Monitoring Visits Explained
A key pro-active interconnection between Supervisors and their supervised entities
Monitoring visits are an essential pro-active monitoring tool for a Licensed Supervisor like Trustees Executors Limited (TE) to deploy on a regular basis. A monitoring visit entails members of TE’s Corporate Trustee Services (CTS) Supervision team going out of office on a field trip to the premises of a client supervised entity in order to undertake face-to-face meetings with key personnel and obtain direct observations and experiences of actual areas of operations and/or compliance.
Through conducting monitoring visits, TE as the Supervisor is able to gain evidenced assurances that its supervised entities are not only functioning according to legislation, regulation, governing document and licensing requirements, but also managing their actual and potential risks effectively and at all times acting in the best interests of their investors. The overarching purpose of monitoring visits is to achieve constructive engagement with supervised entities in fruitful, detailed, risk-focused discussions and observations. These activities should result in evidential bases for the Supervisor to provide meaningful feedback and relevant recommendations that can be worked through with supervised entities to ensure implementation of any needed improvements.
Supervised entities can benefit from monitoring visits in a number of ways. In the short term, a monitoring visit can pick up on risks that need managing better or enhancements that should be introduced to help make a supervised entity’s business and its investment products more fit for purpose. Over the longer term, the need for sustained investor confidence is critical to the ultimate success of a supervised entity. Winning and retaining investor confidence should consistently rank as a top priority for any provider of investments to the general public. That means demonstrating sincere commitment to putting investor interests first. On such basis, actively cooperating with the Supervisor’s monitoring visits should help enhance the respective abilities of all parties concerned to perform their roles more effectively in the best interests of investors.
In this article we examine monitoring visits from two perspectives. In the first part, we consider the antecedents for monitoring visits within published official documents of the Financial Markets Authority (FMA) concerning guidance and expectations for Licensed Supervisors. In the second part, we briefly outline elements of the monitoring visit practiced by TE through the CTS Supervision team. By the end of this article, it is our expectation that the supervised entities of TE should have a clear idea as to why monitoring visits are both required and desirable as a pro-active monitoring tool, and how best to gain most value and benefit from them.
Part 1: Seeking guidance from the FMA
Laying the groundwork for making Supervisors effective within the financial system
The FMA has set out in quite some detail how it expects Licensed Supervisors to go about their work in an official document from June 2013 entitled Guidance Note: Monitoring by Securities Trustees and Statutory Supervisors.
The guidance note, describing Supervisors as “licensees” in context, sets out as an overarching principle that, “Licensees should use the principle of protecting the interests of investors as a guide when monitoring supervised entities.” (Guidance Note, p. 3)
The guidance note explicitly calls for Supervisors to show initiative and engage pro-actively with their supervised entities:
FMA expects each licensee to carry out its monitoring pro-actively. It is not acceptable simply to receive regular reports and to react when an issue becomes manifest. FMA expects licensees to understand the supervised entity’s sector and business and to work with each supervised entity to pro-actively pre-empt problems rather than respond to them once they have occurred. (ibid., p. 6)
Evidently, this high-level requirement means that the FMA expects Supervisors to be getting out and about among their supervised entities. For example, the guidance note makes clear reference to the Supervisor making face-to-face contact in certain circumstances with its supervised entities:
Licensees should take a pro-active approach to their role and should use a variety of monitoring tools. Their activities will include approaches beyond the desk-based evaluation of reports from the supervised entity. Licensees should also interview the supervised entity’s management, review and challenge its key processes, controls and management information and consider the supervised entity’s own compliance assurance. (ibid., p. 4)
In a nutshell, the above passage provides a description of the essential features of a monitoring visit. It is strongly implied that Supervisors should emerge from behind their desks and actively undertake field trips to supervised entities.
