Independent report calls for formal MFSA corrective action policy

The report was prepared by an independent body composed of Piero Ugolini (former Assistant Director at the IMF and Mission Chief to the Malta for the 2003 Assessment), Richard Nunn (Federal Reserve, USA and Consultant at the IMF), and Michael Kehr (German Regulatory Authority, BaFin and Consultant to the IMF).

Presenting the report, Ugolini said the report highlights significant improvement in MFSA’s overall compliance to the Basel Core Principles, largely thanks to the transposition of EU Directives.

In a presentation attended by Prime Minister Lawrence Gonzi, Ugolini said "this independent assessment concludes that the MFSA is compliant with 20 principles and largely compliant with the five remaining principles; there are no instances where the MFSA is materially non-compliant or non-compliant."

However, Ugolini nevertheless presented recommendations to the MFSA, suggesting ways to address certain failings.

Chief among these is its lack of a formal policy for initiating corrective measures and regulatory enforcement actions. “While the MFSA does take action, it needs to ensure that the action taken is adequate and that it is the same for everybody,” Ugolini said.

“For optimal benefit, the policy should link the form and content of a regulatory response to objective, measurable criteria regarding the nature and severity of condition and operations, e.g. capital adequacy, violations of laws or riles, unsafe or unsound baking practices, mismanagement,” the report says.

But the MFSA’s response, also included in the report, is that “legislation as currently drafted is adequate for applying corrective measures.” The MFSA nevertheless conceded to formalise and improve on the existing informal framework currently applied “so that the application of these measures would be officially formalised and implemented.”

The report also recommends that “the issue of monetary fines be re-visited with the two-fold aim of (i) more explicitly defining the circumstances when fines will be applied and (ii) more closely linking the amounts of the fines to the severity of the infraction.”

Ugolini also criticised the way MFSA recruitment is hindered by an administrative circular issued by the Office of the Prime Minister that “as a result of the cumbersome process and administrative layers under which the MFSA has to operate, the recruitment process could take several months and impact on the workload of the MFSA staff. This process should be streamlined and shortened.”

The report also noted that while “the MFSA has drawn up an internal procedure which provides guidance on how the Authority should deal with a possible failure of a market intermediary… authorities should accelerate the completion of the revision of their internal early warning system to better evaluate a potential default by market intermediaries, address the problem, and take timely corrective actions.”

In order to better perform is function as a supervisory authority; the report also recommends that legislation pertaining to the MFSA should “foresee that, in case of dismissal of a board member, the reasons shall be publicly disclosed.”

The report also recommends that while recommendations and general guidance for the internal audit function have been established in 2009, “the establishment of an internal audit function should be made mandatory.”

The report emphasises that “attention should be paid to the separation of duties (internal audit units should not be charged with other tasks, i.e. to avoid from the outset a possible conflict of interest) and to the risk orientation of audit planning and conduct.”

Ugolini also recommended that the MFSA considers arrangements for increased policyholder protection with a particular view to long-term business, pointing out that “the low ceiling for compensation from the Protection and Compensation Fund (PCF) almost renders the purpose of the institution useless.” This recommendation was noted by the MFSA.

An independent assessment of the Malta Financial Services Authority by the independent assessors has found considerable progress made after banking regulation was taken over by the MFSA from the Central Bank in 2002.

These assessors said that in the last audit carried out in 2003, the MFSA was materially non-compliant with one principle, largely compliant with 12 and compliant with 11. According to the 2010 audit, the MFSA is complaint with 21 principles, largely compliant with 5, and materially non-compliant with none.