Financial supervision: 'Honourable and rewarding'

PAUL COCKS spoke to Dr Christopher P Buttigieg, Chief Officer Supervision and Chief Executive Officer ad Interim at the Malta Financial Services Authority

Dr Christopher P Buttigieg
Dr Christopher P Buttigieg

Why is financial supervision important and what does it mean to be a financial supervisor?

Financial supervision is about the monitoring of financial institutions’ compliance with the regulatory framework, which aims at achieving supervisory outcomes in the field of the protection of the consumer of financial services, financial stability and market integrity (the term financial institution is used in the broader sense covering all operators in the field of financial services). These are the high-level objectives of financial regulation.

The different aspects of financial supervision are generally categorised into four: macro-prudential, micro-prudential and conduct supervision as well as the supervision of financial market integrity.

Macro-prudential supervision considers the safety of the financial system as a whole and seeks to identify threats to systemic stability by analysing the trends and imbalances in the financial system. This is a supervisory activity which is undertaken by the MFSA, together with the Central Bank of Malta, within the framework of the Joint Financial Stability Board. On the other hand, micro-prudential supervision is concerned with the stability of individual financial institutions, that is preventing such institutions from taking excessive risks. This is largely carried out through the oversight of the governance, compliance, capital structures and risk management of specific institutions.

Conduct supervision monitors and seeks to ensure that financial services providers, such as credit institutions and investment firms, act in the best interest of their clients. Finally, the supervision of financial market integrity entails the monitoring of capital markets for suspicious transactions and the investigation of market abuse. It also includes the monitoring of compliance with anti-money laundering and counter financing of terrorism regulation.

Each of these different forms of supervision results in supervisory engagement with the industry. The level of engagement is determined through risk assessments carried out by the financial supervisor. Financial regulators have finite resources and are not able to monitor all players equally and therefore a risk-based approach is applied, to focus resources in areas or on firms that are most at risk.

Financial supervisors apply techniques to identify unsustainable business models, weak risk assessments and market malpractice at individual institutions and decide what to do about them. Experience suggests that it takes broad knowledge of the financial system, extensive years of involvement in financial supervision, personal commitment and dedication to build the technical expertise and adequate supervisory approach which would allow the proper fulfilment of the role of a financial supervisor.

Financial supervision may, at times, become an exceptionally demanding and challenging task. Nonetheless, I find that being a financial supervisor is an honourable and rewarding career, as through our work we aim at achieving the common good and protecting the vulnerable who don’t have the means to protect themselves.

What is the MFSA’s Supervisory Strategy? What are its building blocks and where is the MFSA headed with this strategy? What has the MFSA achieved in 2020?

The MFSA’s supervisory strategy aims at: continuing to build a holistic and integrated approach to financial supervision; fostering the right leadership, culture, knowledge and experience to carry out more effective and efficient financial supervision; and establishing financial supervision as a profession. With respect to the latter, one does not become a financial supervisor only by obtaining a finance or law degree and working with a professional services firm. A financial supervisor must know how to implement a regulatory framework, have specialised analytical and investigative skills, and apply professional scepticism. Our intention is to build our financial supervisors to be best in class in what they do. In this regard, we have established a Financial Supervisors Academy which will support this objective by providing specialised training on all aspects of financial supervision.  The implementation of the supervisory strategy will continue to reinforce the MFSA’s supervisory approach and the quality and level of supervisory engagement. Several improvements were implemented in 2020 with the aim of intensifying supervisory engagement. We continued increasing resources, including in the field of financial crime compliance (FCC). The FCC function is a team of subject matter experts who focus on the supervision of the industry’s implementation of anti-money laundering and the countering of financing of terrorism (AMLCFT). During the supervisory cycle 2019-2020 this function carried out 60 inspections, and following an increase in resources and priority, it will be carrying out 75 inspections during the next supervisory cycle 2020-2021. We have also integrated an AML/CFT element to prudential and conduct inspections carried out by the MFSA. Therefore, during every inspection, a certain degree of AML/CFT checks are being carried out.