The guidance note goes on to specify the contexts in which the Supervisor should carry out monitoring visits:
A licensee that is actively fulfilling its role on behalf of investors is likely to seek ongoing interaction with its supervised entity to understand its business, its risks, and its governance, controls and processes. The areas of focus will change as the risks in the entity’s business change. The licensee will seek to identify issues of concern at an early stage and will expect the supervised entity to move quickly to address these. In practice, this may mean: increased visits from the securities trustee or statutory supervisor …. (ibid., p. 5)
Under the heading “Use of pro-active monitoring tools” the guidance note lists “interviews with the supervised entity’s management to assess and challenge on a particular risk or control area”, “on–site detailed discussions with staff carrying out the entity’s key controls or processes”, “visits to the entity to ‘walk through’ and observe processes and controls in operation”, and “some testing of the entity’s practices and controls in key areas.” (ibid., p. 12). All of these pro-active tools are part-and-parcel of monitoring visits.
Monitoring visits contribute to the FMA’s objectives in ensuring that Supervisors use pro-active monitoring techniques to stay attuned to the key risks faced by entities they supervise in order to pre-empt such risks from harming the interests of investors. In its one-page report, Key findings from the recent re-licensing of supervisors of June 2018, the FMA states on this theme, “Monitoring activity is currently sufficient on a reactive basis. We would like to see proactive monitoring of MIS managers to assist in identifying systemic risks within firms.”
The same theme of insistence on pro-active monitoring is reprised in Supervision Insights: An overview of the FMA’s supervision activities and findings from our monitoring reviews of regulated entities of September 2020, which states:
In our monitoring reviews of Licensed Supervisors, we examined their monitoring programmes, which included seeing if they had taken on board previous feedback from us. We found that the development of proactive, risk-based monitoring programmes requires further work, to increase the likelihood that possible risk areas or serious issues will be identified earlier.
We expect Licensed Supervisors to continue developing their risk-based approaches, including ensuring that planned monitoring of MIS Managers includes relevant known risks. The use of sector-based risk assessments can assist in identifying areas for Licensed Supervisors to target. (Supervision Insights, p. 10)
There can be no doubt from the passages cited above that the FMA expects Supervisors to be pro-active in the performance of their duties, including making monitoring visits to their supervised entities to help the latter recognise and respond to relevant risks, among other tasks, and that supervised entities are expected in return to appreciate the benefits of such attentions.
Part 2: TE’s monitoring visit elements
Working together towards constructive results
Based on the FMA’s expectations and recommendations, TE as a Licensed Supervisor works to a proprietary guideline of its own in respect of conducting its pro-active, risk-based monitoring visit activities in a planned, orderly, efficient and methodical fashion. As much value must be extracted as possible for all parties involved together in the monitoring visit procedure in order to generate the most beneficially constructive results, particularly in respect of serving the best interests of investors. In advance of a monitoring visit, TE sends the supervised entity an intention letter which incorporates a detailed visit agenda specifying who will be involved on both sides of the discussions and what topics and/or activities will be included. At the end of the monitoring visit TE conducts a debriefing with senior members of the supervised entity’s team to cover off any last matters for enquiry. Subsequently TE provides the supervised entity with a feedback letter which formally sets out key findings, conclusions, recommendations, and timeframes for action and implementation.
“Monitoring visits are one of the essential pro-active monitoring tools for Licensed Supervisors to undertake effective supervisory activities in New Zealand,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.
“As a Licensed Supervisor, Trustees Executors takes monitoring visits to our client supervised entities very seriously as an integral part of our pro-active, risk-based monitoring programme.”
“We see monitoring visits as a positive, constructive way to engage with our supervised entities in order to get to know them and their businesses in greater depth so that we can offer relevant benefits of our knowledge and experience in return.”
“A well conducted monitoring visit should not be an adversarial, fault-finding exercise.”
“Instead, monitoring visits should be fully engaged learning and genuine growing experiences for both ourselves and our supervised entities in order that we can all perform our respective roles on a continuous improvement basis.”
“We should never forget that monitoring visits are not conducted for the sake of ticking boxes and typing up forms, but are undertaken so the investors that both we as Supervisor and our supervised entities are responsible for can be better protected from exposure to unnecessary risks and build greater confidence in our financial markets.”
“The FMA has rightly made clear that it expects Supervisors and their supervised entities to become much more involved together in working under the aegis of pro-active monitoring, with an emphasis on risk identification and management tools of which monitoring visits are a stand out example.”
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