The Malta Financial Services Authority (MFSA) recently shared insights from its supervisory engagements conducted between July 2022 and July 2024. These reviews, covering approximately 36% of licensed investment firms, highlight critical governance, compliance, and risk management concerns. Alongside these findings, the MFSA outlined expectations for the industry to promote stronger adherence to regulatory frameworks.
Insights from MFSA Supervisory Engagements
The MFSA identified several key areas where improvements are needed:
- Governance Shortcomings
Executive Directors displayed strong operational understanding, but Non-Executive Directors were found lacking in involvement and industry-specific knowledge. Board minutes often lacked evidence of thorough deliberation, with limited challenges to decisions or strategic discussions. - Deficiencies in Internal Controls
Weak reconciliation processes, inadequate compliance training, and limited dual authorization measures undermined internal control frameworks. - Policy and Procedure Gaps
Many firms failed to maintain comprehensive, tailored procedure manuals. Key documents such as Board and committee minutes lacked the depth needed to reflect critical decisions, dissenting opinions, or action plans. - Inconsistent Risk Management Practices
While most firms had risk policies, reports often failed to identify or address emerging risks. Risk management discussions were notably absent from some Board agendas. - Limited ESG Integration
Despite increasing regulatory focus, ESG issues were rarely discussed at the Board level, reflecting insufficient prioritization of sustainability and related risks. - Compliance Weaknesses
Outsourced compliance officers often lacked familiarity with firm-specific operations, and compliance reports were insufficiently detailed, failing to provide actionable insights.
MFSA Expectations for Investment Firms
The MFSA has set out clear directives to address these issues and ensure alignment with best practices:
- Governance: Boards must engage proactively, with Non-Executive Directors taking an active role in oversight. Detailed and transparent minutes should document strategic decisions and dissenting views.
- Internal Controls: Firms must implement robust controls, including dual authorization, comprehensive training, and regular policy reviews.
- Risk Management: Risk should be a standing Board agenda item, supported by live risk registers and detailed reports, including stress testing.
- ESG Focus: Boards are expected to prioritize ESG issues, ensuring compliance with sustainability disclosure requirements under EU regulations.
- Compliance Frameworks: Firms should maintain well-structured compliance programs tailored to their business models, with appropriate resources and documentation.
Next Steps for Licensed Entities
The MFSA advises investment firms to conduct a gap analysis based on these findings, identifying areas where improvements are needed. Compliance with governance and risk management expectations is critical, and the Authority has signaled its intention to follow up on these issues in future reviews.
By addressing the highlighted deficiencies, firms can enhance their operational resilience, regulatory compliance, and overall governance standards. This proactive approach is essential in maintaining investor confidence and aligning with Malta’s regulatory landscape.
