## 1mltea2019007 — Global Insurance Market – 2017 (and MFSA supervision)

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### Executive summary — sector size and structure
- Total insurance sector assets amounted to €11.9 billion (105 percent of gross domestic product (GDP)) at end-2017.
- Sector structure includes:
  - four professional reinsurers,
  - eight captive insurers,
  - 14 protected cell companies (PCC),
  - one reinsurance special purpose vehicle (SPV).
- Life insurance and reinsurance industries are highly concentrated.
- Except for eight domestic insurers, Maltese insurers wrote predominantly or exclusively non-Maltese risks.
- Three banks are enrolled as tied insurance intermediaries to distribute insurance products.
- Some Maltese insurers passport business to other EU member states and contract with managing general agents with delegated authority.

### Investment funds and securities market — key figures
- 688 investment funds in Malta with total NAV of €10.8 billion as of end-2017 (96 percent of GDP); resident investors owned €2.3 billion of that NAV.
- NAV of UCITS passported into Malta circa €265 billion as of December 31, 2017. Top three domiciles: Ireland, Luxembourg, the UK.
- Securities sector licensees as of June 2018:
  - 163 investment services licensees,
  - 69 fund managers,
  - 26 fund administrators,
  - 11 custodians,
  - 94 additional firms regulated under MiFID.
- Market capitalization of the Malta Stock Exchange (MSE) was €12.2 billion as of end-2017.
- As of end-March 2018 MFSA supervised: 65 (re)insurers, one reinsurance SPV, 11 insurance managers, 16 insurance agents, 32 insurance brokers, 459 tied insurance intermediaries, 16 retirement scheme administrators, 51 retirement schemes, two retirement funds, 12 investment managers, and eight back-office administrators.
- Also supervised: 162 investment intermediaries, 688 investment funds, 26 fund administrators, regulated market infrastructures, and oversight for ICOs/virtual financial assets regulatory development.

### MFSA legal powers, governance, and coordination
- MFSA has adequate legal authority to discharge supervisory responsibilities and take preventive and corrective measures to protect the public interest.
- MFSA proposed amending the MFSA Act to explicitly include promotion of financial stability and financial market integrity as key functions.
- Governance features:
  - Board of Governors oversees MFSA; appointment and dismissal provided under MFSA Act.
  - Ethics Framework and Staff Handbook set rules on conflicts of interest.
  - Audit Committee provides independent assurance and oversees the Internal Audit Unit (IAU).
  - IAU established in November 2016 and is working to achieve its approved headcount.
  - MFSA reports annually to parliament; regulatory consultations and public information available on MFSA website.
  - Appeals against MFSA decisions may be made to the Financial Services Tribunal, with further appeal to the Court of Appeals on a question of law.
- Legal protection and confidentiality:
  - Board members, officers, and employees have legal protection for official duties except for omissions or acts in bad faith.
  - Breach of confidentiality can lead to dismissal without notice; confidentiality obligations extend to former officers and external inspectors/auditors/experts.

### Supervisory capacity, funding, and independence
- Severe gap in supervisory capacity identified as an immediate priority.
- MFSA estimated a staff complement of 450 would be required by 2021 (an increase of 150 over the current level) to cater for sector growth and emerging sectors.
- MFSA proposals to address human resources include redesigning the remuneration system, a branding exercise, and an enhanced recruitment strategy.
- Funding issues:
  - Past funding was sufficient and stable, but funding shortfalls are forecast over the next five years—largely due to loss of revenue from separation of the Registry of Companies (ROC) and plans to significantly increase supervisory resources.
  - Recommendation that government provide strong public commitment to a five-year funding plan.
  - Recommendation that MFSA be exempted from public-sector recruitment policy/procedures to better attract and retain supervisors.
- Coordination mechanisms:
  - MoU with the Central Bank of Malta (CBM) on financial services, payment and securities settlement systems.
  - Crisis Management Committee set up by CBM, MFSA, and Ministry of Finance (MFIN) with MoU for crisis coordination.
  - Close cooperation with the Financial Intelligence Analysis Unit (FIAU) on AML/CFT supervision.
  - Bilateral MoUs with EU and third-country supervisors and signatory to multilateral MoUs by international standard setters.

### Risk-based supervision framework and supervisory quality
- MFSA is developing an integrated Risk-Based Supervision Framework (RBSF).
- Current RBSF observations:
  - Insurance-sector RBSF assesses (re)insurers by risk impact and probability to drive annual supervisory plan; monitoring of macro risks and business model analysis could be better embedded.
  - Investment firms’ RBSF evaluates impact and probability of risks; quantitative criteria largely based on financial indicators with less focus on inherent business risks.
  - An integrated RBSF would harmonize risk-based approach across the financial sector and take inputs from the ECB supervision process.
- Conduct supervision:
  - MFSA should formulate a supervisory stance and baseline supervision program for conduct supervision beyond current program for investment services companies.
- Macroprudential surveillance:
  - MFSA should continue to build macroprudential surveillance capabilities for insurance and securities sectors.
- Supervisory effectiveness:
  - Implementation of supervisory plans has been affected by stretched resources, but supervisory assessment quality appears not to be compromised.
  - Market participants regard MFSA highly but voiced concerns that effectiveness may be undermined by inadequate resources.
  - Senior MFSA supervisors demonstrate good understanding of business models and risks; internal procedures and checklists support consistency.
  - Sample review of supervisory files indicates assessments were satisfactory despite resource constraints.

### Market overview — insurance sector specifics
- Total assets held by insurers represented 105 percent of GDP as of end-2017.
- Assets held by insurers amounted to 14 percent of financial sector assets as of end-2017 (excluding CFIML; including CFIML the ratio is 4 percent).
- There were 51 direct insurers as of end-2017 (includes 14 PCCs). Two composite insurers licensed/grandfathered to write both life and non-life insurance; no new composite insurers admitted after 1998.
- Selected changes between end-2013 and end-2017 (preserved figures):
  - Life insurer: No 6; Assets €2,150 (2013) → No 6; Assets €4,135 (2017); Change in Assets €1,985 (91 percent)
  - Non-life insurer: No 27; Assets €1,633 (2013) → No 29; Assets €3,797 (2017); Change in Assets €2,164 (133 percent)
  - Reinsurer: No 4; Assets €5,771 (2013) → No 4; Assets €2,832 (2017); Change in Assets -€2,939 (-51 percent)
  - Captive insurer: No 8; Assets €446 (2013) → No 5; Assets €435 (2017); Change in Assets -€11 (-2 percent)
  - PCC (non-life): No 9; Assets €190 (2013) → No 12; Assets €479 (2017); Change in Assets €289 (152 percent)
  - Aggregate: 2013 — 60 insurers, Assets €10,289; 2017 — 64 insurers, Assets €11,850; Change: +4 insurers, +€1,561 (15 percent)
  - Nominal GDP: €7,642 (2013) → €11,295 (2017)
  - Total assets/GDP (percent): 135 (2013) → 105 (2017)

### Sector growth, passporting, and market concentration
- GWP grew from circa €250 million as of end-2004 to reach €4.2 billion as of end-2017.
- Passporting facilitated mutual market access between insurers in Malta and other EU states.
- Excluding GWP in respect of foreign risks, Malta’s insurance penetration and density rates are below the average penetration of advanced economies.
- More than 90 percent of non-life GWP and 70 percent of life GWP in 2017 related to risks outside Malta.
- Concentration:
  - Top five life insurers accounted for more than 98 percent of the market share in 2017; top two life insurers had 85 percent share in 2017.
  - The larger reinsurer wrote 84 percent of reinsurance premiums in Malta and the second wrote 7 percent.
  - About 54 percent of GWP was written by the top five non-life insurers.

### Product mix, GWP composition, and underwriting models (2017)
- Non-life GWP — totals and market shares (in millions of euros):
  - Motor: Domestic 83; Foreign 380; Total 463; Market Share 28 percent
  - Property: Domestic 32; Foreign 370; Total 402; Market Share 24 percent
  - Liabilities: Domestic 9; Foreign 96; Total 105; Market Share 6 percent
  - Accident and Health: Domestic 13; Foreign 114; Total 127; Market Share 8 percent
  - Others: Domestic 16; Foreign 539; Total 555; Market Share 34 percent
  - Non-life subtotal: Domestic 153; Foreign 1,499; Total 1,652; Market Share 100 percent
- Life GWP — totals and market shares (in millions of euros):
  - Health insurance: Domestic -; Foreign 15; Total 15; Market Share 2 percent
  - With profits/participation: Domestic 324; Foreign -; Total 324; Market Share 48 percent
  - Index-linked and unit-linked: Domestic 35; Foreign -; Total 35; Market Share 5 percent
  - Others: Domestic 31; Foreign 264; Total 295; Market Share 44 percent
  - Life subtotal: Domestic 390; Foreign 279; Total 669; Market Share 100 percent
- Total GWP: Domestic 543; Foreign 1,778; Total 2,321
- Non-life writers used delegated underwriting models (cover-holders) and some specialized in run-off business.

### Assets, solvency, and financial performance (end-2017)
- Total assets by segment (in millions of euros; total €11,850):
  - Life €4,153; Non-life €4,182; Reinsurance €2,922; Captives €593.
- Asset classes (end-2017, in millions of euros; percent of total €11,850):
  - Intangible assets €383 (3.2 percent)
  - Government and Corporate securities €4,706 (40.2 percent)
  - Equities €1,386 (11.7 percent)
  - Real estate and real-estate related €163 (1.4 percent)
  - Cash and bank balances €1,678 (14.2 percent)
  - Investments supporting ULPs €1,003 (8.5 percent)
  - Receivables €553 (4.7 percent)
  - Intragroup/-related company receivables €427 (3.6 percent)
  - Reinsurance recoverables €1,185 (10.0 percent)
  - Other assets €313 (2.6 percent)
- Note: Total assets as reported under IFRS were €11,850; based on the Solvency II framework methodology, the sector’s total assets amounted to €10.7 billion at end-2017.
- Solvency position (end of period, in percentage):
  - Own Funds over MCR (2017): Life 649; General 444; Reinsurance 1077; Captive 775.
  - Own Funds over SCR (2017): Life 257; General 175; Reinsurance 488; Captive 219.
  - Average SCR ratio for life and captive insurers was above 200 percent; reinsurers’ own funds were five times more than the SCR as of end-2017.
  - Two entities were in breach of the MCR as of December 31, 2015, but both rectified the shortfall promptly.

### Distribution and intermediaries (end-2017)
- 16 enrolled agents; 31 enrolled brokers; 11 enrolled insurance managers; 474 tied insurance intermediaries.
- Three core domestic banks—Bank of Valletta, HSBC Bank Malta, and APS Bank Ltd.—are enrolled as tied insurance intermediaries.
- Some Maltese insurers passporting services to other EU member states contract with managing general agents with delegated authority.

### Key risks and vulnerabilities — insurance sector
- Industry concentration: top two life insurers accounted for 96 percent of total assets of domestic life insurers and 85 percent of GWP; largest reinsurer accounted for 84 percent of reinsurance premiums.
- Brexit (hard Brexit) contingency:
  - About 10 insurers write business in the UK exclusively; two insurers have more than 50 percent of business in the UK and may decide to cease operations in Malta and establish an entity in the UK under a hard Brexit.
  - MFSA proactively engaged all (re)insurers on Brexit contingency plans.
- Business model concentration: some insurers rely on a single product or sector; example—50 percent of GWP of four of five domestic non-life insurers came from motor business.
- Market risk from low-yield environment: prolonged low yields and risk of sharp reversal; mitigant—limited exposure to guaranteed-return policies; MFSA recommends scenario analysis on interest-rate impacts and monitoring investment risk appetite.
- PCC legal risk: Malta is the only EU member state with PCC structure; legal sanctity of cell segregation not tested in courts; risk a foreign court may not respect segregation.
- Insolvency case: Setanta Insurance Company Limited liquidated; net deficiency €88.6 million as of end-2017.

