking out for are trustworthiness and credibility.

It is therefore up to the players in this market, collectively and individually, to cherish these values and work hard to build and maintain a sense of trust in spite of all the challenges and the pressures that their business is faced with on a daily basis.