Achieving effective capital markets in Malta : the legal and regulatory framework, recent developments and suggestions for potential reform

Abstract

Capital markets provide an important channel in financing the real economy, allocating risk, supporting economic growth and sustaining financial stability. Nonetheless, these objectives cannot be achieved in a vacuum but can only be aspired to when capital markets are allowed to operate effectively. This dissertation highlights the importance of an appropriate legal and regulatory framework which is key to enable capital markets to effectively intermediate capital and contribute to investor confidence. This thesis reviews the current situation of the local capital markets and their respective challenges, particularly those prevailing due to a somewhat rigid regulatory framework (based on EU Regulation and Directives, together with other locally-enacted legislative acts and rules), its size (which impacts liquidity and limits the value of the new issues coming to market) and the high proportion of unsophisticated retail investors. The author makes a number of suggestions for potential reform in the local capital markets with a view of making it effective for the local economy. These include, primarily, adopting an approach to EU legislation which does not go beyond the minimum requirements (unless this is beneficial to the economy) and develop capital markets that are less onerous and more cost-effective for small and medium sized companies in Malta. Other measures such as the introduction of market makers and the openness to foreign investors could also contribute to an improved effectiveness of the local capital markets. At the same time, Malta also needs to work towards improving financial literacy, by not only improving the knowledge of existing investors but to also enlighten future generations. Whilst the author appreciates the development of Malta’s capital markets since their inception in 1990, further efforts are required to continue improving the local capital markets in order to truly achieve a level of effectiveness that will benefit the economy at large as well as issuers and investors alike.