### Key risks and vulnerabilities — securities sector (DIFs and intermediaries)
- DIFs:
  - 46 DIFs with NAV totaling €1.8 billion as of December 2017; more than 60 percent of DIFs were UCITS.
  - DIFs held predominantly bonds: bonds accounted for 67 percent of AUM with more than half being Malta government securities.
  - Resident households represented almost 50 percent of investors in DIFs, but this investment constituted 3.5 percent of their financial assets.
- Market risk exposure: more than 67 percent of AUM in DIFs held in bonds—vulnerable to interest-rate reversal scenarios.
- Intermediary failures: one intermediary failed in past five years with material shortfall €6.5 million in clients’ assets; criminal charges in one case of fraud, misappropriation, and forgery.

### Interconnectedness and contagion channels
- No (re)insurers or other financial entities designated officially as systemically important.
- MFSA identified 27 insurance groups and two financial conglomerates (Bank of Valletta plc and HSBC Bank Malta plc operate exclusively in Malta).
- Significant ownership links example (as of April 2017):
  - Bank of Valletta plc owned 50 percent of MAPFRE MSV Life plc and 31.08 percent of MAPFRE Middlesea plc.
  - HSBC Bank Malta plc owned 100 percent of HSBC Life Assurance (Malta) Ltd.
- Investment linkages:
  - As of end-2017, the eight domestic insurers held 2.7 percent of their assets in DIFs.
  - DIFs held 0.6 percent of assets in domestic insurers as of March 2017.
- DIFs’ operational links to domestic banks: core domestic banks manage 80 percent of DIFs AUM via banks’ subsidiary fund management companies.
- Authorities consider contagion impact low but note residual risk in extreme scenarios (e.g., high redemptions, liquidity stress).

### EU supervisory framework and MFSA institutional responsibilities
- Supervision of insurance and securities sectors in the EU is responsibility of national competent authorities (NCAs); ESAs (EIOPA, ESMA, EBA, ESRB) play key roles in rule-setting and supervisory convergence.
- MFSA:
  - Single regulator responsible for banking, insurance, and securities; part of the European System of Financial Supervisors.
  - Statutory functions include regulation, supervision, consumer protection, enforcement, and advising the government.
- MFSA operational and enforcement powers include on-site access, information requests, freezing funds, imposing capital add-ons, suspending officers, appointing administrators/liquidators, and imposing penalties up to €150,000 per infringement (and in certain notices up to €5 million or 10 percent of turnover).

### Governance, transparency, and internal controls
- Board of Governors sets policy and strategic direction; Supervisory Council (led by the Director General) handles licensing, regulation, and supervision.
- Audit Committee comprises three independent, nonexecutive Board members; oversees IAU.
- IAU:
  - Established November 2016; current staff three internal auditors including IAU Director; approved headcount seven; next external quality assessment scheduled for 2019.
- Proposed MFSA Act amendments (pending) aim to improve organization, introduce an Executive Committee, establish AML and Risk Committees, create an Academy for Financial Supervisors, and upgrade ICT and RegTech exploration.

### Ethics framework, confidentiality, and legal protection
- Ethics Framework and Staff Handbook set conflict-of-interest rules and require disclosures of interests including those of spouses and dependents.
- Cooling-off periods on termination for certain managers: two or six months.
- Confidentiality obligations extend to former officers and external experts; breach can lead to dismissal without notice.
- MFSA committed to supporting staff in legal actions initiated against them, including financial assistance.

### Supervisory framework and units — IPSU and SMSU
- IPSU (Insurance and Pensions Supervision Unit):
  - Required to adopt prospective, risk-based supervision; SRP obligations under Solvency II include ORSA, technical provisions, capital, and own funds assessment.
  - IPSU RAF stages: assessment of information; determination of impact classification; determination of probability classification; determination of risk score; determination of intensity and frequency of supervision.
  - IMROVE tool identifies governance quality, macroeconomic risks, and business model as main risk drivers.
  - IPSU staffing (2017): 23.5 FTE.
- SMSU (Securities and Markets Supervision Unit):
  - Completing Risk Monitoring System (RMS); licensees ranked by Total Composite Risk rating (TCR) driven by Total Probability Rating (TPR) and Total Impact Rating (TIR).
  - TPR ranges between 50 and 400; TIR ranges between 20 and 160; TCR computed by multiplying TPR by TIR, ranging between 1.6 percent and 100 percent.
  - SMSU staffing (2017): 39 FTE.
- Conduct Supervision Unit (CSU):
  - Assumed conduct supervision of investment firms effective September 1, 2016; issued Conduct of Business Rulebook in December 2017 after three-year consultation.
  - Conduct supervision of insurance sector covered by IPSU pending resourcing of CSU conduct supervision team (expected completion by end-2018).
  - Identified issue: lack of clear supervisory stance and baseline program for conduct supervision, particularly for banks acting as distributors.

### Macroprudential surveillance and RDU role
- MFSA participates in the Joint Financial Stability Board (JFSB); CBM is designated macroprudential implementation authority.
- RDU performs macroprudential risk assessment twice a year; current staffing: one FTE and two FTEs monitoring insurance and securities sectors respectively.
- Current surveillance limited to eight domestic insurers and DIFs; RDU has yet to formulate tailored models for systemic risk analysis except for investment funds liquidity stress testing.
- Recommendation: RDU should cultivate expertise and tailored methodology/models for holistic macroprudential surveillance of insurance and securities sectors.

### Supervisory resources, staffing, and human capital challenges
- MFSA estimated significant staff increases needed to address sector growth and emerging areas (FinTech, virtual assets); projected staff complement of 450 by 2021 (increase of 150).
- Table highlights (selected):
  - IPSU offsite review: 2013 22.5; 2015 23.5.
  - SMSU subtotal: 2013 26.0; 2017 39.5.
- Experience and turnover:
  - In 2017 about half of IPSU supervisors had fewer than three years’ experience; 60 percent for SMSU.
  - IPSU experienced 30 percent turnover for supervisors with fewer than three years’ experience.
  - Annual staff turnover at MFSA is 10.5 percent.
- Remuneration and recruitment reforms:
  - August 2018: revised compensation structure retrospectively to January 1, 2018, introducing variable component and performance bonuses; salary levels adjusted upward based on benchmarking.
  - Branding exercise and recruitment initiatives to attract local and international candidates.
  - Footnote: cabinet decided in October 2018 to add MFSA to entities exempt from public-sector recruitment policies (Directive 7) — this decision occurred after the FSAP mission period.
- External assessments and audits:
  - EIOPA (May 2016) recommended MFSA increase insurance supervisory staff and develop Solvency II capabilities.
  - ESMA peer review (Q1 2017) found MFSA allocated “very few resources” for examination of financial information and relied on outsourced review, limiting enforcement profile.
  - IAU audit of IPSU (June 2017) rated IPSU Compliance and Risk team “ineffective” due to inadequate resources.

### Key recommendations (institution, priority)
- Supervisory Resources and Independence
  - 1. Ensure stable funding for the MFSA by providing strong public commitment to a five-year plan to increase its budgetary resources. — Government — High
  - 2. Grant the MFSA full autonomy over its recruitment process by exempting it from the recruitment policies and procedures applicable to public-sector entities. — Government — High
  - 3. Address the significant gap in supervisory capacity as an immediate priority. — MFSA — High
  - 4. Ensure that the IAU is adequately resourced, including timely recruitment to achieve the approved headcount. — MFSA — Medium
- Insurance and Securities Regulation and Supervision
  - 5. Formulate a clear supervisory stance, including a baseline supervisory program for conduct supervision, particularly for banks acting as distributors of insurance and securities products. — MFSA — High
  - 6. Cultivate the necessary expertise to enable more holistic macroprudential surveillance, with tailored methodology and models that reflect the risk profiles of the insurance and securities sectors. — MFSA, CBM — High
  - 7. Finalize the proposed amendment to the MFSA Act to provide explicit clarity on the MFSA’s key functions to promote financial stability and financial market integrity. — Government — Medium
  - 8. Finalize the ongoing initiative to improve and harmonize the MFSA’s risk-based supervision framework. — MFSA — Medium

*Source: 1mltea2019007*

### 1. Global Insurance Market – 2017 _____________________________________________________________ 11

### 1. Global Insurance Market – 2017

### Executive summary — sector size and structure
- Total insurance sector assets amounted to €11.9 billion (105 percent of gross domestic product (GDP)) at end-2017.
- The sector structure includes:
  - four professional reinsurers,
  - eight captive insurers,
  - 14 protected cell companies (PCC),
  - one reinsurance special purpose vehicle (SPV).
- Life insurance and reinsurance industries are highly concentrated.
- Except for eight domestic insurers, Maltese insurers wrote predominantly or exclusively non-Maltese risks, mainly in other EU member states.
- Three banks are enrolled as tied insurance intermediaries to distribute insurance products.
- Some Maltese insurers passport business to other EU member states and contract with managing general agents with delegated authority.

### Investment funds and securities market key figures
- There were 688 investment funds in Malta with total net asset value (NAV) of €10.8 billion as of end-2017 (96 percent of GDP); resident investors owned €2.3 billion of that NAV.
- NAV of Undertakings for Collective Investment of Transferable Securities (UCITS) passported into Malta was circa €265 billion as of December 31, 2017. Top three domiciles: Ireland, Luxembourg, and the United Kingdom (UK).
- Securities sector licensees as of June 2018:
  - 163 investment services licensees,
  - 69 fund managers,
  - 26 fund administrators,
  - 11 custodians,
  - 94 additional firms regulated under the Markets in Financial Instruments Directive.
- Market capitalization of the Malta Stock Exchange (MSE) was €12.2 billion as of end-2017.
- As of end-March 2018, MFSA supervised: 65 (re)insurers, one reinsurance SPV, 11 insurance managers, 16 insurance agents, 32 insurance brokers, 459 tied insurance intermediaries, 16 retirement scheme administrators, 51 retirement schemes, two retirement funds, 12 investment managers, and eight back-office administrators.
- Also supervised: 162 investment intermediaries, 688 investment funds, 26 fund administrators, regulated market infrastructures, and oversight for initial coin offerings/virtual financial assets regulatory development.

### MFSA legal powers, governance, and coordination
- MFSA has adequate legal authority to discharge supervisory responsibilities and take preventive and corrective measures to protect the public interest.
- MFSA has proposed amending the MFSA Act to explicitly include promotion of financial stability and financial market integrity as key functions.
- Governance features:
  - Board of Governors oversees MFSA; appointment and dismissal provided under MFSA Act.
  - Ethics Framework and Staff Handbook set rules on conflicts of interest.
  - Audit Committee provides independent assurance and oversees the Internal Audit Unit (IAU).
  - IAU established in November 2016 and is working to achieve its approved headcount.
  - MFSA reports annually to parliament; regulatory consultations and public information available on MFSA website.
  - Appeals against MFSA decisions may be made to the Financial Services Tribunal, with further appeal to the Court of Appeals on a question of law.
- Legal protection and confidentiality:
  - Board members, officers, and employees have legal protection for official duties except for omissions or acts in bad faith.
  - Breach of confidentiality can lead to dismissal without notice; confidentiality obligations extend to former officers and external inspectors/auditors/experts.

