Malta’s Financial Watchdog Flags Weaknesses in Fund Managers’ Risk Controls

Key Takeaways

• MFSA Review: The regulator identified weaknesses in record-keeping, stress testing, suitability of committee members, and ESG integration.
• Liquidity Risks: Firms were found to be using unrealistic assumptions in liquidity stress tests and failing to address control function findings.
• Good Practices: 87% of firms conduct pre-trade liquidity checks, with many also using structured procedures like redemption coverage ratios.
• Governance Expectations: The MFSA emphasized the role of boards and management bodies in overseeing liquidity and investment processes.

Deep Dive

The Malta Financial Services Authority (MFSA) has flagged weaknesses in how management companies overseeing Alternative Investment Funds (AIFs) and UCITS handle their investment management responsibilities and liquidity risk controls. The findings, published September 24 following a thematic review, were communicated in a “Dear CEO Letter” that set out the regulator’s expectations for improvements across governance, oversight, and integration of liquidity considerations.

The review revealed a series of shortcomings. These included poor record-keeping, unrealistic assumptions in liquidity stress testing, weak suitability assessments for Investment Committee members, and limited follow-up on issues identified by control functions. The MFSA also noted that companies were not sufficiently embedding environmental, social, and governance (ESG) risks into investment strategies.

At the same time, the regulator acknowledged areas of good practice. According to the MFSA, 87% of management companies confirmed they perform pre-trade liquidity checks to ensure new investments do not undermine a fund’s ability to meet redemption requests. Many firms also demonstrated structured monitoring procedures such as redemption coverage ratios to track liquidity positions, showing an industry shift toward embedding forward-looking liquidity assessments into everyday investment decisions.

“The investment process is key to ensuring that the investment strategy implemented is aligned with the interests of investors,” said Ian Meli, MFSA’s Head of Investment Services Supervision. “It is the primary tool for managing risks, whilst managing a framework to monitor risks.”

The Authority underscored that management companies play a critical role in safeguarding investor interests by regularly monitoring fund liquidity and addressing mismatches between assets and liabilities. Strong governance and active oversight by boards were described as essential for meeting these obligations.

The MFSA said it would continue supervising progress through ongoing monitoring, guidance, supervisory meetings, and further thematic reviews, encouraging companies to build on existing positive practices while addressing the deficiencies identified.

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