Appendix I. MFSA’s Supervision and Enforcement Units

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1

Prepared by Su Hoong Chang, an IMF external regulatory expert. The review was conducted during the period of September 10–16, 2018, and considers the legal and regulatory framework in place and the supervisory practices employed at the time. The review did not cover the regulation and supervision of virtual assets.

2

The ratio is derived from excluding assets held by Captive Financial Institutions and Money Lenders (CFIML); including the CFIML assets, the ratio is 4 percent.

3

Includes 14 PC C s. The PCC has two parts: (a) a core, which maintains and controls the PCC; and (b) a number of cells, each with its own share capital. The income, assets, and liabilities of each cell are segregated from those belonging to other cells and the core of the PCC. While each cell does not have a separate legal entity, it is protected or ring-fenced through segregation, i.e., creditors may only have recourse to the cellular assets attributable to the cell(s) they have transacted with. In the event of a solvency shortfall, a cell may have recourse to the core to meet liabilities when its assets are exhausted. However, a cell carrying on captive insurance business or restricted to write reinsurance only is permitted to enter into a nonrecourse agreement.

4

A captive (re)insurer provides insurance cover exclusively for the risks of the parent or other associated companies within the group. Under EU laws, a captive cannot be owned by a re(insurer) or an insurance group.

5

Penetration rate is measured by GWP as a percentage of GDP, while insurance density is GWP per capita.

6

Insurers are grouped into two categories, domestic and international. The CBM’s systemic risk monitoring covers domestic insurers only (see paragraphs 111–114 on macroprudential surveillance). Domestic insurers are given higher weights under the current RBSF.

7

The indicator of each insurer is divided by the maximum level of each category to standardize the variables, such that the relative sizes are preserved and are independent of the measurement unit. The standardized indicators within each category are added to give one score per insurer.

8

Resident investment assets include bonds (government bonds, corporate bonds, collateralized debt securities, and structured notes) and equity (equity and participations in collective investment undertakings).

9

Source: EIOPA Risk Dashboard (April 2018).

10

The high profitability relative to the EU may be contributed to the dominance of domestic life insurers, which write mainly participating business and invest locally, unlike most foreign insurers.

11

One PCC writes direct motor third-party liability business through the core and through a cell. Another PCC writes reinsurance business through a cell. Although nine PCCs are authorized to write general liability, only four currently write this business—one on a direct basis and the rest through reinsurance.

12

Domestic non-life risks relate to policies where the insureds are residents in Malta. All other risks are considered as foreign risks.

13

Cover-holders act as agents for insurers, writing insurance contracts on their behalf and serving as their local representatives. Cover-holders enable insurers to extend their geographic reach by benefiting from local knowledge of risks and market conditions.

14

Domestic life risks relate to risks located in Malta or where the insureds are Malta residents or have permanent establishments in Malta.

15

The sum assured is a guaranteed benefit and is paid when the policy matures or upon the death of the insured. Participating policyholders are allowed to participate or to share in the profits of an insurer’s participating fund, typically paid in the form of bonuses or cash dividends.

16

The reasonable expectations of policyholders will depend on the types of policy, the practice of the insurer, the manner in which benefits are presented to policyholders, and the expectations created by marketing materials. In this regard, international best practices call for clear and explicit governance arrangements, including policies and practices for distributing discretionary bonuses and proper disclosure of the parameters for exercising discretion such as the methodology to calculate emergence of surplus; allocation of profits between policyholders and shareholders; the approach adopted for smoothing the discretionary benefits; and managing conflicts of interest between policyholders and shareholders, as well as between different generations of policyholders. The MFSA has not issued guidance on insurers’ governance arrangement for with-profits policy.

17

Under ULPs, the investment risks are typically passed on to policyholders, i.e., policyholders may receive less than the premiums in the event of a market distress.

18

The SCR is calibrated at a 99.5 percent value at risk (that (re)insurers can meet their obligations to policyholders and beneficiaries) over the next 12 months. If an insurer or reinsurer is not complying with the SCR, it has to take measures (increasing capital or lowering risk) to meet the SCR within six months.

19

The MCR represents the minimum level of capital that (re)insurers are required to hold. It is set at an 85 percent confidence level that a (re)insurer will be able to meet its obligations over the next 12 months. The MCR is bounded between 25 percent and 45 percent of the SCR. A breach of the MCR could result in a withdrawal of authorization unless it is covered again in three months.

20

Directive 2014/65/EU of the European Parliament and of the Council of 15th May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

21

Directive 2014/91/EU of the European Parliament and of the C ouncil of 23 July 2014 am ending Directive 2009/65/EC on the coordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities as regards depositary functions, remuneration, and sanctions.

