The Regulator
The Malta Financial Services Authority (MFSA) is responsible for the licensing, regulation and supervision of credit institutions, electronic money institutions and financial institutions. The MFSA also licenses, regulates and supervises investment services, insurance, collective investment schemes and recognized investment exchanges. The MFSA requires the highest standards of probity and honesty and every license is issued subject to standard conditions which may be adapted to suit certain circumstances so long as standards are not compromised.
The Applicable Law
The notion of an E-Money institution was introduced into Maltese legislation through the Banking Act (Cap. 371 – Laws of Malta) which came into force on 15th November, 1994 and was further amended in 2009. The Banking Act 1994, which replaced the Banking Act 1970, has adopted European Union Directives as the main reference for the regulatory concepts and supervisory practices which it introduced. As of 2011 the regime regulating such institutions is found in the Financial Institutions Act (Cap. 378 – Laws of Malta) (“the Act”) as well as the Rule relating to the taking Up, Pursuit of and Prudential Supervision of the Business of Financial Institutions Authorised to Issue Electronic Money.
Definition
The Third Schedule of the Act defines an e-money institution as follows:
"electronic money institution" means a financial institution that has been licensed in accordance with the Act and authorised to issue electronic money or that holds an equivalent authorisation in another country in terms of the Electronic Money Directive to issue electronic money.
The Act defines electronic money as follows:
"electronic money" electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions and which is accepted by a natural or legal person other than the financial institutions that issued the electronic money;
The Licensing Process
Introduction
In order to be able to grant a license under the Act, the MFSA must be satisfied that the minimum criteria relating to prudent conduct, fitness and properness, integrity and professional staff and safety of clients are respected. A number of documentation requirements need to be fulfilled in order to satisfy the MFSA in this regard. Generally speaking, every licensing process follows the following three phase process:
Phase 1 – Preparatory Stage
During this phase preliminary meeting(s) with the MFSA are held. Ideally such preliminary meeting will be held well in advance of submitting an application. Responsibility for the formulation of the proposal and the completion of the Application documents will remain with the Applicant. It is essential that the Applicant submits a comprehensive (written) description of the proposed activity before the meeting.
The next step is that the promoters submit draft documentation. The draft Application and the supporting documentation will be reviewed and comments provided to the Applicant by the MFSA. The MFSA may ask for more information and may make such further enquiries as it considers necessary. The “fit and proper” checks – which entail following up the information which has been provided in the Application documents begin at this stage.
Phase 2 – Pre-licensing
Once the review of the draft application and supporting documents has been completed and any issues clarified, the Authority will issue its “in principle” approval for the issue of a license. At this stage, the applicant will be required to finalise any outstanding matters.
Phase 3 – Post-Licensing/Pre-commencement of business
The applicant may also be required to satisfy a number of post-licensing matters prior to formal commencement of business.
The Fitness and Properness Test
The Fitness and Properness Test is an integral part of the MFSA’s licensing process by means of which the suitability of the persons in question to run the proposed business is gauged.
In general terms, there are three criteria which must be met, to satisfy the “fit and proper” test:
1. integrity;
2. competence; and
3. solvency.
Integrity involves the Licence Holder and its employees being of good repute and acting honestly and in a trustworthy fashion in relation to its clients and other parties.
Competence means that those people carrying on the business of the Licence Holder must be able to demonstrate an acceptable amount of knowledge, professional expertise and experience. The degree of competence required will depend upon the job being performed. The MFSA will take into account the qualifications, experience, training and skills of those involved. Sound and prudent management, adequate resources, and a scrupulous attitude towards clients are essential. The business should be well organised, it should have adequate controls, and it should maintain sufficient records to demonstrate these attributes. It should be noted that the lack of, for example, specific qualifications does not mean that a person will not be able to satisfy the ‘Competence’ criterion. MFSA will base its judgment on a holistic overview of the applicant’s various attributes, and it is not excluded that an applicant could make up for a lack of academic qualifications by demonstrating the possession of a high-level of experience. Applicants are also encouraged by the MFSA to employ any people that they need in order to make up for any weaknesses e.g. highly qualified but inexperienced applicants are encouraged to hire people who have more experience.
