Latvijas Banka has set the financial market supervision priorities, and, based on them, the financial market supervision plan for 2023 has been approved and published. It provides for 40 different on-site inspections to gain assurance about the resilience and sustainability of the financial sector as well as about the conformity of the operation of financial institutions with the requirements established in laws and regulations and the protection of the interests of the costumers serviced by these institutions.
"In 2023, Latvijas Banka will devote particular attention to the management of various risks, the operational and financial resilience of the financial market participants as well as the protection of the interests of consumers of financial services. The inspection plan has been published to ensure a transparent supervision process and an opportunity for the financial market participants to better prepare for cooperation with the supervisory authority. Overall, the work of financial sector supervisors becomes more extensive with each year, therefore, the recent integration of the Financial and Capital Market Commission into Latvijas Banka presents an additional opportunity to concentrate resources and knowledge to ensure an efficient supervision and development of Latvia's financial sector," emphasises Santa Purgaile, Deputy Governor of Latvijas Banka.
Five financial market supervision priorities have been set for 2023: macroeconomic and geopolitical risks, operational and financial resilience, transition risks, risks related to money laundering and the financing of terrorism and proliferation (ML/FT/FP) and to sanctions and the protection of consumers of financial services.
The priorities focus on assessing the impact of Russia's war in Ukraine and on the impact the associated interest rate and inflation increase has on the changes in asset value. The resilience of the financial sector to crises will also be evaluated by analysing the management of credit risk and other risks. At the same time, transition risks and business model transformation will also be assessed.
This year, Latvijas Banka plans to carry out 11 inspections in the area of anti-money laundering and combating the financing of terrorism and proliferation (AML/CFTP) and of sanctions, 3 inspections in the area of information technologies and 26 inspections in the area of prudential supervision. Additionally, Latvijas Banka's supervision experts will participate in the inspections conducted by the European Central Bank.*
By segment, the inspections planned for 2023 are as follows: 19 inspections in banks, 2 – in the insurance sector, 1 – in the area of pensions, 4 – in the area of investment management, 4 – in the central securities depository and regulated market organiser, 4 – in the area of payment services, 3 – in investment firms and 3 – in co-operative credit unions.
"In 2022, extensive new international sanctions against Russia were imposed. Latvia's financial sector demonstrated its ability to apply them in a timely manner by identifying the persons subject to sanctions and the companies controlled by such persons and by freezing 83 million euro. The year 2023 will continue to face challenges regarding the management of sanctions circumvention risks, while maintaining a risk-based approach. To ensure that the financial market participants do not take radical decisions as a risk mitigation measure to refuse service to particular geographical regions or customers, the understanding among the customers who work in high sanctions risk regions or segments together with the efficiency of the internal control systems in the area of sanctions are crucial," Santa Purgaile stresses.
In 2022, the Financial and Capital Market Commission (FCMC) carried out a total of 41 on-site inspections, including 15 inspections in credit institutions, 4 – in the insurance and pension sector, 6 – in the area of investment services, 9 – in investment firms, 4 – in payment and e-money institutions and 3 – in co-operative credit unions. In addition, FCMC supervision experts also participated in the inspections organised by the European Central Bank in the credit institutions under its direct supervision.
The inspection results reveal that last year credit institutions focused on the rectification of the deficiencies detected previously in the internal control systems and in the area of risk management. Overall, the number of high-NPL credit institutions has decreased in Latvia. Credit institutions have to continue working on the risk management framework and improvement of its efficiency, since the on-site inspections carried out in 2022 identified shortcomings in credit risk management, in the capital adequacy assessment process, in the processes of making collective provisions, in the areas of internal management and the management of certain risks.
It was found during the inspections of insurance companies, private pension funds and investment managers that overall the internal control system corresponds to their business profile. However, some improvements are needed in the areas related to the internal audit, administration of pension plans, outsourcing, as well as the management of conflicts of interest. The on-site inspections carried out in other segments identified shortcomings in the management of certain risks.
Inspection results in the ML/FT/FP risk management area suggest that overall financial institutions have substantially upgraded their internal control systems for determining the ML/FT/FP risks inherent to its activities, customers and the products used by this customer. These systems need to be further developed to strengthen a risk-based approach under which resources are primarily devoted to the management of higher risks and the reduction of the administrative burden in the areas where the risks are low. The most common shortcomings identified during the inspections of the AML/CFTP area were related to the efficiency of transaction monitoring systems, as well as the ability of financial institutions to comprehensively assess the information and conclusions drawn during the customer due diligence.
In 2022, the FCMC instructed financial institutions to implement particular measures towards eliminating the identified shortcomings within a specified timeframe and, following the integration, Latvijas Banka supervises their implementation.
Latvijas Banka's supervision priorities for 2023 are available here: https://infogram.com/finansu-tirgus-uzraudzibas-prioritates-2023-gadam_eng-1h0r6rpm15rpl2e.
The publicly available part of the financial market supervision plan for 2023 is available here: https://datnes.latvijasbanka.lv/uzraudziba/Parbauzu_plans_2023_EN.pdf.
* The on-site inspection plan of the European Central Bank is not publicly available therefore these inspections have not been included in the on-site inspection plan published by Latvijas Banka.