### Supervisory capacity, funding, and independence
- There is a severe gap in supervisory capacity identified as an immediate priority.
- MFSA estimated a staff complement of 450 would be required by 2021 (an increase of 150 over the current level) to cater for sector growth and emerging sectors.
- MFSA proposals to address human resources include redesigning the remuneration system, a branding exercise, and an enhanced recruitment strategy.
- Funding issues:
  - Past funding was sufficient and stable, but funding shortfalls are forecast over the next five years—largely due to loss of revenue from separation of the Registry of Companies (ROC) and plans to significantly increase supervisory resources.
  - Recommendation that government provide strong public commitment to a five-year funding plan.
  - Recommendation that MFSA be exempted from public-sector recruitment policy/procedures to better attract and retain supervisors.
- Coordination mechanisms:
  - MoU with the Central Bank of Malta (CBM) on financial services, payment and securities settlement systems.
  - Crisis Management Committee set up by CBM, MFSA, and Ministry of Finance (MFIN) with MoU for crisis coordination.
  - Close cooperation with the Financial Intelligence Analysis Unit (FIAU) on AML/CFT supervision.
  - Bilateral MoUs with EU and third-country supervisors and signatory to multilateral MoUs by international standard setters.

### Risk-based supervision framework and supervisory quality
- MFSA is developing an integrated Risk-Based Supervision Framework (RBSF).
- Current RBSF observations:
  - Insurance-sector RBSF assesses (re)insurers by risk impact and probability to drive annual supervisory plan; monitoring of macro risks and business model analysis could be better embedded.
  - Investment firms’ RBSF evaluates impact and probability of risks; quantitative criteria largely based on financial indicators with less focus on inherent business risks.
  - An integrated RBSF would harmonize risk-based approach across the financial sector and take inputs from the ECB supervision process.
- Conduct supervision:
  - MFSA should formulate a supervisory stance and baseline supervision program for conduct supervision beyond current program for investment services companies.
- Macroprudential surveillance:
  - MFSA should continue to build macroprudential surveillance capabilities for insurance and securities sectors.
- Supervisory effectiveness:
  - Implementation of supervisory plans has been affected by stretched resources, but supervisory assessment quality appears not to be compromised.
  - Market participants regard MFSA highly but voiced concerns that effectiveness may be undermined by inadequate resources.
  - Senior MFSA supervisors demonstrate good understanding of business models and risks; internal procedures and checklists support consistency.
  - Sample review of supervisory files indicates assessments were satisfactory despite resource constraints.

### Market overview — insurance sector specifics and table snapshot
- Total assets held by insurers represented 105 percent of GDP as of end-2017.
- Assets held by insurers amounted to 14 percent of financial sector assets as of end-2017 (excluding Captive Financial Institutions and Money Lenders (CFIML); including CFIML the ratio is 4 percent).
- There were 51 direct insurers as of end-2017 (includes 14 PCCs). Two composite insurers were licensed/grandfathered to write both life and non-life insurance; no new composite insurers admitted after 1998.
- Table 1 (Insurance Market Structure) highlights changes between 2013 and 2017 (selected figures):
  - Life insurer: No 6; Assets €2,150 (2013) → No 6; Assets €4,135 (2017); Change in Assets €1,985 (91 percent)
  - Non-life insurer: No 27; Assets €1,633 (2013) → No 29; Assets €3,797 (2017); Change in Assets €2,164 (133 percent)
  - Composite insurer: No 2 (2013) → No 2 (2017); assets allocated under non-life to reflect dominant portfolios
  - Reinsurer: No 4; Assets €5,771 (2013) → No 4; Assets €2,832 (2017); Change in Assets -€2,939 (-51 percent)
  - Captive insurer: No 8; Assets €446 (2013) → No 5; Assets €435 (2017); Change in Assets -€11 (-2 percent)
  - Captive reinsurer: No 3; Assets €77 (2013) → No 3; Assets €149 (2017); Change in Assets €72 (94 percent)
  - PCC (non-life): No 9; Assets €190 (2013) → No 12; Assets €479 (2017); Change in Assets €289 (152 percent)
  - PCC (life): No 1; Assets €22 (2013) → No 2; Assets €23 (2017); Change in Assets €1 (5 percent)
  - Reinsurance SPV: No 0; Assets €0 (2013) → No 1; Assets €0 (2017); Change in Assets €0
  - Aggregate: 2013 — 60 insurers, Assets €10,289; 2017 — 64 insurers, Assets €11,850; Change: +4 insurers, +€1,561 (15 percent)
  - Nominal GDP: €7,642 (2013) → €11,295 (2017)
  - Total assets/GDP (percent): 135 (2013) → 105 (2017)

### Objective and scope of the Technical Note
- Purpose: review institutional arrangement and supervisory practices for insurance and securities sectors in Malta, focusing on supervisory effectiveness.
- Benchmarks: Insurance Core Principles (International Association of Insurance Supervisors) and Objectives and Principles of Securities Regulation (IOSCO).
- Securities scope limited to investment funds and securities firms.
- Review based on MFSA responses to questionnaire, technical discussions with authorities, and interviews with industry participants.
- Review prepared by Su Hoong Chang and conducted during September 10–16, 2018; it considers legal and regulatory framework and supervisory practices in place at that time and did not cover regulation/supervision of virtual assets.

### Key recommendations (institution, priority)
- Supervisory Resources and Independence
  - 1. Ensure stable funding for the MFSA by providing strong public commitment to a five-year plan to increase its budgetary resources. — Government — High
  - 2. Grant the MFSA full autonomy over its recruitment process by exempting it from the recruitment policies and procedures applicable to public-sector entities. — Government — High
  - 3. Address the significant gap in supervisory capacity as an immediate priority. — MFSA — High
  - 4. Ensure that the IAU is adequately resourced, including timely recruitment to achieve the approved headcount. — MFSA — Medium
- Insurance and Securities Regulation and Supervision
  - 5. Formulate a clear supervisory stance, including a baseline supervisory program for conduct supervision, particularly for banks acting as distributors of insurance and securities products. — MFSA — High
  - 6. Cultivate the necessary expertise to enable more holistic macroprudential surveillance, with tailored methodology and models that reflect the risk profiles of the insurance and securities sectors. — MFSA, CBM — High
  - 7. Finalize the proposed amendment to the MFSA Act to provide explicit clarity on the MFSA’s key functions to promote financial stability and financial market integrity. — Government — Medium
  - 8. Finalize the ongoing initiative to improve and harmonize the MFSA’s risk-based supervision framework. — MFSA — Medium

*Source: 1mltea2019007 - 1. Global Insurance Market – 2017*

### 5. Malta’s accession to the EU has contributed to the strong growth of the insurance

### 5. Malta’s accession to the EU has contributed to the strong growth of the insurance sector

### Sector growth and EU passporting
- Gross written premium (GWP) grew from circa €250 million as of end-2004 to reach €4.2 billion as of end-2017.
- Passporting through freedom of services or freedom of establishment facilitated mutual market access between insurers in Malta and other EU states.
- Excluding GWP in respect of foreign risks, Malta’s insurance penetration and density rates are below the average penetration of advanced economies, with scope for further growth, particularly in non-life insurance.
- More than 90 percent of non-life GWP and 70 percent of life GWP in 2017 related to risks outside of Malta (see Table 3).

### Market structure and concentration
- Life insurance concentration:
  - Top five life insurers accounted for more than 98 percent of the market share in 2017.
  - The top two life insurers had 85 percent share in 2017.
- Reinsurance concentration:
  - The larger reinsurer wrote 84 percent of reinsurance premiums in Malta and the second wrote 7 percent.
- Non-life industry:
  - About 54 percent of GWP was written by the top five non-life insurers.
- Captives and PCCs:
  - 30 of the 35 direct insurers, all four reinsurers, the eight captive insurers, and 13 PCCs wrote predominantly or exclusively non-Maltese risks.
  - Malta is the only EU member state that has established PCC corporate structure for insurance operations; as of end-2017 there were 14 PCCs (34 cells), up from 10 PCCs (22 cells) in 2013.
  - Nine of the 14 PCCs were licensed to write general liability class of business, and one PCC wrote mandatory motor third-party liability risks.

### Domestic insurers and systemic links
- Authorities identified eight “domestic insurers” whose assets totaled €4.1 billion as of end-2017, or 36 percent of GDP.
- The CBM uses four equally weighted indicators to identify domestic insurers with significant links to the domestic economy:
  - (a) shareholding by core domestic banks;
  - (b) resident investment assets;
  - (c) total GWP for risks situated in Malta;
  - (d) total gross claims paid for risks situated in Malta.
- Domestic insurers reported combined return on assets of 1.3 percent and return on equity of 13 percent in 2017, compared with EU medians of 0.4 percent and 7 percent, respectively.

### Product mix, GWP composition, and underwriting models
- Non-life GWP:
  - Average year-on-year (YoY) growth of 17 percent over the past five years for direct non-life insurers.
  - In 2017, market share by class: motor 28 percent; property 24 percent; liabilities 6 percent; accident and health 8 percent; others 34 percent.
  - More than 90 percent of non-life GWP in 2017 was sourced from foreign risks through passporting to other EU members.
  - Some insurers specialized in run-off business acquiring legacy portfolios to provide finality and capital relief.
  - Some large non-life writers used EU cover-holders business models with delegated underwriting and claims within predefined parameters.
- Life GWP:
  - Average YoY growth of 19 percent over the past five years.
  - The top two life insurers had more than two-thirds market share.
  - About 58 percent of life GWP was attributable to domestic risks; of which 83 percent came from with-profits or participating policies.
  - Participating policies provide both guaranteed and non-guaranteed benefits; insurers are expected to meet policyholders’ reasonable expectations for discretionary non-guaranteed benefits supported by clear governance arrangements.
- Reinsurance:
  - GWP of reinsurers in 2017 totaled €1.9 billion, of which proportional premiums were €1.1 billion (58 percent) and the remainder from non-proportional business.
  - Malta had the highest share of reinsurance premiums as a proportion of total GWP in Q4 2017 according to EIOPA analysis, mainly attributable to subsidiaries of large EU (re)insurance groups in Malta.
  - All reinsurers in Malta are part of international groups.

### Assets, solvency, and financial performance
- Insurers’ assets and composition (end-2017, in millions of euros; total 11,850):
  - Total assets by segment: Life €4,153; Non-life €4,182; Reinsurance €2,922; Captives €593.
  - Asset classes (end-2017, in millions of euros; percent of total 11,850):
    - Intangible assets €383 (3.2 percent)
    - Government and Corporate securities €4,706 (40.2 percent)
    - Equities €1,386 (11.7 percent)
    - Real estate and real-estate related €163 (1.4 percent)
    - Cash and bank balances €1,678 (14.2 percent)
    - Investments supporting ULPs €1,003 (8.5 percent)
    - Receivables €553 (4.7 percent)
    - Intragroup/-related company receivables €427 (3.6 percent)
    - Reinsurance recoverables €1,185 (10.0 percent)
    - Other assets €313 (2.6 percent)
  - Total assets as of end-2013: €10,289
  - Increase/decrease (percent) since end-2013: Life +91 percent; Non-life +129 percent; Reinsurance -50 percent; Captives +33 percent; Total +15 percent.
  - Note: Total assets as reported under IFRS were €11,850; based on the Solvency II framework methodology, the sector’s total assets amounted to €10.7 billion at end-2017.
- Solvency position (end of period, in percentage):
  - Own Funds over MCR (2017): Life 649; General 444; Reinsurance 1077; Captive 775.
  - Own Funds over SCR (2017): Life 257; General 175; Reinsurance 488; Captive 219.
  - Average SCR ratio for life and captive insurers was above 200 percent; reinsurers’ own funds were five times more than the SCR as of end-2017.
  - Two entities were in breach of the minimum capital requirement (MCR) as of December 31, 2015, but both rectified the shortfall promptly.

