Malta’s ranking in the 40th place in the Global Competitive Index is an omen to its success within the financial services industry this past decade. Many argue that this is due to the regional and global consolidation of business and financial markets, as well as Malta’s integration into the European Single Market. The relatively low costs of set-up, possibility of tax efficiency as well as the banking industry’s resilience in the face of international financial crisis have rendered Malta a suitable destination for licensing banking services on a national and international level.
Regulation of Banking Activity in Malta
The Banking Act was introduced into Maltese Law in 1994 as a means of regulating all areas related to the banking industry, and most importantly, was intended to ensure the implementation of European Union Directives regulating the industry into Maltese law. Through Article 4B of the Act, power is conferred to the Malta Financial Services Authority (MFSA), appointing it as the competent authority responsible for the licensing, regulation and supervision of credit institutions, electronic institutions and financial institutions in Malta. When issuing a banking licence, it is within the duties of the MFSA to ensure that the credit institution in question is of the highest standard in terms of integrity and honesty, and consequently, must ensure regulation of all the stages of life of the licence holder. Therefore, credit institutions in Malta are regulated by the Banking Act, EU Banking Directives as well as Banking Rules issued by the MFSA. As a measure of ensuring proper supervision over Malta’s financial markets and institutions, the European Central Bank (ECB) is responsible for monitoring national authorities and guaranteeing the proper implementation of EU banking legislation.
The main function of the MFSA is to ensure constant supervision and enquiry into the affairs of credit institutions. Therefore, it has the power to carry out off-site and on-site examinations of said institutions. The former requires the credit institution to submit a report in relation to their legal obligations, which will subsequently be analysed by the competent authority. On-site supervision, on the other hand, is carried out through planned visits to the credit institutions to examine their activities. If it is found that a credit institution is in breach of its obligations, a penalty may be imposed, or if the issue is more serious, the MFSA has the authority to suspend or withdraw the relevant licence.
The Licensing Process
Article 5 of the Banking Act holds that any company which intends on carrying out a business of banking in Malta must hold a valid licence granted by the competent authority. This mainly concerns establishments which are: joint ventures, branches for foreign banks, or subsidiaries which are legally independent institutions, but which are partially or fully owned by a credit institution incorporated in Malta or in another country.
The process of application for a licence is established through Banking Rule 1 of 2013 as well as Article 6 of the Banking Act. The process commences once the banking business notifies the competent authority in writing that it is applying a licence, where it must state its programme of intended operations and the structural organisation of the intended credit institution. Before a licence is granted by the MFSA, the authority must ensure that the application conforms with the aforementioned Banking Rule, which holds that the application form must be accompanied with:
- A copy of the Memorandum and Articles of Association of the institution;
- Audited financial statements for the last three years (if applicable);
- A business plan stating the structure, organisation and management system of the prospective bank;
- The identity of all directors, controllers and managers of the institution;
- The identity of all shareholders with a qualifying shareholding
- The identity of the individuals who will be directing the business of the prospective bank
Article 7 of the Banking Act lays down specific conditions that must be satisfied in order for a licence to be granted, including:
- an initial capital of not less than €5,000,000;
- at least 2 individuals who direct the business of the company;
- giving notification to the Competent Authority regarding the identity of the 20 largest shareholders/members which have holdings;
- satisfaction of requirements of the fit and proper test of the shareholders/members
- confirmation that no links with the company will hinder MFSA’s supervision over the company.
Once the competent authority has gathered enough information on the business, it will be able to determine whether to grant a licence without conditions, a licence subject to certain conditions, or refuse the application for a licence.
As mentioned above, one of the conditions required is the due diligence of directors, senior managers and shareholders of the institution to ensure prudent conduct, fit and proper persons, integrity and professional staff as well as the safety of potential depositors. Directors or controllers of the credit institution must fulfil the requirements held in Article 14 of the Banking Act in order to determine if they hold a good repute and possess the necessary knowledge, skills and experience to perform their duties properly.
Opening Branches and Representative Offices in EEA and non-EEA States
Once a bank is given a licence in Malta, it enjoys passport rights to open branches in EEA (European Economic Area) States. However, the bank must inform the MFSA in writing and must obtain consent from the competent authority in order to do so. If a business wishes to open a branch in a third country (a state which is not part of the EEA), the MFSA must ensure that the country involved is a reputable regulator and that there are no secrecy laws or regulations which might impinge on the supervisory duties of the authority. If these requirements are satisfied, the MFSA will give consent to open a subsidiary or a branch in a non-EEA state. Representative offices may also be set up, upon the consent from the MFSA, which specifies the type of liaison activities that may be carried out by the office.
The MFSA and the EU
Directive 2013/26/EU, Title 2, Article 6 guarantees that there is co-operation between the competent authorities of each Member State and the European System of Financial Supervision (ESFS). Member States must ensure that their competent authorities:
- Provide an appropriate flow of reliable information between them at other parties to the ESFS
- Participate in the activities of EBA and colleges of supervisors
- Comply with the guidelines and recommendation issued by the EBA
- Co-operate closely with the ESRB (European Systemic Risk Board)
- Are not limited from carrying out their duties as members of EBA, the ESRB or from following any EU Directives or Regulations due to any national mandates conferred on them
Fees Applicable
The Credit Institutions (fees) Regulations set out the different fees applicable pre-licensing and post-licensing and the method of payment applicable for the relevant fees. Upon applying for a licence with the MFSA, a fee of €35,000 is imposed, irrespective of whether the licence is granted or refused. The regulation also sets out the supervision fee for credit institutions which have been set up, where the annual fee must be equivalent to 0.0002 of its deposit liabilities as reported at the end of the year, this must not be less than €25,000 and not more than €1,200,000. Any companies which are incorporated outside of Malta, but which have representative offices in Malta, shall pay the MFSA a fee of €3,600 every year. None of the fees mentioned above are refundable.
Our Banking Industry Team
Our Banking Industry Team consists of legal advisors, accountants and tax specialists who are well versed in the setting up of credit institutions and will provide optimal financial regulatory consulting services at pre-licensing, set-up and post-licensing stages. They also offer specialist insight on legal and regulatory aspects of the industry, as well as on corporate and tax matters, helping devise the most apposite and tax-friendly structure. Our Legal team will help set up a client portfolio and ensure compliance with Maltese law at all times. Chetcuti Cauchi’s experience dealing with the MFSA allows it to have a comprehensive understanding of the local regulatory process and can, therefore, provide clients with consolidated financial services solutions and advice on regulatory, licensing, operational and traditional substantive law issues. Our multi-disciplinary team is also qualified and experience to work with banks in Europe, the Americas and Asia.