22

The ratio is derived from excluding assets held by C a ptive Financial Institutions and Money Lenders (CFIML, sector 127 of the European System of National and Regional Accounts, ESA 2010). Including the CFIML assets, the ratio is 4.2 percent.

23

Some PIFs were reclassified as AIFs in response to regulatory changes.

24

Source: 2019 FSAP, General Questionnaire for Vulnerability Assessment.

25

Investment management is conducted via in-house Investment Committee under the oversight of the Board of Directors.

26

Funds where residents hold more than 50 percent of NAV.

27

Source: 2019 FSAP, General Questionnaire for Vulnerability Assessment.

28

Funds that invest in more than two asset classes.

29

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.

30

Under MiFID II, the term “trading venues” encompasses regulated markets, multilateral trading facilities, and organized trading facilities.

31

Companies considering admission to Prospects MTF require the services of a corporate advisor prior to and following the admission process.

32

The IFSM is specifically designed for the institutional investors. The minimum denomination of financial instruments quoted on the IFSM is €100,000. The types of instruments that are admissible to the IFSM are: debt securities, asset-backed securities, insurance-linked notes, convertible debt securities, and derivative securities.

33

ETFs are open-ended investment funds listed and traded on a stock exchange. An ETF typically aims to produce a return that tracks or replicates a specific index such as a stock or commodity index. Such index-tracking ET F s are passively managed by ETF managers and do not try to outperform the underlying index, and charge lower fees than those of actively managed investment funds.

34

See discussion of financial sec tor interconnectedness below.

35

With a recent change in the insurance legislation in Ireland, eligible third-party personal injury claimants will receive 100 percent compensation from the Insurance Compensation Fund, including any necessary and reasonable costs and expenses. Likewise, eligible third-party property damage claimants will receive 100 percent compensation.

36

See also FSAP Technical Note on Risk Analysis.

37

Defined as: (a) (re)insurers with head office in Malta that participate in at least one (re)insurer or third-country (re)insurer; or (b) (re)insurers whose parent is an insurance holding company or a mixed financial holding company that has its head office in Malta.

38

Defined under the Financial Conglomerates Regulations (Legal Notice 182 of 2013). Essentially, it is a group/subgroup where at least one of the entities has significant activities in the insurance sector and at least one has significant activities in the banking or investment services sector.

39

Article 17B of CBM Act.

40

Article 4 of MFSA Act.

41

Article 2 of MFSA Act: “Financial services’’ means the business of credit and financial institutions, the business of insurance and the activities of insurance intermediaries, the provision of investment services and CIS, pensions and retirement funds, regulated markets, central securities depositories and such other areas of activity or services as may be placed under the supervisory and regulatory competence of the Authority by the Minister or by any other law.”

42

Article 4(1) of IB Act.

43

Since 2017, the MFSA falls under the remit of the office of the Prime Minister. Article 20A of MFSA Act, LN 401 of 2017 (MiFIR and MiFID), LN 222 of 2016 (UC IT S), LN 407 of 2017 (C SDR) and LN 32 of 2014 (CRD).

44

Articles 29 to 32 of IB Act; Article 16 of MFSA Act; Article 13 to 16A of IS Act; Articles 32 to 34 of Financial Markets Act (FM Act); Schedule III and Reg 18 of ISA(SR)R.

45

Articles 16, 18, 18C, 26, and 28 of IB Act; Articles 7, 15, and 15A of IS Act; Articles 7, and 8 of FM Act; and Article 15 of Insurance Intermediary Act (IA Act) https://www.mfsa.com.mt/pages/AdministrativeMeasuresPenalties.aspx.

46

Article 30(7) of IB Act.

47

Article 6 to Article 12 of MFSA Act.

48

Listing Authority—Article 7A of MFSA Act and FM Act Resolution Authority–Articles 7B and 7C and the first schedule of MFSA Act, Bank Recovery and Resolution Directive, and Recovery and Resolution Regulations.

49

See also FSAP Technical Note on Banking Supervision and Technical Note on Bank Resolution and Crisis Management.

50

Article 21 of MFSA Act, Article 58 of IB Act, Article 19(2) of IA Act, and Articles 42 to 44 of FM Act.

51

Article 12A and Article 12B of MFSA Act.

52

The CEO is appointed by the Board of Governors (Article 2 of MFSA Act).

53

Currently, risk management is focused at the sectoral supervisory level, and a more holistic approach incorporating operational and reputational risks will be adopted.

54

Reg 6 of the IBS(GPS)R 2015 and the ISA(SR)R. The specific information 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; and supervisory measures taken, and administrative penalties imposed.

55

Article 4(1)(e) and Article 6 of MFSA Act.