### Distribution and intermediaries
- As of end-2017:
  - 16 enrolled agents;
  - 31 enrolled brokers;
  - 11 enrolled insurance managers;
  - 474 tied insurance intermediaries.
- Three core domestic banks—Bank of Valletta, HSBC Bank Malta, and APS Bank Ltd.—are enrolled as tied insurance intermediaries to distribute insurance products.
- Some Maltese insurers passporting services to other EU member states contract with managing general agents with delegated authority for distribution or ancillary services.

### Table 3 — Analysis of Gross Written Premiums, 2017 (in millions of euros)
- Non-life:
  - Motor: Domestic 83; Foreign 380; Total 463; Market Share 28 percent
  - Property: Domestic 32; Foreign 370; Total 402; Market Share 24 percent
  - Liabilities: Domestic 9; Foreign 96; Total 105; Market Share 6 percent
  - Accident and Health: Domestic 13; Foreign 114; Total 127; Market Share 8 percent
  - Others: Domestic 16; Foreign 539; Total 555; Market Share 34 percent
  - Non-life subtotal: Domestic 153; Foreign 1,499; Total 1,652; Market Share 100 percent
- Life:
  - Health insurance: Domestic -; Foreign 15; Total 15; Market Share 2 percent
  - With profits/participation: Domestic 324; Foreign -; Total 324; Market Share 48 percent
  - Index-linked and unit-linked: Domestic 35; Foreign -; Total 35; Market Share 5 percent
  - Others: Domestic 31; Foreign 264; Total 295; Market Share 44 percent
  - Life subtotal: Domestic 390; Foreign 279; Total 669; Market Share 100 percent
- Total GWP: Domestic 543; Foreign 1,778; Total 2,321
- Note: Reinsurance is not included. Source: MFSA.

_Source: MFSA; Swiss Re – World Insurance in 2017, Sigma 3/2018; EIOPA Risk Dashboard (April 2018)._

### 23. Funds  established as multi-funds were most popular, followed by standalone and

### 23. Funds  established as multi-funds were most popular, followed by standalone and 

### Fund structures and domestic investment funds (DIFs)
- As of December 2017:
  - 81 percent of the CISs operated using a multi-fund structure.
  - 16 percent operated as standalones.
  - About 3 percent were master-feeder structures.
- DIFs (Funds where residents hold more than 50 percent of NAV):
  - There were 46 DIFs with NAV totaling €1.8 billion as of December 2017.
  - More than 60 percent of the DIFs were UCITS funds.
  - DIFs are generally not permitted to use borrowing except temporarily, and it cannot exceed 15 percent of total assets.
  - Asset allocation of DIFs as of December 2017:
    - Bonds accounted for 67 percent of AUM.
      - More than half of those bond holdings consisted of Malta government securities; the rest was mainly corporate bonds.
      - Corporate bond issuers were mainly foreign and domestic NFCs, captive financial institutions and banks.
    - Equity holdings in MFIs formed the remaining 17.7 percent of AUM of DIFs.

### Fund types and net asset value (NAV) composition
- As of end-2017:
  - Diversified funds had the largest share of NAV: 40 percent or €4.3 billion.
  - Equity funds accounted for 26 percent.
  - Bond funds accounted for 17 percent.
- Investment management for these funds:
  - Investment management is conducted via in-house Investment Committee under the oversight of the Board of Directors.

### Passporting and cross-border UCITS/AIF activity
- Through passporting (as of September 2018 and end-2017 data combined):
  - 308 UCITS funds, 75 AIFs, and 44 EU AIFs licensed as venture capital funds have submitted notifications to market in Malta as of September 2018.
  - As of December 31, 2017, the total NAV of other European UCITS passporting into Malta was circa €265 billion.
  - The top three EU domiciles where the funds were passported from are Ireland, Luxembourg, and the UK.
  - The MFSA did not have information on the investor profile.

### Investment intermediaries (licensing and activities)
- As of June 2018 (163 investment services licensees):
  - 69 are fund managers.
  - 94 are regulated MiFID firms (including 11 custodians).
- License categories described:
  - Category 1: authorized to receive and transmit clients’ orders and to provide investment advice.
  - Category 2: may hold or control client money/assets, execute and provide portfolio management services in addition to Category 1 activities.
  - Category 3: allowed to trade for their own account.
  - Category 4: trustees or custodians of CISs.
- Of the 94 regulated MiFID firms:
  - 55 have been licensed to provide products and services to retail clients, although only 43 have done so.
  - The 94 regulated MiFID firms include eight licenses that are in suspension or under appeal.
  - Of the 11 Category 4 licenses, seven firms also hold a Category 2 license, while two firms hold a Category 3 license.
- Passporting of investment services:
  - 37 firms have notified the MFSA of their intention to passport their services out of Malta, but only 24 firms have done so.
  - Top three jurisdictions for passports: Germany, Italy, and the UK.
  - One European investment firm has established a branch in Malta.
- Proprietary trading:
  - Only 13 firms holding a Category 3 license may conduct proprietary trading.
  - Of these, five firms derive significant revenue from such trading.
  - Revenues from proprietary trading amounted to only 16 percent of the total revenues of all investment firms (excluding banks and fund managers).

### Trading venues and Malta Stock Exchange (MSE)
- MSE overview:
  - The MSE was the only market operator in Malta at the time of review; it commenced operations on January 8, 1992.
  - Back-office services include maintenance of share and bond registers, clearing and settlement, and custody services through its Central Securities Depository.
  - There are currently 17 members on the MSE.
- Market capitalization and composition at end-2017:
  - Total market capitalization: €12.2 billion.
  - Equity issues: 23 equity issues totaling €4.3 billion.
  - Bond issues: 63 bond issues totaling €1.7 billion.
  - Maltese government securities: 50 issues totaling €6.1 billion.
  - Market turnover in 2017: total trading volume €0.6 billion; equity turnover €88 million.
- Market features and listing:
  - No high-frequency trading, no market makers, no direct market access, or short-selling on the MSE.
  - Admission to listing on the regulated market is subject to prior approval from the Listing Authority (the Board of Governors of the MFSA).
  - Although 29 DIFs were listed on the MSE, these were not traded on the exchange.
- Prospects MTF and IFSM developments:
  - In February 2016, MSE launched the Prospects multi-trading facility (MTF) for SMEs.
    - In 2017, Prospects market capitalization reached €15 million and annual turnover was €0.2 million.
  - In October 2016, MSE launched the National Capital Markets Strategic Plan.
  - In September 2017, MSE introduced the Institutional Financial Securities Market (IFSM), the first fully Maltese institutional securities market.
    - The IFSM minimum denomination of financial instruments quoted is €100,000.
    - Types admissible to IFSM: debt securities, asset-backed securities, insurance-linked notes, convertible debt securities, and derivative securities.
  - MSE plans to introduce exchange traded funds (ETFs) to its platform.
- Market concentration:
  - At end-2017, four banks, GlobalCapital plc, and Mapfre Middlesea plc accounted for almost half the equity market capitalization on the MSE.
  - Outstanding bonds issued by five banks, GlobalCapital plc, and Gasan Finance Company plc accounted for almost 30 percent of the total bonds listed on the MSE.
- External market closures:
  - The European Wholesale Securities Market, which operated in Malta since February 2012, ceased operations on July 31, 2018.

### Key risks and vulnerabilities — Insurance sector
- Industry concentration:
  - The top two life insurers accounted for 96 percent of total assets of domestic life insurers and 85 percent of the GWP of the industry.
  - The largest reinsurer accounted for 84 percent of reinsurance premiums in Malta.
- Brexit (hard Brexit) contingency monitoring:
  - Under a hard Brexit scenario:
    - About 10 insurers who write business in the UK exclusively, while two insurers with more than 50 percent of their business in the UK, may decide to cease operations in Malta and establish an entity in the UK.
    - UK insurers have been writing substantial health insurance business in Malta via passporting. If the UK were considered a third country, these insurers would need to operate in Malta via a third-country branch or cease carrying on business in Malta, which may affect consumers’ choices.
  - The MFSA has proactively engaged all (re)insurers on their Brexit contingency plans.
- Business model and concentration risks:
  - Some insurers rely on selling one insurance product or targeting one sector/market.
  - Example concentration: 50 percent of the GWP of four of the five domestic non-life insurers came from motor business.
- Market risk from low-yield environment:
  - Prolonged low yields and the risk of a sudden and sharp reversal are key risks.
  - Mitigant: life insurers in Malta have limited exposure to policies with guaranteed returns.
  - MFSA recommends scenario analysis on the impact of interest rates on insurers’ asset portfolios and their technical provisions (via the discount rate used for technical provisions).
  - MFSA is monitoring possible shifts in investment risk appetite; no material change found.
- Adoption of innovative legal structures and FinTech:
  - Malta is the only EU member state that has adopted the PCC corporate structure; legal sanctity of cell segregation has not been tested in courts.
  - Risk that a court outside Malta may not support segregation provisions of Maltese PCC legislation.
  - Risk of injured third parties challenging cell segregation as creating involuntary creditors.
  - Increased cybersecurity and privacy risks from FinTech usage.
- Insolvency case and liabilities:
  - One insurer, Setanta Insurance Company Limited, was liquidated for insolvency in the reviewed period.
    - Established in 2007; authorized to write motor business including third-party motor liability cover in Ireland via ~230 brokers.
    - Key causes of failure: shortfall in required capital, poor governance, underestimation of technical provisions.
    - Surrendered license in April 2014; liquidation process ongoing.
    - A net deficiency of €88.6 million was reported as of end-2017.
    - Compensation for third-party motor claims from Irish funds/bureaus is still pending.
  - Note: Recent change in Irish insurance legislation will provide eligible third-party personal injury claimants 100 percent compensation from the Insurance Compensation Fund; eligible third-party property damage claimants will also receive 100 percent compensation.

### Key risks and vulnerabilities — Securities sector (DIFs and intermediaries)
- Systemic relevance and stability impact of DIFs:
  - The 15 umbrella DIFs that mainly transact with residents held €1.8 billion assets (16 percent of GDP) in December 2017.
  - Resident households represented almost 50 percent of investors in DIFs, but this investment constituted merely 3.5 percent of their financial assets.
  - Low levels of leverage in these funds further limit their impact on financial stability.
- Market risk exposure:
  - More than 67 percent of AUM in DIFs were held in bonds, making them vulnerable to interest rate reversal scenarios (e.g., tapering of the ECB’s asset purchase program).
  - Equity prices may respond unfavorably to heightened political uncertainties (risks of trade wars, US political agenda, Brexit, etc.).
- Intermediary failures:
  - In the past five years (prior to the review), one intermediary failed due to a material shortfall of €6.5 million in clients’ assets.
  - A director of Maltese Cross Financial Services Limited was charged with criminal offenses including fraud, misappropriation, and forgery, causing loss of clients’ assets.

