The Annual Report of the Malta Financial Services Authority was tabled in Parliament last week.
The report, inter alia, is quite scathing about the level of compliance in general among financial entities in Malta.
It states:
A number of compliance visits were carried out at the offices of entities licensed in terms of the Investment Services Act. These included visits to investment firms, fund managers, Collective Investment Schemes, custodians and the MSE.
The visits were focused on governance, compliance and risk management processes. These reviews were designed to verify the extent to which selected licence holders have proper systems in place and the extent to which these are being complied with and applied in practice.
The MFSA also conducted ten on-site inspections related to the implementation of EMIR. These inspections were carried out in order to verify the status of the implementation of this regulation by the relevant entities. Following the visits various communications were issued to respective licence holders setting out the findings and advising them to take corrective action.
Outcomes from on-site visits
Based on the general outcomes arising out of the on-site visits undertaken during the year a number of industry circulars were also issued in order to help licence holders avoid the common pitfalls related to the observance of regulatory and compliance standards. An overview of these outcomes is provided below.
i. General Observations
A number of findings were common in both Collective Investment Schemes and fund managers. A general observation related to weaknesses in the establishment and maintenance of a conflicts of interest policy and the implementation of the necessary organisational and administrative arrangements designed to prevent conflicts of interest.
It was also noted that in certain cases Board of Director meetings were not being held frequently enough. Some licence holders were required to amend the Key Investor Information Document and ensure that the required information, including details of fund performance, is properly and accurately documented.
The Authority also noted several deficiencies with respect to Procedures Manuals and Policies, which ranged from such documents not being approved by the Board of Directors to inadequately drawn up procedures.
ii. Collective Investment Schemes
The MFSA found that the majority of Collective Investment Schemes placed significant reliance on the internal control processes and procedures of their service providers. Many Collective Investment Schemes do not perform due diligence and monitoring of their service providers, relying on constant communication with them and their good reputation. Collective Investment Schemes were advised by the Authority to conduct due diligence and ongoing onsite monitoring in an appropriately formalised and documented manner. Certain deficiencies in compliance reports were also frequently encountered.
The Authority also noted that shareholders meetings were sometimes held infrequently, that record-keeping and safekeeping of assets was in particular instances found to be wanting, and that in some cases Total Expenses Ratios were higher than expected. It was also noted that a number of Collective Investment Schemes failed to present service provider reports to Board of Director meetings.
iii. Fund Managers
The Authority also identified a number of deficiencies relating to the governance of fund managers. These entailed lack of adequate substance, insufficient independence between the fund manager and the collective investment scheme, shortcomings in the Investment Committee meeting proceedings and inadequately documented training logs. Some fund managers were advised or required to take out and maintain professional indemnity insurance.
One of the main areas addressed during compliance visits to fund managers, particularly at AIFMs, was remuneration. Some remuneration policies were found not to be in line with AIFM Directive requirements. Another area covered during onsite inspections was delegation and outsourcing obligations. The main findings related to the fact that no specification of the remuneration to be paid for the delegated function was available and no ongoing monitoring of the delegated functions was conducted.
It was also noted that some fund managers failed to record pre-deal communication exchanged between the risk management function and the portfolio management function.
iv. Investment Firms
Compliance visits to investment firms focused on governance, risk management and compliance, and also included a review of clients' monies and clients' assets reconciliation process. Throughout these visits a number of shortcomings were identified.
The most common findings were in relation to governance and internal procedures.
In certain cases, internal reporting lines were not clearly defined and were not formalised in the procedures manual. Additionally, terms of reference relating to the organisational structure of internal committees were not always drawn up or signed by the relevant parties.
MFSA officials also reviewed the firms' risk management function. The Authority found cases where the risk management procedures appraised were of a general nature and did not address the firms' actual and specific circumstances. It was also noted that not all firms had a remuneration policy in place, as required by the rules and that Compliance Officers were not always being involved in material business decisions being taken.
A review of client monies and client asset accounts was also undertaken in a number of cases. MFSA officials identified cases where
[i] reconciliations were not being conducted in a timely manner; and/or
[ii] there was no evidence of the dual control principle being properly observed for such reviews.
It was emphasised that the four eyes principle should be properly applied when carrying out a reconciliation exercise and that this test should be included in the compliance monitoring programme.
(http://www.mfsa.com.mt/pages/announcement.aspx?id=7617)