Defining the MFSA’s risk-based supervisory approach

The adoption of a risk-based approach to supervision provides the MFSA with a framework for assessing and addressing risks proactively


By Sephora Scerri

Sephora Scerri is Senior Manager, Risk Management, at the Malta Financial Services Authority

The regulation, monitoring and supervision of Malta’s financial services industry falls squarely within the remit of the MFSA.

The MFSA adopts a risk-based approach to supervision, which considers potential macro- and micro-prudential, conduct and financial crime risks associated with the firms we oversee.

As part of our continuous drive towards increasing our engagement with industry and the public, last week, we published the document, ‘Risk-Based Supervision - Strengthening our Supervisory Approach’, which articulates the way the MFSA exercises its supervisory role.

Through this document, we highlighted how financial crime risks have been integrated into our assessment processes, and how they are now positioned right at the heart of it. This Risk-Based Supervision document ties in with other instruments:

The MFSA AML and CFT Strategy; MFSA Supervisory Expectations and Supervisory Priorities 2020  published by the Authority last year, thereby continuing to strengthen the risk model underpinning its supervisory activity and strategic approach towards AML and CFT supervision.

The Authority’s risk-based supervisory approach applies supervisory judgement whilst being forward-looking and focused on key risks. This allows us to increase our supervisory effectiveness.

Through the adoption of a risk-based approach, we can focus our supervisory and regulatory activities on those areas that pose the greatest risk to consumers and the stability of the financial market.  This plays a crucial role in the functioning of the economy.

A qualitative and quantitative risk assessment framework

The Authority’s risk assessment framework is both qualitative and quantitative in nature. Essentially, human decision-making as well as supervisory judgement, are applied at some stage of this risk assessment process, with this partly reflecting our supervisory risk appetite.

When forming our judgements, amongst the key factors we consider are the type of business a firm carries out; its complexity, organisation and financial vulnerability; and the degree of adequacy of the controls, management and governance it has in place.

Supervision supported by enforcement

Crucially, the MFSA’s risk-based supervisory approach is supported by enforcement action.

Over the past years, resources in this respect have in fact been significantly increased, as we seek to enhance and facilitate enforcement action. High-risk firms which have the greatest potential of harming financial services consumers will receive the most supervision, which will lead to early enforcement measures with a view towards mitigating potential risks.

Joint MFSA-FIAU effort to combat AML/CFT

The MFSA also adopts a risk-based supervisory approach when it comes to mitigating risks related to money-laundering and the financing of terrorism emanating from Malta’s financial services industry, with the regulator playing a very important role here.

In this spirit, the Financial Intelligence Analysis Unit and the Authority have set up a joint AML/CFT supervisory regime.

This is proving to be indispensable in terms of a better coordination between our efforts in the AML/CFT arena and those of the FIAU. And, as a result of this cooperation, our prudential and conduct risk assessment models are now incorporating money laundering and terrorism financing risk scores provided by the FIAU – under its Compliance and Supervision Platform for Assessing Risk (CASPAR) – when it comes to subject persons supervised by the MFSA.

A sectoral risk assessment has been conducted with the goal of determining sector-specific susceptibility to a set of vulnerabilities, including AML/CFT. This has been used as a basis for determining the weighting to be adopted for inclusion of the FIAU CASPAR risk score into our prudential and conduct risk assessment models.

The Authority recognises that focusing its supervisory efforts on firms and/or areas which are deemed to pose the highest risk is crucial. The adoption of a risk-based approach to supervision

provides the MFSA with a framework for assessing and addressing risks proactively.

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