### Interconnectedness and contagion channels
- Systemic designation:
  - No (re)insurers or other financial entities have been designated officially as systemically important financial institutions, and none of the reinsurers is considered domestically relevant.
- Group structures and ownership stakes (as of April 2017 and time of review):
  - MFSA had identified 27 insurance groups and two financial conglomerates.
  - The top five insurance groups did not have domestic operations in Malta.
  - The two financial conglomerates (Bank of Valletta plc and HSBC Bank Malta plc) operated exclusively in Malta.
  - As of April 2017:
    - Bank of Valletta plc owned 50 percent of MAPFRE MSV Life plc and 31.08 percent of MAPFRE Middlesea plc.
    - HSBC Bank Malta plc owned 100 percent of HSBC Life Assurance (Malta) Ltd.
- Interlinkages and contagion risks:
  - Strong interlinkages between related entities of insurance groups and financial conglomerates may elevate contagion risks:
    - Examples: a life insurer outsourced significant investments supporting ULPs to a related fund manager within the group; parent banks serving as key distribution channels and holding material deposits from related insurers; insurers deriving significant business from parent banks.
    - In event of financial distress of parent or related banks, implications include operational impacts and material risk of losing business.
- Investment linkages between insurers and other domestic financial institutions:
  - As of end-2017, the eight domestic insurers held 2.7 percent of their assets in DIFs.
  - DIFs held negligible investments in domestic insurers—0.6 percent as of March 2017.
- DIFs’ operational links to domestic banks:
  - Core domestic banks manage 80 percent of DIFs AUM via banks’ subsidiary fund management companies.
  - Authorities consider contagion impact low because DIFs are separate legal entities with independent governing bodies and contractual features (gating, liquidity fees) that limit redemptions.
  - Network Model analysis by MFSA did not indicate any DIF to be highly connected to the domestic financial system.
  - Residual risk remains in extreme scenarios of crisis of confidence, high redemptions by policyholders or investors, and resulting liquidity stress (as evidenced during 2007–09).

### Supervisory structure and institutional arrangements (introductory assessment)
- Effective supervision prerequisites noted:
  - Adequate supervisory powers and resources, operational independence, clear mandate, strong technical capacity to make rules and issue guidance, exercise robust supervision, initiate proportionate preventive and corrective measures, and take enforcement actions.
- Importance of coordination:
  - Given increasing domestic and global interconnectedness, supervisors need clear and transparent frameworks to coordinate and cooperate with relevant supervisors and authorities domestically and cross-border, ensuring information exchange and mutual assistance while preserving supervisory confidentiality.

*Source: 2019 FSAP chapter text (analysis of CIS licensed by the MFSA and MFSA data as cited).*

### 50. The supervision of the insurance and securities sectors in the EU is the responsibility of

### 1mltea2019007 - 50. The supervision of the insurance and securities sectors in the EU is the responsibility of

### EU supervisory framework and role of ESAs
- Supervision of the insurance and securities sectors in the EU is the responsibility of the national competent authorities (NCAs).
- The European Supervisory Authorities (ESAs) play a key role in rule-setting. The ESAs comprise:
  - EIOPA,
  - European Securities and Markets Authority (ESMA),
  - European Banking Authority,
  - European Systemic Risk Board (ESRB).
- The key objective of the ESAs is to improve the functioning of the internal market, including promoting supervisory convergence across NCAs.

### Malta: institutional responsibilities and coordination
- Currently, the MFSA, the CBM, and the FIAU share responsibilities for the supervision of the financial sector in Malta.
- MFSA (established in 2002):
  - Single regulator responsible for regulation and supervision of financial services in Malta, including banking, insurance, and securities.
  - Part of the European System of Financial Supervisors and participates in meetings of the ESAs.
- CBM:
  - Responsible for the financial stability of Malta and has the macroprudential mandate.
  - Collaborates with the MFSA through the Joint Financial Stability Board (JFSB).
  - CBM attends relevant organs of the ECB and the ESRB relating to macroprudential policy and financial stability; responsible for notifying relevant European authorities of its macroprudential policy decisions.
- MFIN:
  - An observer on the JFSB and holds no voting powers.
- FIAU:
  - Tasked with monitoring and supervision of compliance with AML/CFT requirements, including imposing administrative sanctions for breaches of AML/CFT obligations.
  - Works with the MFSA as agent in conducting joint AML/CFT supervision of financial services license holders.
- Joint and technical-level working groups and meetings complement the JFSB’s work.

### MFSA supervisory organization and units
- MFSA assigns supervisory responsibilities largely along sectoral lines, with cross-sectoral approach for authorization, regulatory development, conduct supervision, and enforcement.
- MFSA supervision and enforcement units:
  - Banking Supervision Unit,
  - Conduct Supervision Unit (CSU),
  - Insurance and Pensions Supervision Unit (IPSU),
  - Securities and Markets Supervision Unit (SMSU),
  - Regulatory Development Unit (RDU),
  - Authorization Unit,
  - Enforcement Unit.
- The MFSA’s respective accountabilities are summarized in Appendix I (in source).

### Mandates and legal powers of the MFSA
- MFSA has a broad supervisory mandate; it took over supervisory functions previously carried out by the CBM, the MSE, and the Malta Financial Services Centre.
- Current prudential and conduct supervision mandate covers:
  - Banking industry: credit institutions and financial institutions (FIs) and as resolution authority for credit institutions;
  - Insurance industry: insurers, reinsurers, captive insurers, and insurance intermediaries;
  - Capital markets: investment services license holders, CISs, regulated markets (including market surveillance), central securities depositories, financial market infrastructures, recognized private CISs, registered tied agents, recognized administrators, and as the listing authority;
  - Other regulated entities: trust management companies, listed entities, Registry of Companies, company services providers, pension schemes, pension funds, and pension service providers;
  - Related supervisory activities: promoting financial stability, AML/CFT supervision, enforcement, and regulatory development including FinTech and consumer education.
- Statutory functions of the MFSA include:
  - (a) regulate, monitor, and supervise financial services in Malta;
  - (b) promote the general interests and legitimate expectations of consumers and fair competition practices;
  - (c) monitor business conduct of FIs and provide relevant information and guidance to the public;
  - (d) enforce financial sector laws;
  - (e) advise the government on financial sector policies;
  - (f) investigate allegations of practices and activities detrimental to consumers and take appropriate deterrent measures;
  - (g) ensure high standards of conduct and management throughout the financial system;
  - (h) perform such other functions as may be assigned under the MFSA Act or any other law.
- Sectoral supervisory objectives:
  - Insurance Business Act requires the MFSA to have regard for: (a) the protection of insured persons, policyholders, beneficiaries, and the general public; (b) the protection of the reputation of Malta, taking account of Malta's international commitments; (c) the promotion of competition and choice.
  - For securities supervision (Investment Services Act), objectives are: (i) safeguarding financial stability; (ii) protecting the investor; (iii) ensuring that the financial markets are fair, efficient, and transparent.
  - MFSA has proposed amending the MFSA Act to include promoting financial stability and financial market integrity as key functions.

### Legal enforcement powers and penalties
- The Minister makes regulations to transpose and implement EU directives/regulations based on MFSA advice; MFSA is empowered to issue legally binding rules and directives.
- Administrative penalties:
  - Up to €150,000 may be imposed for each infringement of or failure to comply with any provision of the MFSA’s rules or directives.
  - Pursuant to various legal notices, penalties for various breaches can be increased to €5 million or 10 percent of turnover.
- MFSA operational powers include:
  - reasonable access and entry to business premises;
  - requiring submission of information and records;
  - examining the affairs of (re)insurers;
  - freezing funds and entering and searching premises;
  - imposing capital add-on;
  - suspending or removing any officer of (re)insurers;
  - for investment firms, taking necessary supervisory measures to enforce the EU Capital Requirements Regulation and impose specific liquidity requirements.
- Preventive and corrective measures:
  - Reprimands, warnings, disciplinary sanctions or enforcement measures (all must be published on MFSA’s website);
  - Requiring rectification or remediation (including submission of recovery plan or finance scheme);
  - Appointing advisor, administrator, liquidator, or person to assume control or take charge of assets;
  - Restricting disposal of assets;
  - Suspending or revoking authorization or registration (insurance intermediary);
  - Ordering dissolution and winding up of regulated entities.
- Outsourcing and substance requirements:
  - MFSA empowered to review and inspect service providers performing outsourced activity or function by re(insurers).
  - Outsourcing by (re)insurers is subject to prior approval of IPSU.
  - (Re)insurers must have at least two key functions (internal audit, actuarial, internal control including compliance, or risk management) and two critical functions (e.g., claims or underwriting) in Malta.
  - Investment intermediaries must have at least two individuals who are residents of Malta.
  - MFSA may challenge outsourcing of a critical or important operational function or activity where necessary.

### Information exchange and confidentiality
- Well-established legal gateways exist for the MFSA to exchange information with relevant supervisors and authorities, domestically and internationally.
- Information exchange is subject to confidentiality, purpose, and use requirements (see Section F on “Supervisory Coordination and Cooperation” in source).

### Recommendation
- The mission supports the timely finalization of the proposed amendment to the MFSA Act to provide explicit clarity on the MFSA’s key functions of promoting financial stability and market integrity.

### Governance and transparency of the MFSA
- Board of Governors sets policy and strategic direction; headed by a Chairperson appointed by the prime minister and comprises seven members including the Chairperson.
- MFSA organs facilitating Board oversight:
  - Supervisory Council, led by the Director General (DG), responsible for licensing, regulation, and supervision; Directors of supervision, authorization, and regulatory development units attend Council meetings;
  - Board of Management and Resources, headed by the Chief Operations Officer, handles day-to-day management and finances;
  - Coordination Committee (Chairman, CEO, DG, Chief Operations Officer, Director of the Legal Office) oversees implementation of Board policies and principal communication channel;
  - Legal Office provides legal advice and assistance.
- Board of Governors also acts as the Listing Authority and the Resolution Authority.
  - Listing Authority functions: authorizing admissibility of financial instruments, issuing Listing Rules, ensuring compliance with Listing Rules; may establish a Listing Committee; SMSU assists and advises the Listing Committee.
  - Resolution Authority: established Resolution Committee and Resolution Unit; mandated to be operationally independent and act independently of Supervisory Council.

### Appointments, appeals, and oversight mechanisms
- Appointment and dismissal of Chairperson and Board of Governors governed by MFSA Act:
  - May hold office for up to five years and may be reappointed for another term.
  - Prime Minister may dismiss a Governor on grounds of inability or misbehavior; requirement to publish reason for termination in the Gazette.
- Centralization at the Supervisory Council:
  - Promotes consistent and proportionate supervisory practices and decisions.
  - All licensing decisions subject to Council approval.
  - All material supervisory issues and proposed refusals of appointments of approved persons are considered by the Council.
  - Supervisory policy issues discussed at Council before Board of Governors approval.
  - Council reviews supervisory priorities and quality assurance matters per MFSA’s Quality Assurance Manual.
  - During 2017, the Supervisory Council met 55 times.
- Appeals:
  - Established legal procedure for appeals against MFSA decisions, including to the Financial Services Tribunal (FST), appointed by the Minister.
  - FST hearings generally open to the public and decisions are public.
  - FST determines whether MFSA’s decision wrongly applied legal provisions or is an abuse of discretion or manifestly unfair.
  - No appeal for any decision carrying a penalty of less than €232.94 or for reprimand, warning, or similar disciplinary sanction.
  - Appeals against FST decisions can be made to the Court of Appeals, but only on a question of law.
  - An appeal to the FST does not suspend MFSA’s directive or decision, except for revocation of authorization, in which case the decision will not be operative until the period for making appeal expires. If an appeal is made, the decision becomes operative on the date the FST dismisses the appeal or the date on which the appeal is abandoned.
  - So far, the FST has yet to rule against the MFSA’s decisions in response to appeals.

