Financial Services Regulation |  Dec 23, 2015

MFSA conducts a Thematic Review on Governance, Compliance and Risk Management with respect to Investment Services Licence Holders

On the 22nd December 2015, the MFSA issued a letter to the Compliance Officers of Investment Services Licence Holders to inform them of the shortcomings the MFSA identified during focused reviews which it carried out on investment services providers licensed in Malta (“Licence Holders”). The MFSA is encouraging all Licence Holders to consider the key findings set out in the letter so as to avoid the common pitfalls found and to make sure that remedial action is taken in a timely manner.

This letter is divided into the following seven sections highlighting the salient findings by the MFSA:

Procedures

It was noted that the MFSA expects that each Licence holder is to establish a procedures manual which is specific to business and organisation of the said Licence Holder.

Client Monies and Client Assets Accounts

The MFSA identified 3 main deficiencies:

Reconciliations Process

This is to be done accurately and on a regular basis by two persons (preparer an d reviewer).

The MFSA highly recommends that that the compliance function should conduct re-performance checks of samples of the reconciliations in order to ensure that these are being conducted in an orderly manner.

Designation of Client Monies and Assets Accounts

The MFSA recommends that firms obtain a declaration in writing from the Bank/Custodian stating that the latter renounces and will not attempt to enforce/execute, any charge, right of set-off or other claim against account, or combine the account with any other account in respect of any debt owed to the Bank/Custodian by the firm and that interest payable on account will be credited to the account.

“Parked” Monies

MFSA also recommends that client procedures are drawn up with a view to ensure that ‘parked’ client monies are duly protected.

Governance

The MFSA expects that responsibilities of respective persons in charge of making decisions are properly defined in the investment firm’s procedures manual. Business continuity logs should be properly maintained and in cases where internal committees are set up, terms of reference drawn up and signed by the relevant parties. With respect to minutes of the Board of Directors meetings, the Authority emphasises that these are to reflect material issues.

Compliance

The Compliance Officer is to be involved in the material business of the Licence Holders and should not conduct front-office duties due to conflicts of interests which may arise.

Compliance reports should be presented to senior management, at least annually and prepared in accordance with the ESMA Guidelines.

Risk Management & Remuneration Policy

With respect to risk management policies and procedures, the MFSA notes that these should reflect the actual and specific circumstances of each Licence Holder.

Also, holders of Category 2 and 3 licences must have a remuneration policy in place.

Ancillary Issues

Here the MFSA identified 2 issues:

  • Websites of Licence Holders should only feature the activities which they are licensed to perform and should also highlight any risks associated with the said activities;
  • Licence Holders must establish an Order Execution policy and/or Best Execution policy which should be monitored annually.

MiFID II guidelines

The MFSA reminded the Licence Holders that ESMA has published the final report on guidelines which will apply to Licence Holders as from 3 January 2017:

  • on complex debt instruments and structured deposits; and
  • the final report on guidelines for the assessment of knowledge and competence.

Kindly find a copy of the MFSA letter here.

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