56

Articles 23, 27, and 28 of MFSA Act and Reg 6 of Insurance Business (General Provisions of Supervision) Regulations (IB(GPS)R).

57

Articles 4(1)c), 16(8) of MFSA Act.

58

MFSA Newsletter May 2018.

59

The reserve fund was €15.1 million as of end-2017, equivalent to the operating expenses of 2016. The pegging to operating expenses implies that the reserve fund could be used to meet unexpected expenses. There is no legal provision governing the use of the reserve fund, and no precedent, as the MFSA thus far has not encountered a funding shortfall.

60

Articles 22 and 26 of MFSA Act, Insurance Business Fees Regulations (LN 139/1999) last am ended in 2009.

61

Article 22 of MFSA Act. The same provision applies to the salaries/allowances payable to the holders of key offices such as the judiciary, the Attorney General, and the Public Service Commission.

62

The explanatory note for IOSCO Principle 2 states: “A stable source of funding is critical because operational independence can be compromised if funding can be curtailed by external action.”

63

Manual for public sector entities: delegation of authority to effect recruitment, promotions and industrial relations, section 3.1.1.

64

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). As the amendment took place after the end of the FSAP mission, it was not reviewed by the team.

65

Article 17 of MFSA Act, Article 59 of IB Act, Article 26 of IS Act, s38 of FMA.

66

s2.6 and s3.20 of MFSA Staff Handbook.

67

Article 17 of MFSA Act, Article 55 of IB Act, Reg 6(6) and Schedule V of ISA(SR)R.

68

s29 of MFSA Act, Article 66 of IB Act, and s3.24 of MFSA Staff Handbook.

69

MFSA and FIAU cooperation is discussed in the Technical Notes on AML/CFT and on Banking Supervision.

71

Article 31B of IB Act.

72

Schedule 1 and 2 of ISA(SR)R.

73

Reg4(3) of IB(GPS)R.

74

Article 31B of IB Act and Article 36 of Solvency II Directive.

75

The ratings are 5=low , 22. 5=medium , 40=high, based on predetermined thresh olds ( e. g. , levels of total assets as an impact RQC and number of customers) and qualitative considerations (e.g., governance and nature of breaches or number/nature of complaints).

76

The TPR ranges between 50 and 400, while the TIR ranges between 20 and 160.

77

These include environment risks; customers, products and markets; business process risks; and prudential risks.

78

Macroprudential surveillance is defined as a set of systems and processes that monitors the vulnerability of the financial system with respect to economic and financial shocks. One of the aims of macroprudential surveillance and regulation is to: identify systemic risk (including shocks, interconnectedness, and feedback effects); reduce the likelihood of systemic risk; and mitigate spillover effects within the financial system and into the real economy.

79

Article 17B of Central Bank Act.

80

Reg 3 of IB(GPS)R and Reg 5 of ISA(SR)R.

81

A college of supervisors is not required for the remaining 25 insurance groups, as they are Maltese groups, with the MFSA as the only involved regulator.

82

They are the Munich Re Group, Germany; the Mapfre Group, Spain; the Bupa Group, UK; and the Wesleyan Group, UK.

83

Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance.

84

Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of November 26, 2014, on key information documents for packaged retail and insurance-based investment products. These products can be broadly classified into four groups: investment funds, insurance-based investment products, retail structured securities, and structured term deposits.

85

Regulation (EU) 2017/2402 of the European Parliament and of the Council laying down a general framework for securitization and creating a specific framework for simple, transparent, and standardized securitization, and amending Directives 2009/65/EC , 2009/138/EC, and 2011/61/EU and Regulations (EC) No. 1060/2009 and (EU) No. 648/2012.

86

Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC, OJ L 168, 30.6.2017.

87

ESMA—Guidelines on Enforcement of Financial Information—Peer Review Report (ESMA 42–111-4138) dated July 18, 2017.

88

This opinion reflects the Euro system—Internal Auditors Committee methodology, which describes the rating when the “applicable system of internal controls and governance framework are designed and/or operated such that one or more business objectives may be compromised in a material manner.”

89

For example, Articles 30(1) and 59 of IB Act, Article 14 of IS Act, and Article 33 of FMA.

90

The MFSA clarified that while a physical onsite inspection was not carried out, supervisors engaged with third-party service providers via teleconference and Skype; when necessary, they were requested to meet the MFSA in Malta.

91

Clyde Caruana—Number of foreign workers could increase by 30,000 in the next four years. See: http://www.independent.com.mt.

Malta: Financial Sector Assessment Program-Technical Note-Insurance and Securities Sector Supervision
Author: International Monetary Fund. Monetary and Capital Markets Department