### Audit, internal audit unit (IAU), and governance reforms
- Audit Committee:
  - Provides independent assurance to the Board on governance, controls, and risk-management processes.
  - Determines role and remit of the IAU and evaluates IAU performance.
  - All three members are independent, nonexecutive members of the Board of Governors and are appointed in their personal capacity.
- Internal Audit Unit (IAU):
  - Established November 2016; adopts risk-based approach in identifying audit universe.
  - Core services: assurance, advisory, information technology, investigative.
  - Current staff: three internal auditors including IAU Director; recruitment in progress to reach approved headcount of seven.
  - Required to have external quality assessment under standards established by the Institute of Internal Auditors and the ECB; next assessment scheduled for 2019.
  - Required to undergo internal quality assurance and report back to the ECB.
  - Performed audit of IPSU Compliance Team onsite work in June 2017; internal audit of SMSU supervisory activities planned for 2019.
- Proposed amendments to MFSA Act to enhance governance and operational efficiency (pending legislative approval) include:
  - New organization chart to improve accountability and efficiency; establish an Executive Committee to replace the Supervisory Council and act as the Listing Authority, led by the CEO and five Chief Officers (supervision, strategy and innovation, enforcement, legal, operations). Except for Chief Officer Operations and Chief Officer Supervision (current DG), three positions are new.
  - Greater focus on AML/CFT issues, enterprise risk management, research, FinTech developments, and knowledge management; introduce AML Committee and Risk Committee; functions of risk management, program management, and quality assurance to report directly to the CEO; Board of Governors to formally set MFSA’s risk appetite.
  - Establish an Academy for Financial Supervisors to spearhead training for supervisors.
  - A three-year plan being developed to upgrade MFSA’s information and communication technology infrastructure and to explore adoption of regulatory technology (RegTech) to improve supervisory efficiency.

*Source: 1mltea2019007 - 50. The supervision of the insurance and securities sectors in the EU is the responsibility of (PDF).*

### 70. The MFSA has established an Ethics Framework as part of its governance culture.

### 1mltea2019007 - 70. The MFSA has established an Ethics Framework as part of its governance culture.

### Ethics Framework and conflicts of interest
- All staff members and members of decision-making and internal bodies of the MFSA are required to ensure the credibility, reputation, and public confidence in the integrity and impartiality of the MFSA and to comply with established ethics standards and relevant provisions in the Staff Handbook.
- The CEO is appointed by the Board of Governors (Article 2 of MFSA Act).
- The Staff Handbook sets out clear rules on managing conflicts of interest by staff members and the Board of Governors; declarations must be made immediately in accordance with the Ethics Framework.
- Declarations of potential conflicts of interest include any personal interest in regulated entities and interests held by spouses, civil partners, dependents, and immediate family members.
- Cooling-off periods on termination of employment apply to managers within any of the regulatory units represented on the Supervisory Council, the Enforcement Unit, and the Resolution Unit:
  - Cooling-off periods: two or six months.
  - This requirement does not apply to support staff, non-clerical staff, staff falling within the Operational Units, and the Legal and International Relations Units.
- Recommendation:
  - Given the key role played by the IAU in the MFSA’s governance framework, the MFSA is encouraged to ensure that the IAU is adequately resourced promptly, including timely recruitment to achieve the approved headcount.

### Transparency, public consultation, and disclosures
- The MFSA consults the public on regulatory changes and provides comprehensive information on its website, including:
  - financial sector legislation and regulations, MFSA Annual Reports, MFSA Consumer Complaints Reports, consultations, sanctions, penalties, warnings, and lists/databases of regulated entities.
- The MFSA is required to disclose specific information in line with the Solvency II Directive and the Capital Requirements Directive to foster uniform transparency and accountability across EU supervisory authorities; such information is disclosed in a common format sufficient to enable comparison of supervisory approaches.
- Specific disclosures include: laws, regulations, administrative rules, general guidance; aggregate statistical data; the manner of exercise of the options and discretions available in the EU (e.g., Solvency II Directive); supervisory objectives; functions and activities; supervisory review process; supervisory measures taken; and administrative penalties imposed.

### Operational and financial independence — findings
- Operational independence:
  - Within its legal powers, the MFSA has operational autonomy to discharge responsibilities.
  - The Board of Governors must follow policy guidelines set by the government and advises the government on financial sector policies (Article 4(1)(e) and Article 6 of MFSA Act).
  - No evidence of government interference in institution-specific supervisory matters; Supervisory Council makes supervisory decisions without external approval; Board of Governors is notified but has no veto.
- Public accountability:
  - The MFSA reports to the parliament annually, must keep proper books of accounts, and have its financial statements audited; audited financial statements and annual report are presented to parliament through the Minister.
  - Annual estimates of income and expenditure are to be examined by a parliamentary committee.
- Publication obligations:
  - MFSA publishes Annual Reports and audited financial statements on its website and must make public all sanctions and penalties, indicating whether they are being appealed where applicable.
- Funding structure and statistics:
  - The MFSA is funded by fees and charges derived from supervisory functions, other income from assets and investments, and from the Consolidated Fund.
  - The MFSA currently regulates over 2,180 licensees, an increase of over 360 (about 20 percent) during the past three years.
  - The reserve fund was €15.1 million as of end-2017, equivalent to the operating expenses of 2016; the reserve fund must not exceed the operational expenses recorded in the preceding financial year.
  - Any surplus after allocation to the reserve fund must be paid to the Government.
- Funding outlook and causes of shortfall:
  - An increasing trend of funding shortfall is forecasted, largely due to:
    - The loss of the ROC’s revenue (ROC functions migrated to a new Registry of Companies Agency as of April 2018).
    - Higher operating expenses, particularly payroll costs driven by urgent hiring needs and proposed infrastructure/upgrading capital expenditure.
  - The MFSA’s financial projection for 2019–21 indicates an increasing trend of funding shortfall.
- Legislative change and implications:
  - The MFSA Act was amended recently to stipulate that any shortfall in the MFSA’s funding shall be paid out of the Consolidated Fund (Article 22 of MFSA Act).
  - The recent change requires the MFSA to negotiate governmental and parliamentary approval of its budget yearly, introducing uncertainty and potential instability in funding.
- Recruitment constraints:
  - The MFSA must comply with public sector recruitment policy and procedures, including endorsement by MFIN of projected HR budget and approval of vacancies by the Office of the Parliamentary Secretary for Financial Services, Digital Economy and Innovation; CBM and MSE are exempt from this procedure.
  - Perception challenge: industry players suggest careers at MFSA are less attractive due to public-sector employment status, complicating recruitment amid intense competition from financial industry.
  - Footnote: Following discussions with the FSAP mission team, the cabinet decided in October 2018 to add the MFSA to the list of entities that are exempt from the recruitment policies and procedures applicable to public-sector entities (Directive 7). The amendment took place after the end of the FSAP mission and was not reviewed by the team.

### Operational and financial independence — recommendations
- To maintain the financial and operational independence of the MFSA, the authorities should consider:
  - putting in place appropriate measures to ensure stability of funding for the MFSA; and
  - exempting the MFSA from the recruitment policies and procedures applicable to public sector entities.
- Further recommended actions in the report:
  - Develop a five-year plan to increase budgetary resources in a sustained way, supported by a strong public commitment from the Government.
  - Review the policy for license fees and the basis used for other regulatory charges; conduct research and a feasibility study on the appropriate basis for license fees and regulatory charges and consult the industry.
  - Implement fee revision in a gradual and phased manner over the next three to five years to avoid sudden large regulatory burden increases; Government subventions would be required during the transition period.

### Confidentiality safeguards and legal protection
- Confidentiality obligations:
  - Board of Directors, organs of the MFSA, officers, employees, former officers/employees, inspectors, auditors, and experts acting on behalf of the MFSA must safeguard confidentiality of any information acquired; disclosure only with consent of the person who divulged the information, except summary/aggregate forms that do not enable identity ascertainment (Article 17 of MFSA Act, Article 59 of IB Act, Article 26 of IS Act, s38 of FMA).
- Internal policies:
  - Staff Handbook reiterates duty to protect professional secrecy; breach of confidentiality can lead to dismissal without notice; letters of appointment refer to confidentiality duties.
  - MFSA has adopted the Common Rules Minimum Standards policy for document classification according to sensitivity and issued related guidelines.
- Legal gateways and cooperation:
  - Legal gateways exist for MFSA to exchange information with relevant authorities in Malta, the EU, and third countries, subject to confidentiality, purpose, and use requirements; specified authorities include financial regulators, enforcement agencies, ESAs, ESRB, the European Commission, statutory auditors and their regulators, liquidators, administrators, investigators, and actuaries.
- Legal protection for staff:
  - The MFSA, members of its Board of Governors, officers, and employees have legal protection in the exercise of their official duties, except for acts/omissions done in bad faith.
  - MFSA has committed to supporting staff in legal actions initiated against them, including financial support to cover costs or losses, obtaining legal advice, or necessary financial guarantees for revocation of precautionary warrant (s29 of MFSA Act, Article 66 of IB Act, and s3.24 of MFSA Staff Handbook).

### Supervisory coordination and cooperation
- MoUs and committees:
  - MFSA signed an MoU with the CBM to facilitate exchange of information pertaining to financial services and payment/securities settlement systems; MoU established a Standing Committee and contact persons and processes for information sharing in line with MFSA Act and Central Bank Act.
  - CBM, MFSA, and MFIN jointly set up a Crisis Management Committee and executed an MoU to coordinate prevention and management of financial crises; authorities are signatories to the EU 2008 MoU on cooperation among financial supervisory authorities, central banks, and finance ministries of the EU on cross-border financial stability.
- AML/CFT cooperation:
  - MFSA and FIAU signed an MoU relating to cooperation in AML/CFT supervision in 2014.
  - MFSA established a dedicated AML/CFT team within the Enforcement Unit in 2015 to assist the FIAU in AML/CFT inspections; from 2017 both agencies adopted a joint AML/CFT supervisory mechanism and common joint examination procedures.
  - The AML/CFT MoU was signed in August 2018.
- International cooperation:
  - MFSA has signed a number of bilateral MoUs with international regulators and is signatory to multilateral MoUs through IOSCO, EIOPA, and ESMA.
  - MFSA is a signatory to five coordination arrangements with other European regulatory authorities for the establishment of supervisory colleges.
  - A list of MoUs executed is published on the MFSA’s website.

### Supervisory framework and resources — background context
- Importance of capacity:
  - Building and maintaining strong technical capacity is essential for effective supervision; operational and financial independence are critical for attracting and retaining skilled staff.
- Evolving standards:
  - Post-2008/2009, international standard setters raised benchmarks on supervisory practices and effectiveness; the Supervisory Intensity and Effectiveness Group of the Financial Stability Board provided guidance to promote robust supervisory practices.
  - Current supervisory paradigm requires skilled, experienced supervisors capable of credible interactions on strategic issues such as risk appetite/culture and of exercising sound forward-looking judgment.
- Legal framework for insurance supervision:
  - The IB Act established a legal framework for the MFSA’s supervisory review process for insurance firms (Article 31B of IB Act).
  - The MFSA reviews strategies, processes, and reporting procedures of (re)insurers, assessing compliance with governance, risk management, technical provisions, capital requirements, investments, own funds, use of internal models, and stress testing.
  - Supervisory reviews shall be conducted regularly; MFSA shall establish minimum frequency and scope of reviews with regard to the nature, scale, and complexity of activities of the (re)insurers concerned.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1mltea2019007.pdf*

### 93. The Investment  Service Act (Supervisory Review) Regulations (ISA(SR)R) outlines

### 93. The Investment Service Act (Supervisory Review) Regulations (ISA(SR)R) outlines

### Supervisory review for the securities sector (SMSU)
- ISA(SR)R outlines minimum supervisory review and evaluation for the securities sector.
- SMSU supervisory assessments cover, inter alia:
  - investment firms’ stress testing framework,
  - concentration risks,
  - use of recognized credit risk mitigation techniques,
  - adequacy of own funds,
  - liquidity risks,
  - business model,
  - geographical location of exposures,
  - excessive leverage,
  - systemic risks.
- SMSU responsibilities:
  - formulate annual supervisory examination programs;
  - undertake more intensive and frequent supervisory activities (including permanent presence at the firm) where appropriate.
- Since 2018, each supervisory unit within the MFSA must identify and submit the list of the top five risky entities under its remit to the Supervisory Council, including an update of the supervisory approach adopted for these entities; any onsite review reports of such entities should also be reviewed by the Supervisory Council before finalization.

