Issue link: https://maltatoday.uberflip.com/i/1360420
maltatoday | SUNDAY • 11 APRIL 2021 12 COMMERCIAL Why is financial supervision important and what does it mean to be a financial super- visor? Financial supervision is about the monitoring of financial in- stitutions' compliance with the regulatory framework, which aims at achieving superviso- ry outcomes in the field of the protection of the consumer of financial services, financial sta- bility 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-lev- el objectives of financial regula- tion. The different aspects of fi- nancial supervision are gener- ally categorised into four: mac- ro-prudential, micro-prudential and conduct supervision as well as the supervision of financial market integrity. Macro-prudential supervision considers the safety of the finan- cial 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 ac- tivity which is undertaken by the MFSA, together with the Central Bank of Malta, within the frame- work of the Joint Financial Sta- bility Board. On the other hand, micro-prudential supervision is concerned with the stability of individual financial institu- tions, that is preventing such institutions from taking exces- sive 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 cred- it institutions and investment firms, act in the best interest of their clients. Finally, the supervi- sion of financial market integrity entails the monitoring of capital markets for suspicious trans- actions 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 super- visory engagement with the industry. The level of engage- ment 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 unsus- tainable business models, weak risk assessments and market malpractice at individual insti- tutions 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 commit- ment and dedication to build the technical expertise and adequate supervisory approach which would allow the proper fulfil- ment 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 hon- ourable 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 strat- egy aims at: continuing to build a holistic and integrated approach to financial supervision; foster- ing the right leadership, cul- ture, knowledge and experience to carry out more effective and efficient financial supervision; and establishing financial su- pervision as a profession. With respect to the latter, one does not become a financial supervi- sor 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 an- alytical and investigative skills, and apply professional scepti- cism. 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 Acade- my which will support this ob- jective by providing specialised training on all aspects of finan- cial supervision. The implemen- tation of the supervisory strate- gy will continue to reinforce the MFSA's supervisory approach and the quality and level of su- pervisory engagement. Several improvements were implement- ed in 2020 with the aim of in- tensifying supervisory engage- ment. 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 implementa- tion of anti-money laundering and the countering of financing of terrorism (AMLCFT). Dur- ing the supervisory cycle 2019- 2020 this function carried out 60 inspections, and following an increase in resources and pri- ority, it will be carrying out 75 inspections during the next su- pervisory cycle 2020-2021. We have also integrated an AML/ CFT element to prudential and conduct inspections carried out by the MFSA. Therefore, dur- ing every inspection, a certain degree of AML/CFT checks are being carried out. Overall, by the end of 2020, the MFSA has more than dou- bled the number of inspections on licensed entities (419 in- spections 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 car- ry out a review of governance oversight, internal controls, in- cluding those relating to AML/ CFT and the sustainability of the business models of banks. Where weaknesses are identi- fied, the MFSA is requesting firms to take appropriate ac- tion. For example, in circum- stances 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 improve- ments and inform the Financial Intelligence Analysis Unit (FI- AU) about the findings and rec- ommendations to the firm. The MFSA works closely with the Financial supervision: 'Honourable PAUL COCKS spoke to Dr Christopher P Buttigieg, Chief Officer Supervision and Chief Executive Officer ad Interim at the Malta Financial Services Authority