Solvency means ensuring that proper financial control and management of liquidity and capital is applied.
The MFSA initiates the background checks necessary for the fit and proper test as soon as all the necessary application forms have been submitted. However, the applicant should bear in mind that the expeditiousness with which this phase can be completed will depend very much on any third parties which the MFSA will need to contact in order to make all the necessary verifications. The applicant is therefore encouraged by the MFSA to ensure that any third parties (banks, academic referees etc) are informed of the importance of replying to the MFSA’s queries as quickly as possible.
Small electronic money issuers
The Act renders the legal regime in relation to small electronic money issuers very flexible. In fact, the MFSA is able to waive the application of all or part of the provisions relating to general prudential requirements, initial capital, own funds and safeguarding requirements. Small electronic money issuers are those institutions:
- Where the total business activities of the institution generate an average outstanding electronic money that does not exceed two million euro (€ 2,000,000), and
- Where none of the natural persons responsible for the management or operation of the company’s business has been convicted of offences relating to money laundering or terrorist financing or other financial crimes.
- Where the maximum storage amount on the payment instrument or payment account of the consumer where the electronic money is stored does not exceed two hundred fifty euro (€250).
Although small electronic money issuers are treated in a generally more lenient manner, such institutions cannot benefit from the right of establishment or the freedom to provide services in another Member State or EEA State. Moreover, they may appoint agents solely for the undertaking of any payment services ancillary to the issuance of electronic money as may have been authorised by the MFSA.
Where the conditions upon which the institution gained its status as a small electronic money issuer are no longer met, the institution will be required to apply in writing to the MFSA for a licence in terms of the Financial Institutions Act within thirty calendar days. In default, the institution will be prohibited from issuing electronic money.
Exemptions
The Act does not apply to the following:
(a) monetary value stored on instruments that can be used to acquire goods or services only in the premises used by the issuer or under a commercial agreement with the issuer either within a limited network of service providers or for a limited range of goods or services;
An instrument is considered to be used within such a limited network if it can be used only either for the purchase of goods and services in a specific store or chain of stores, or for a limited range of goods or services, regardless of the geographical location of the point of sale. Where such an instrument develops into a general-purpose instrument, the exemption from the scope of the Act no longer applies. Instruments which can be used for purchases in stores of listed merchants are not exempted as such instruments are typically designed for a network of service providers which is continuously growing.
(b) monetary value that is used to make payment transactions executed by means of any telecommunication, digital or IT device, where the goods or services purchased are delivered to and are to be used through a telecommunication, digital or IT device, provided that the telecommunication, digital or IT device or IT operator does not act only as an intermediary between the holder of electronic money and/or the payment service user and the supplier of the goods and services.
This is a situation where, for instance, a mobile phone or other digital network subscriber (i.e. the electronic money holder and/or payment service user) pays the network operator directly and there is neither a direct payment relationship nor a direct debtor-creditor relationship between the network subscriber and any third party supplier of goods or services delivered as part of the transaction.
Capital
Under the Act, electronic money institutions are required to hold at the time of authorization an initial capital to the tune of EUR 350,000. Electronic money institutions are to hold at all times own funds that are at least equal to the initial capital. The own funds requirement will be calculated on the basis of a projected outstanding electronic money evidenced by the business plan of the institution, subject to any adjustment to the plan having been required by the MFSA.
The MFSA is quite flexible in its treatment of capital, in that it may review the institution’s risk-management processes, risk loss databases and internal control mechanisms and on that basis require the institution to hold an amount of own funds which is up to 20% higher or 20% lower than the amount of own funds which would have otherwise been applicable.
Activities
Under the Rule, apart from issuing electronic money, electronic money institutions may also be licensed to conduct the following activities:
- the provision of payment services as regulated under the Payment Services Directive;
- the granting of credit related to payment services – such credit shall not be granted from funds received in exchange of electronic money;
- the provision of operational services and closely related ancillary services in respect of the issuing of electronic money or to the provision of payment services referred to above;
- business activities other than the issuance of electronic money, having regard to the applicable law regulating such activities.