### Insurance and Pension Supervision Unit (IPSU) — Risk-based and prospective supervision
- MFSA required to adopt a prospective and risk-based approach to supervision: timely and proportionate supervision through an appropriate combination of offsite and onsite activities; regulatory requirements commensurate with nature, scale, and complexity of risks (Reg4(3) of IB(GPS)R).
- IPSU Supervisory Review Process (SRP) obligations under the Solvency II Directive include evaluation of:
  - strategies, processes, and reporting procedures established by (re)insurers;
  - (re)insurers’ own-risk and solvency assessment (ORSA);
  - technical provisions;
  - capital requirements;
  - quality and quantity of own funds;
  - investments in accordance with the prudent person principle.
- SRP is documented and published on the MFSA’s website (Article 31B of IB Act and Article 36 of Solvency II Directive).

### IPSU risk assessment cycle and framework
- Periodic assessment based on a risk assessment cycle: risk identification, risk evaluation, analysis of management actions and controls, risk scoring, supervisory activities, and monitoring of risks and mitigation actions.
- IPSU Risk Assessment Framework (RAF) five stages:
  - assessment of information;
  - determination of impact classification;
  - determination of probability classification;
  - determination of risk score;
  - determination of intensity, and frequency of supervision.
- Impact assessment:
  - performed annually through metrics, quantitative indicators, and supervisory judgment;
  - impact classification categories: Low, Medium Low, Medium High, and High;
  - quantitative indicators adjusted for types of insurance business (non-life, life, composite, captives, etc.) and concentration in business lines;
  - impact classification of an insurance group considers complexity and interconnectedness.
- Probability evaluation:
  - conducted annually; considers current and future risks and the ability to withstand possible events or future changes in economic conditions;
  - probability classification categories: Low, Medium Low, Medium High, and High;
  - process involves assessments of risks, controls, risk drivers, and relevant sector risks; for insurance groups, group-specific issues also considered;
  - both quantitative and qualitative information considered to arrive at a net probability score, adjustable by supervisory judgment.

### IMROVE and enhancements
- IMROVE supervisory tool identifies three main risk drivers: quality of governance, macroeconomic risks, and business model.
- IMROVE complements ORSA in identifying future risks and possible adverse effects.
- IPSU acknowledges need to enhance monitoring of macro-risks and business model analysis (e.g., cross-border activities and geographical risk concentration).
- IPSU intends to develop its own stress testing framework to complement (re)insurers’ tests.

### IPSU overall risk scoring and supervisory plan
- IPSU assigns overall risk score based on impact and probability and compares classifications on a risk map.
- Overall risk classifications:
  - High Risk: possibly at risk of detriment due to the risks they face and not meeting obligations to policyholders and beneficiaries in the short and long terms; (Re)insurers may also be in this category due mainly to their size and higher potential impact in the market;
  - Medium High Risk: at risk of suffering detriment due to the higher likelihood that their identified risks will materialize;
  - Medium Low: not expected to suffer detriment or impact policyholders or the market significantly if their identified risks materialize;
  - Low Risk: low likelihood of risks materializing.
- Supervisory plan is driven by the RAF; overall risk scores plus other supervisory information set the supervisory plan for each (re)insurer, outlining frequency and intensity of supervisory activities and supported by documented procedures.
- IPSU has integrated recommendations and good practices from the EIOPA Supervisory Handbook.

### Supervisory judgment and governance
- IPSU established a high-level policy on form and level of judgment at each SRP stage to ensure appropriate use of supervisory judgment while allowing flexibility within specific parameters.
- Policy aims to ensure consistency of supervisory judgment; IPSU drafting a System of Governance Manual to define good governance practices, considering proportionality.
- Going forward, IPSU will conduct impact and probability assessments on a quarterly basis based on a limited set of metrics and indicators to enhance timely monitoring and enable proactive supervisory stance and early intervention.

### Securities Market Supervision Unit (SMSU) — Risk Monitoring System (RMS)
- SMSU is completing an RMS to provide efficient management and optimization of scarce supervisory resources, adopt a more proactive supervision style, and allow early intervention.
- Risk assessments conducted annually per the Risk Monitoring Manual.
- Under RMS, licensees ranked by Total Composite Risk rating (TCR), which determines supervisory intensity and focus.
- Risk quantitative criteria (RQC) tailored by licensee category to assess risk profiles; RMS assesses risks posed by each licensee in isolation (not interlinkages or systemic impact).
- Risk ratings assigned to RQC, weighted equally but adjustable by analysts; RQC include probability and impact variables rated and mapped on a probability and impact matrix.
- Computation details:
  - separate summation of variables yields total probability rating (TPR) and total impact rating (TIR) for each licensee;
  - TPR ranges between 50 and 400;
  - TIR ranges between 20 and 160;
  - TCR computed by multiplying the TPR by the TIR, ranging between 1.6 percent and 100 percent;
  - higher TCR implies higher risk to investors and SMSU supervisory objectives;
  - RMS categorizes licensees into low-, medium-, or high-risk categories based on TCR.
- RMS drives annual supervisory plan reflecting frequency and intensity of supervision for each licensee; plan supported by documented procedures and observes proportionality.

### Conduct Supervision (CSU)
- CSU assumed conduct supervision of investment firms effective September 1, 2016.
- Key areas: client disclosure and reporting; financial product governance; management of conflict of interests; selling processes and practices; contractual agreements with retail clients; execution of clients’ orders; governance of regulated persons.
- Board of Governors mandated CSU to issue the Conduct of Business Rulebook, published in December 2017 after a three-year consultation period.
- Conduct supervision of insurance sector currently covered by IPSU pending resourcing of CSU conduct supervision team, expected to be completed by end-2018.
- Identified issue: lack of clear supervisory stance and baseline program for conduct supervision, particularly for banks acting as distributors of insurance and securities products; MFSA has not performed onsite conduct supervision of one major bank in its capacity as a tied insurance intermediary.

### Ongoing initiatives and recommendations (RBSF)
- MFSA formulating an integrated risk-based supervision framework (RBSF) to harmonize supervision across banking, insurance, and securities sectors, taking inputs from the ECB risk-based supervision process.
- Integrated approach aims to foster common understanding across supervisory units and embed assessment of business risk elements (environment risks; customers, products and markets; business process risks; and prudential risks) in RBSF.
- Recommendations:
  - It is advisable for the MFSA to formulate a clear supervisory stance, including a baseline supervisory program for conduct supervision, particularly for banks acting as distributors of insurance and securities products.
  - The ongoing initiative to improve and harmonize the MFSA’s risk-based supervision framework is commendable; MFSA should maintain momentum and finalize the framework in a timely manner.

### Macroprudential surveillance and RDU role
- MFSA contributes to financial stability oversight through participation at the JFSB; JFSB macroprudential policy recommendations are forwarded to the CBM Board of Directors for adoption (CBM is the designated macroprudential policy implementation authority).
- MFSA must have regard for potential impact of its decisions on EU financial system stability and take account of an EU dimension in supervisory responsibilities (Reg 3 of IB(GPS)R and Reg 5 of ISA(SR)R).
- ESRB responsible for EU-wide macroprudential oversight; EIOPA conducts EU-wide stress tests and coordinates crisis prevention and management among NCAs.
- Within MFSA, the RDU has financial stability and macroprudential focus; performs macroprudential risk assessment twice a year with bilateral discussions with supervisory units; financial stability assessments presented to Supervisory Council.
- Current RDU capacity and coverage:
  - RDU building macroprudential surveillance capabilities for insurance and securities sectors in line with mandate;
  - Current staffing: one full-time equivalent (FTE) staff and two FTE staff monitoring the insurance and securities sectors, respectively;
  - Current surveillance limited to the eight domestic insurers and the DIFs in terms of surveyed entities prone to propagation of systemic risk to the Maltese financial system;
  - RDU has yet to formulate supporting models for domestic systemic risk and financial stability analysis of insurance and securities sectors, except for the investment funds liquidity stress testing.
- Recommendation:
  - RDU should cultivate necessary expertise to enable more holistic macroprudential surveillance, with tailored methodology and models reflecting risk profiles of the insurance and securities sectors.

### Supervisory capacity and responsibilities
- Staffing changes: number of supervisory staff in IPSU and SMSU has increased marginally since 2013.
- 2017 staffing:
  - IPSU had 23.5 FTE staff;
  - SMSU had 39 FTE staff.
- IPSU supervisory scope as at end-March 2018:
  - supervision of 65 (re)insurers,
  - one reinsurance SPV,
  - 11 insurance managers,
  - 16 insurance agents,
  - 32 insurance brokers,
  - 459 tied insurance intermediaries,
  - 16 retirement scheme administrators,
  - 51 retirement schemes,
  - two retirement funds,
  - 12 investment managers,
  - eight back-office administrators.
- SMSU supervisory mandate covers:
  - 162 investment intermediaries,
  - 688 investment funds,
  - 26 fund administrators,
  - regulated market infrastructures,
  - enforcement of listing requirements,
  - processing of notifications pursuant to the Securitization Act (since March 2018),
  - market surveillance;
  - development of regulatory framework for initial coin offerings, virtual financial assets, and related service providers.
- Insurance group supervision:
  - MFSA identified 27 insurance groups;
  - MFSA designated group supervisor for the Darag Group and Compre Group and has set up a college of supervisors for these two groups;
  - MFSA is member of supervisory colleges for four international insurance groups: the Munich Re Group, Germany; the Mapfre Group, Spain; the Bupa Group, UK; and the Wesleyan Group, UK.
- As group supervisor, IPSU functions include:
  - coordination of gathering and dissemination of relevant or essential information for going concerns and emergency situations;
  - supervisory review and assessment of financial situation of the group;
  - assessment of compliance with solvency, risk concentration, and intragroup transaction rules;
  - assessment of the system of governance of the group, including fitness and propriety of the Board of Directors of participating undertakings;
  - planning and coordination through regular meetings or other means of supervisory activities in going concerns and emergency situations in cooperation with relevant authorities.

*Source: 1mltea2019007 - 93. The Investment Service Act (Supervisory Review) Regulations (ISA(SR)R) outlines*

### 119. Similarly, the resources allocated to financial conglomerates are the supervisors of the

### 1mltea2019007 - 119. Similarly, the resources allocated to financial conglomerates are the supervisors of the

### Supervisory arrangements for financial conglomerates
- Two Maltese financial conglomerates exist.
- Neither requires the establishment of a supervisory college because the MFSA is the only relevant competent authority.
- The conglomerates are supervised by a Joint Supervisory Team comprising staff from the ECB and the MFSA.

