The Financial Institution Act 1994 (the Act) can be considered as being an “offshoot” of the Banking Act 1994. It covers institutions that regularly or habitually undertake activities as listed in the Schedule to the Act but do not take deposits from or other funds repayable to the public. Indeed this is the main difference between a bank / credit
institution and a financial institution.
The Act regulates companies carrying on the business of -
1. Lending (including personal credits, mortgage credits, factoring with or without recourse, financing of commercial transactions including forfaiting);
2. Financial leasing;
3. Venture or risk capital;
4. Issuing and administering means of payment (e.g. credit cards, travellers’ cheques and bankers’ drafts);
5. Payment Services.
6. Guarantees and commitments;
7. Trading for own account or for account of customers in:
(a) money market instruments (e.g. cheques, bills, Certificates of deposits, etc.);
(b) foreign exchange;
(c) financial futures and options;
(d) exchange and interest rate instruments;
(e) transferable instruments;
8. Underwriting share issues and the participation in such issues;
9. Money broking.
No business of a financial institution can be carried in or from Malta without the obtainment of a licence. In order to be granted a license, the financial institution needs to possess minimum own funds to the satisfaction of the MFSA. The institution also needs to satisfy the four-eyes principle, in that it needs to have at least two directors, the ‘fit and proper’ test, and the close links ‘criteria’.
Once granted a license, a financial institution can open branches outside Malta after obtaining the written approval of the MFSA. The provision of services in other states might trigger further regulatory requirements in the particular state involved. Due to the fact that the MFSA is a highly respected regulatory authority, foreign regulatory authorities usually consider such businesses very favorably.
Various statutory requirements and obligations of financial institutions are delineated in the Act, and these are markedly less onerous when compared to those emanating out of the Banking Act 1994. Such criteria coupled with the powers conferred upon the MFSA to issue Rules, ensure a regime that can be applied to any type of financial institution, from the basic outlet engaged in the purchase and sale of foreign currency notes and travellers’ cheques to an institution that operates as a “quasi-bank”.
In ensuring compliance, the MFSA retains the power to adopt Banking Rules to financial institutions depending upon the complexity or otherwise of their business operations. In so far as statutory licensing criteria and the rights of the competent authority to examine under confidence the affairs of a financial institution are concerned, the Act establishes criteria that are very similar to those included in the Banking Act 1994.
The Act also provides for the competent authority to take over the control of financial institutions under certain conditions. In providing for this, the Act provides for the respect of full confidentiality with gateways for lifting of confidentiality as necessary, while establishing offences and penalties for non-compliance.
