National regulators strengthen their supervision of the compliance function

ESMA published a follow-up report assessing the progress of certain NCAs in strengthening their supervisory frameworks and practices related to the compliance function under MiFID I. The report focused on the NCAs of CySEC (Cyprus), HCMC (Greece), CBI (Iceland), AFM (Netherlands), and ATVP (Slovenia), which were part of the original peer review conducted in 2017.
According to the report, these NCAs have made significant improvements in their supervisory approaches since the 2017 review. They have undertaken investigations, thematic reviews, and utilized enforcement tools to address compliance shortcomings and deter non-compliant behavior by financial firms. The report specifically highlighted the efforts of CySEC and CBI, acknowledging their progress in enhancing their supervisory practices.
For CySEC, ESMA recommended consolidating its supervisory approach to maintain a continuous focus on firms‘ compliance functions. This is crucial given the number, size, and complexity of investment firms operating in Cyprus. On the other hand, CBI was encouraged to fully integrate all elements of the ESMA Guidelines on the compliance function under MiFID into its supervisory approach and to strengthen controls on the compliance function of non-banking investment firms.
The report stressed the importance of the compliance function in promoting sound and compliant behavior by financial firms. It serves as a key element in identifying, assessing, monitoring, and reporting on compliance risks under MiFID. Effective compliance functions are essential for maintaining market integrity and protecting investors‘ interests.
ESMA reiterated the need for all NCAs to continue monitoring the application of the Guidelines and to take appropriate supervisory actions whenever necessary. The compliance function remains a critical aspect of the regulatory landscape, and ongoing efforts are essential to ensure that investment firms comply with their obligations under MiFID.
Despite the progress made by the assessed NCAs, ESMA expressed concern about the need for more extensive and dynamic supervision in Cyprus. Given the number of supervised firms offering complex and risky products on a cross-border basis, a proactive and rigorous approach to supervising compliance functions is crucial to address potential issues effectively.