### Legislative and regulatory developments (2015–2017)
- MFSA delivered an intensive program of legislative and regulatory developments driven by significant EU regulatory overhaul, including:
  - Solvency II Directive.
  - European Commission’s Green Paper on Building a Capital Markets Union.
  - Packaged Retail and Insurance-based Investment Products Regulation.
  - UCITS V, MiFID II, and Securitization Regulation.
- New legal acts, notices, rules, and circulars issued by the MFSA each year are listed in Appendixes I to III of the MFSA’s Annual Reports for 2015 to 2017.
- Extensive resources were applied to public consultations and to compile and assess feedback, summarized in Appendix IV of the Annual Reports.

### Analysis of supervisory resources (table highlights)
- Table 7. Analysis of Supervisory Resources (selected entries preserved exactly)
  - Offsite review: 2013 IPSU 22.5, 2013 SMSU 21.0, 2015 IPSU 23.5, 2017 SMSU 28.0
  - Onsite inspection: 2013 IPSU 4.0, 2015 SMSU 10.5
  - Macroprudential surveillance: 2013 IPSU 0.5, 2013 SMSU 0.5, 2015 IPSU 1.0, 2017 SMSU 1.5
  - Others: 2013 IPSU Nil, 2013 SMSU 1.0, 2015 IPSU Nil, 2017 SMSU 1.0
  - Subtotal: 2013 IPSU 22.5, 2013 SMSU 26.0, 2015 IPSU 23.5, 2017 SMSU 39.5
- Supervisory experience (table highlights)
  - Fewer than 3 years: 2013 IPSU 14.0, 2013 SMSU 14.0, 2015 IPSU 11.5, 2017 SMSU 23.0
  - More than 3 but fewer than 5 years: 2013 IPSU Nil, 2013 SMSU 5.0, 2015 IPSU 3.0, 2017 SMSU 5.5
  - More than 5 but fewer than 10 years: 2013 IPSU 1.0, 2013 SMSU 4.5, 2015 IPSU 6.0, 2017 SMSU 8.5
  - More than 10 years: 2013 IPSU 7.5, 2013 SMSU 2.5, 2015 IPSU 3.0, 2017 SMSU 2.5
  - Subtotal: 2013 IPSU 22.5, 2013 SMSU 26.0, 2015 IPSU 23.5, 2017 SMSU 39.5
- Notes from table:
  - The IPSU offsite supervisors also cover onsite inspections.
  - For SMSU, 7 of the offsite supervisors had dual roles covering both offsite review and onsite inspection in 2015 and 2017.
  - The Investment Services License Holder team within the CSU was created in September 2016.

### Assessments, peer reviews and audits
- EIOPA Supervisory Oversight Team (visit to IPSU in May 2016) recommended:
  - MFSA should “continue to increase its insurance supervisory staff, to continue to develop mechanisms to attract and retain highly skilled and experienced people in order to be able to respond to the fast-changing business environment and upgrade its supervision toward the more risk-based Solvency II.”
- ESMA independent peer review (first quarter of 2017, peer review on Guidelines on Enforcement of Financial Information) findings:
  - MFSA allocated “very few resources” for examination of financial information examination.
  - MFSA outsourced an important part of reviewing financial statements to a third party.
  - Resulted in “a disclosure checklist approach” without scrutiny of recognition and measurement issues.
  - Consequence: MFSA is “not building up any expertise or experience, nor is the MFSA holding itself out as an enforcer that challenges issuers, and as an enforcer is somewhat invisible to the market.”
  - Listing Authority informed all listed entities of enhancements to the examination approach and processes on September 12, 2017.
- IAU audit of IPSU (June 2017) opinion:
  - IPSU Compliance and Risk team are “ineffective” due to inadequate resources (lowest of IAU’s four-stage scale).
  - Supervisory processes (e.g., regular onsite visits of high-risk licensees, timely issuance of post-visit compliance reports) undermined by inadequate resources.
  - IPSU reports that a number of weaknesses highlighted are being addressed during the current year.

### Staffing, turnover, training and recruitment
- Experience and turnover:
  - In 2017, about half of IPSU supervisors had fewer than three years of experience.
  - Ratio is higher at 60 percent for the SMSU.
  - IPSU experienced a 30 percent turnover rate of supervisors with fewer than three years of experience, and a 14 percent turnover rate for supervisors with fewer than 10 years of experience.
  - Turnover at SMSU and CSU have been low, with the departure of only two supervisors in 2017.
- Training and development:
  - MFSA has a comprehensive training roadmap covering: induction, technical, soft skills, and qualifications attained through self-development.
  - Induction program three-stage approach: (a) pre-employment and contact on the first day of work; (b) induction training on key internal procedures such as security (physical, access, data) and ethics; and (c) induction training on organizational structures.
  - Technical and soft skills training gaps identified top-down and bottom-up; delivery in-house or externally.
  - Self/Employee Development Scheme offers financial support for certificate, diploma, first degree, or master’s/post-graduate degree studies; considered MFSA’s strongest confirmation of commitment to building a qualified workforce.
  - Structured Career Progress Plan to be complemented by a Mentoring Program to build professional relationships between experienced staff (mentors) and mentees.
- Use of external experts:
  - MFSA may hire or contract outside experts; empowered to appoint inspectors, auditors, or experts pursuant to relevant legislation.
  - External experts bound by confidentiality obligations, required to sign confidentiality undertaking, implement technical and organizational measures for data protection law compliance, and manage conflicts of interest.
- Documented procedures:
  - Procedure manuals used by IPSU and SMSU for offsite surveillance and onsite inspections are structured and sufficiently detailed.
  - Scope exists for integrating common procedures across supervisory units to reduce duplication, harmonize practices, promote common supervisory culture/language, and facilitate staff rotation.
- Human Resource Audit and initiatives:
  - MFSA commissioned a Human Resource Audit in 2017 to develop a Human Resource strategy; core findings divided into recruitment, retention, and remuneration.
  - MFSA has initiated measures to address audit findings and implement recommendations.
  - MFSA estimated a significant increase in staff complement required over the next three years to cater for sector growth and emerging sectors (FinTech and virtual financial assets); increase of FTEs over current staff strength anticipated.
  - HR Unit initiatives include engaging private recruitment agencies specializing in Finance/ICT to attract local and foreign candidates.
- Structural talent challenges:
  - Annual staff turnover rate at the MFSA is 10.5 percent.
  - Malta’s population is aging; only a quarter of new jobs created annually are filled by locals.
  - Chairperson of Jobsplus reported that if the current growth rate in the economy of 6–7 percent on an annual basis is maintained, there will be considerable difficulty in meeting Malta’s staffing requirements.
- Remuneration and branding changes (retrospective and 2018 reforms):
  - Until December 2017, MFSA had a fixed salary structure with pay raises only at promotion.
  - In August 2018, MFSA revised compensation structure retrospectively to January 1, 2018, to build in a variable component to reward good performance with salary reviews and performance bonuses.
  - Salary levels adjusted upward based on benchmarking against three studies conducted by HR consulting agencies.
  - New grades and opportunities for career progression based on experience (in lieu of academic qualification) introduced as of August 2018.
  - MFSA embarked on a branding exercise to position itself as employer of choice; job descriptions updated based on a competency framework; diversification of recruitment sources including international candidates; business process reengineering to clarify delegation of authority and staff empowerment.

### Assessment of supervisory capacity and industry views
- Summary assessment:
  - Current MFSA resources for insurance and securities supervision have lagged behind market and regulatory developments.
  - Malta has sophisticated financial markets and embraces financial innovation (PCC, Incorporated Cell Companies (ICCs), Fintech).
  - Effective implementation of Solvency II requires supervisors with expertise and sound judgment to conduct business model analysis; assess/approve (re)insurers’ internal models and ORSA; and develop local stress testing frameworks.
  - Supervisory resources have remained stable in absolute numbers, but significant staff turnover has eroded supervisory experience in the IPSU.
  - Stretched resources likely to aggravate staff challenges due to additional workloads and inadequate guidance for new staff from a declining pool of experienced seniors.
- Industry consensus and concerns:
  - Severe resource shortage is well known in the industry.
  - Examples cited where supervisory reports or reviews were issued after a long delay and processing of certain applications took a long time.
  - Some entities reported MFSA has not inspected third-party service providers performing outsourced key functions outside of Malta (MFSA clarified supervisors engaged via teleconference/Skype and requested in-person meetings in Malta when necessary).
  - Concerns about limited talent pool resulting in mutual poaching of staff between the MFSA and the financial industry.

### Key findings and recommendations (preserved wording and emphasis)
- It is critical that the MFSA addresses the significant gap in supervisory capacity as an immediate priority:
  - The severe inadequacy of the MFSA’s supervisory capacity has been reported by both external independent reviews and the IAU. There is also industry consensus that the supervisory effectiveness of the MFSA may be undermined by inadequate resources;
  - The inadequate staff resources and inexperienced supervisors will seriously compromise the MFSA’s ability to supervise effectively and meet its supervisory objectives;
  - This will in turn have implications for the reputation of the MFSA as well as of Malta’s financial sector; and
  - Unless concerted efforts are made to address this pressing issue, there is risk of a vicious cycle. The expanding workload may result in increased turnover of overstretched supervisors, aggravating the workload of remaining supervisors. The severe resource gap is also well known, which compounds the challenges confronting the MFSA in its recruitment efforts.

### Appendix I — MFSA’s Supervision and Enforcement Units (key responsibilities)
- Banking Supervision / Conduct Supervision (CSU)
  - Supervising credit and financial institutions.
  - Securing appropriate protection for financial services consumers.
  - Supervising trustees, fiduciaries, and company service providers.
  - Supervising investment services license holders.
  - Supervising insurance intermediaries and insurance undertakings and credit and financial institutions (pending resourcing of the respective supervision teams).
- Insurance and Pensions Supervision (IPSU)
  - Supervising insurers, reinsurers, insurance intermediaries, retirement schemes, retirement funds, and related service providers.
  - Safeguarding the stability of the financial system as a member of the JFSB.
  - Organized into four functions: Actuarial, Compliance, Risk Management, and Regulatory and Legal.
- Securities and Markets Supervision (SMSU)
  - Prudential supervision of investment services license holders, CIS, recognized private CIS, registered tied agents, recognized administrators, fund managers, market infrastructures (including regulated markets, multilateral trading facilities, and central securities depositories), and entities within the scope of the European Market Infrastructure Regulation.
  - Regulating capital markets activities including admissibility to listing on regulated markets, processing notifications pursuant to the Securitization Act, continuing obligations of listed companies, and market surveillance.
  - Maintaining statutes and legislation relating to securities and markets and transposition of EU legislation as required.
  - Developing regulatory framework for investor protection, market integrity, and financial stability in the field of initial coin offerings, virtual financial assets, and related service providers.
  - Organized into four teams: CIS and Investment Firms, Capital Markets and Market Infrastructures, Fintech and Virtual Currencies, and Regulatory and Policy (not yet in place).
- Regulatory Development
  - Research and development and implementation of cross-sectoral policies, with focus on cross-sectoral financial stability oversight, systemic risk monitoring, and macroprudential supervisory issues.
- Authorization
  - Managing and coordinating processing of authorization applications by various sectoral legislation.
  - Administering cross-border notifications of Maltese finance services licence holders operating in the EU/EEA countries.
- Enforcement
  - Reviewing actions and conducting investigations of license holders for breaches of the law.
  - Investigating persons carrying on financial services activities without necessary license or authorization.
  - Conducting joint AML/CFT supervision with the FIAU.

*Source: MFSA.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mltea2019007.pdf_