Overall, by the end of 2020, the MFSA has more than doubled the number of inspections on licensed entities (419 inspections at the end of 2020) and intensified certain aspects of its supervisory work, such as the Supervisory Evaluation and Review Process (SREP) carried out by the Banking Supervision Function. As part of the SREP, the MFSA supervisors carry out a review of governance oversight, internal controls, including those relating to AML/CFT and the sustainability of the business models of banks. Where weaknesses are identified, the MFSA is requesting firms to take appropriate action. For example, in circumstances where, as part of the assessment, AML/CFT control weaknesses are identified, the MFSA would generally request the licence holder to address these through system improvements and inform the Financial Intelligence Analysis Unit (FIAU) about the findings and recommendations to the firm. The MFSA works closely with the FIAU, which is the competent authority responsible for AML/CFT supervision in Malta. The MFSA and FIAU have regular meetings to discuss developments in the field of financial supervision and to coordinate our supervisory effort with the aim of achieving a higher degree of market integrity.

During 2021, the Authority aims to continue increasing the coverage of risk-based supervisory interactions. MFSA’s supervisory engagement goes beyond the ordinary; we have  enhanced the supervisory inspections that the Authority carries out by visiting the premises of authorised persons or holding them remotely due to the current environment caused by the COVID-19 pandemic. The engagement programme also includes the application and use of other supervisory tools such as supervisory meetings and mystery shopping exercises depending on the objectives of the MFSA, the identified risk areas, the risk profile of the authorised person and their business model. Supervisory Interactions are either broad in scope to assess general compliance levels in multiple areas of supervisory focus, or have specific and thematic focus areas to help identify common findings and guide further initiatives to urge improvement and avoid common pitfalls. During this year, the MFSA will expand its reporting on its public Supervisory & Enforcement Effectiveness Dashboard to include aggregate information of such Supervisory Interactions.

What is the MFSA planning for 2021 in terms of Supervision and how will the MFSA ensure that the financial services industry is safer for all those involved?

The MFSA’s supervisory plans and priorities for 2021 were published in November of last year. These include: [a] a continued emphasis on the review of governance and systems and controls, which are key to ensuring that licensed entities are compliant; [b] a drive to raise the bar for compliance professionals who are the regulators’ extended arm in the industry; [c] a more detailed review of credit risk in the field of banking together with quality of business planning, liquidity and cyber controls; [d] a thematic review of fees and costs and supervisory engagement of cross border activity, liquidity and control of assets in the field of asset management; and [e] a focus on the effectiveness of internal controls in the context of outsourcing in the field of insurance.

The supervision the Authority is carrying out is making a difference with respect to standards applied by financial services firms when providing services to their clients and in ensuring a safer and sounder financial system. For example, as a result of the MFSA’s inspections, licensed entities are generally requested to prepare remediation plans to address the identified weaknesses.

In certain instances where key functionaries, such as the MLRO or the CO, are found to be weak, the MFSA requires licensed entities to replace the official or to carry out retraining. If the identified weaknesses are systemic, for example weak customer due diligence or risk assessments, the MFSA may decide to take regulatory action, which may include the imposition of an administrative penalty and/or the cancellation of the entity’s licence. Regulatory action does not only serve as a mechanism to address identified weaknesses and failures but also acts as a deterrent to dissuade others from carrying out similar failures.

What are the main challenges faced by the MFSA in terms of financial supervision?

 The main challenge is to keep raising standards of governance, compliance and conduct. This approach will ensure that the industry becomes more conscious of the standards of compliance expected of them to ensure a sustainable future for the financial services sector.

The ever-increasing size and complexity of the sector meant that the MFSA needed to invest in continually strengthening its resources, including the capacity and capabilities of its financial supervisors.

We have come a long way and we are confident that the MFSA is on the right track to become an even more trusted and respected European financial supervisor.

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