MFSA explains Guidance Note setting out transparent, proportionate framework to determine administrate penalties for credit institutions

Last August, the Malta Financial Services Authority issued a guidance note introducing a transparent, proportionate framework to determine administrative penalties applicable to credit institutions (MFSA Publishes Administrative Penalties Methodology for Credit Institutions – MFSA).

Although non-binding, the MFSA told the Investi website that the guidance note aims to enhance transparency in the way administrative penalties for credit institutions are determined. “By setting out a clear methodology, the Guidance Note provides institutions with a better understanding of how the Authority assesses regulatory breaches, the factors taken into consideration when determining the seriousness of a breach and how these considerations may influence the level of the resulting penalty,” the MFSA added.

Through this guidance note, the MFSA wants to promote greater regulatory certainty and stronger compliance by making the Authority’s enforcement approach clearer and helping institutions better understand the potential consequences of regulatory breaches.

How the penalty model is applied

The application of the penalty model depends on the classification of the credit institution and the nature of the breach concerned. Less Significant Institutions (LSIs) fall within the scope of the Guidance Note, and the methodology applies to both prudential and conduct-related breaches falling within the MFSA’s competence.

“For Significant Institutions (SIs), the position differs,” the MFSA added. “Prudential breaches fall under the direct supervisory remit of the European Central Bank (ECB) within the Single Supervisory Mechanism and the Penalty Model in question is not applicable to SIs. However, conduct-related breaches by SIs that fall within the MFSA’s supervisory competence remain subject to the methodology set out in the Guidance Note.”

A clear, structured framework for enforcement

The guidance note, which is already in effect, sets out the methodology followed by the Authority when determining administrative penalties for relevant breaches by credit institutions moving forward. It provides enforcement with a clear, structured framework to assess the severity of a breach and determine a penalty that is effective, proportionate, consistent and dissuasive.

“Within that framework, each relevant breach is assessed on its particular facts and circumstances,” the MFSA said. “This includes consideration of the nature, seriousness, impact and duration of the breach, as well as any applicable aggravating or mitigating factors, and the circumstances of the institution concerned. This ensures that the methodology is applied consistently, while allowing the resulting penalty to reflect the specific circumstances of the breach.”

No new regulatory obligations

The guidance note does not introduce new regulatory obligations for the banking sector. Rather, it provides clarity on how the MFSA determines administrative penalties when breaches occur. “Credit institutions should, therefore, familiarise themselves with the methodology and the factors that may influence the level of a penalty, and consider these within their existing compliance and risk-management frameworks,” the MFSA said.

“In particular, institutions should continue to maintain effective systems and controls to identify, address and remediate regulatory breaches promptly, while ensuring appropriate co-operation with the Authority.”

In line with the MFSA’s Publication Policy, all enforcement actions taken by the Authority are made public. There are certain circumstances where the applicable framework allows the Authority to publish an enforcement action on an anonymous basis.

“The manner of publication would therefore be determined in accordance with the MFSA’s Publication Policy and the circumstances of the particular case,” the MFSA said.