The Malta Financial Services Authority (MFSA) has highlighted a mixed compliance performance among Malta’s investment firms in its latest supervisory review.

The assessment, which covered engagements conducted between July 2022 and July 2024, revealed both positive strides and areas requiring urgent attention.

The MFSA found that many firms have made commendable efforts to strengthen governance and compliance structures, reflecting a growing adherence to regulatory expectations.

However, shortcomings were identified in key areas such as internal controls, risk management, and conflicts of interest policies.

Commenting on the findings, Doreen Balzan, Head of Investment Services Supervision, noted: “The Authority issued various briefings and published a series of Circulars to keep the industry updated on developments and provide guidance on what is required and expected of licensed firms. Supervisory engagements have helped us assess the sector’s progress in implementing these standards.”

One of the key observations was the limited active participation of Non-Executive Directors.

While Executive Directors showed strong engagement with day-to-day operations, Non-Executive Directors often lacked the same level of interaction, leading to a gap in independent oversight.

The MFSA stressed the importance of having a balanced and proactive Board, where all members contribute meaningfully to discussions and strategic decisions.

Additionally, Board minutes and Investment Committee records often lacked sufficient detail, making it difficult to assess the depth of discussions or challenge provided by members. This points to a need for improved documentation practices to enhance transparency and accountability.

The Authority also highlighted inconsistencies in the quality of compliance reports. While many compliance officers demonstrated familiarity with their roles, others were less knowledgeable about critical regulations, such as the Investment Firms Regulation and Directive (IFR/D). Reports often lacked sufficient detail on the compliance checks conducted, raising concerns about the robustness of monitoring practices.

The MFSA emphasised the value of having in-house compliance officers, noting that outsourced roles sometimes lacked the operational knowledge needed for effective oversight.

Addressing conflicts of interest and risk management

The MFSA’s review also pointed to deficiencies in identifying and managing conflicts of interest. While most firms maintained conflict-of-interest registers, some lacked detailed mitigation strategies, and a few had no registers at all. The Authority recommended that firms include conflict declarations as a standard agenda item in Board meetings.

In terms of risk management, some firms failed to present comprehensive risk reports to their Boards, while others did not adequately address emerging risks.

The MFSA advised firms to prioritise regular risk assessments and ensure that risk is a recurring topic of discussion in Board meetings.

The findings have been summarised in a "Dear CEO" letter issued by the MFSA, which outlines the Authority’s expectations and provides actionable recommendations for improvement.

The letter underscores the importance of aligning internal policies with regulatory requirements and fostering a culture of compliance across all levels of an organisation.

Investment firms are encouraged to conduct gap analyses to identify deficiencies in their practices and take corrective action.

As the MFSA continues to monitor progress, it is clear that achieving high compliance standards will remain a central focus for Malta’s financial sector.