In the event that an electronic money institution undertakes payment services not related to the issuance of electronic money, the own funds requirement for this activity will need be calculated in accordance with a method as may be decided by the MFSA.
Naturally, the provision of such additional services as are mentioned above is subject to the appropriate authorization and approval on the part of the MFSA. What is interesting is that is that the MFSA may exempt a person who is proposed to become a controller or shareholder of an electronic money institution that undertakes other business activities than those strictly pertaining to e-money institutions from the requirement to get approval from the MFSA prior to doing so. This exemption is available on a case-by-case basis, and only in the event that the issuance of electronic money activity does not reach a high percentage of the total business activities of the company, and is largely dependent on an evaluation of the company’s risk profile.
Issuance and redeemability of electronic money
Given that e-money institutions perform activities that are different from those performed by banks, the former cannot take deposits or other repayable funds from the public.
An electronic money institution is required to issue electronic money at par value on receipt of funds. Furthermore, the electronic money institution needs to ensure that at any moment, upon request by the electronic money holder, it is in a position to redeem the monetary value of the electronic money held, at par value and without delay. Moreover, the contract between the electronic money institution and the electronic money holder is to clearly and prominently state the conditions of redemption, including any fees relating thereto, and the electronic money holder shall be informed of those conditions before being bound by any contract or offer.
The general rule is that redemption should be free of charge. However, redemption may be subject to a fee, which needs to be stated in the contract and be proportionate and commensurate with the actual costs incurred by the electronic money institution. In any case, charging a fee on redemption is only allowed in any of the following cases:
- where redemption is requested before the termination of the contract;
- where the contract provides for a termination date and the electronic money holder terminates the contract before that date;
- where redemption is requested more than one year after the date of termination of the contract.
Where redemption is requested before the termination of the contract, the electronic money holder may request redemption of the electronic money in whole or in part. Where redemption is requested by the electronic money holder on or up to one year after the date of the termination of the contract, the total monetary value of the electronic money held has to be redeemed. However, it is important to note that such rights are only granted to consumers. In fact, in the case of persons other than consumers, redemption rights of a person will be subject to the contractual agreement between the electronic money institution and that person.
Finally, an electronic money institution is not allowed to grant interest or any other benefit unless such benefits are not related to the length during which the electronic money is held. In a similar manner, offering rewards to customers such as anniversary gifts is not permissible. On the other hand, the offering of discount vouchers for use when purchasing particular products for customers who for instance hold electronic money above a particular minimum threshold or who undertake a set number of transactions, is allowable.
Agents and Distribution Network
Under the Rule, an electronic money institution is prohibited from issuing electronic money through an agent or distributor. However, it may distribute and redeem electronic money through such agents or distributors which act on its behalf according to the requirements of its business model. An electronic money institution is also allowed to provide any additional services as permitted by the terms of its license through such agents. However, small electronic money issuers may appoint agents solely for the undertaking of any payment services ancillary to the issuance of electronic money as may have been authorised by the MFSA.
The appointment of agents by the institution needs to be preceded by a communication to the MFSA and indicated in the information accompanying the official application documentation of the institution. The same procedure applies in the case that the electronic money institution wishes to distribute electronic money in another Member State by engaging such natural or legal persons.
Passport rights
An electronic money institution authorized by the MFSA may exercise its European right to issue electronic money in another Member State or EEA State either through the establishment of a branch or under the freedom to provide services if it satisfies the applicable provisions. Analogously, an electronic money institution licensed or holding an equivalent authorisation in another Member State or EEA State may issue electronic money in Malta either through the establishment of a branch or under the freedom to provide services.
As pointed out above, small electronic money issuers cannot benefit from the right of establishment or the freedom to provide services in another Member State or EEA State.
Conclusion
The recent amendments in the legal regime regulation electronic money institutions is expected to instill greater flexibility and thus be more attractive the promoters wishing to set up such institutions in Malta. This together with the importance given by the MFSA to high regulatory standards are bund to make Malta an ideal electronic money jurisdiction. Chetcuti Cauchi will guide the applicant in the process for the attainment and maintenance of the license, represent the applicant with the MFSA, the banks and any other involved third party consultants/operators.
