Introduction
The Banking Act of 1994 (hereinafter to be referred to as ‘the Act’), can be credited as the law which has changed the face of the legislation regulating this sector. In fact, it has replaced the Banking Act of 1970 and managed to render the legal regime compliant with modern international practice through the harmonization of the various relevant EU Directives. The new law passed through Parliament with a unanimous vote, was aimed to make Malta more attractive to international banking institutions as well as to enhance the business environment for local banks. The body appointed to administer the Act is the Malta Financial Services Authority, an independent authority which, among others, regulates and supervises credit institutions.
Business of Banking
This term is defined as the business of a person who accepts deposits of money from the public withdrawable or repayable on demand or after a fixed period or after notice or who borrows or raises money from the public (including the borrowing or raising of money by the issue of debentures or debenture stock or other instruments creating or acknowledging indebtedness), in either case for the purpose of employing such money in whole or in part by lending to others or otherwise investing for the account and at the risk of the person accepting such money;
The carrying out of such an activity requires the obtainment of a license under the Act. In cases of doubt, the MFSA is empowered to conclusively determine whether the business of banking is being carried out or not.
Requirements for the obtainment of a license
A credit institution needs to have at least €5,000,000 by way of minimum own funds, and which must be maintained at all times. The four eyes principle, as well as the fit and proper criteria, are given a lot of importance by the regulator. Assuming that all the necessary documentation is in place, a licence application is to be determined within a period of six months from the date of submission. In the case that the documentation is incomplete, or if additional information is requested, the time limit can be extended to no more than 12 months. Unless a reply is received within such time, this is deemed to be a refusal of the relevant application.
Agencies, offices and branches
Once authorised to do business, a Malta credit institution can open agencies, offices or branches in Malta through a simple notification procedure. In the case that a credit institution desires to set up a cross-border establishment, the consent of the MFSA is required, unless this is to be done within the EU/EEA area.
Change in ownership
Whenever any changes in shareholding are proposed and which involve a significant or qualifying holding (in tranches of 20%, 33%, 50%), then the relevant MFSA authorisation will be required. Such affects not only transfers of shares, but also mergers and reconstruction. Unless the relevant procedure is followed, the MFSA is empowered to cancel the relevant transaction.
Prohibited activities
Having acquired a license, a credit institution is prohibited from
· granting credit facilities against its own shares or other securities;
· granting unsecured credit facilities where there could be a conflict of interest;
· granting unsecured facilities to its own staff;
· making investments by the acquisition of equity in other entities in relation to the credit institution’s own funds and investee’s capital; and
· acquiring immovable property.
Ongoing obligations
Credit institutions are required to publish, display and file with the MFSA, a copy of their audited financial statements within four months of the end of the financial period. Moreover, periodic statements of assets and liabilities, as well as profit and loss positions, are required to be submitted to the Central Bank of Malta. A credit institution must also immediately report to the MFSA if it considers itself to be unable to meet its obligations.
Credit institutions are also expected to contribute on a regular basis to the applicable deposit protection schemes for the protection of depositors.
The MFSA
The Act sets out the regulatory obligations and other requirements of both credit institutions and the MFSA. The Act grants the MFSA the power to issue various Rules which regulate the conduct of banking activity. The MFSA, through the Banking Supervision Unit, is also empowered to supervise and enquire into the affairs of a credit institution. This is achieved through both off-site as well as on-site examinations.
Off-site supervision is mainly carried out through the various reporting requirements to which credit institutions are subject. On the other hand, on-site supervision is carried out through planned and ad hoc visits to credit institutions to examine their affairs. The factors normally examined range from asset quality to adequacy of capital requirement, from internal controls to risk management. This apart from the fact that the MFSA is empowered to require the production of any document and other information that it may require in the exercise of its duties. More importantly, the MFSA can also appoint accountants or persons who will independently report to it on any particular aspect that it deems fit to investigate. In order to render such powers effective, the law allows the right of entry to the MFSA as well as to any accountant, officer or other person appointed by the MFSA to examine a credit institution. Moreover, any person who obstructs any examination or investigation by falsifying, concealing, destroying or otherwise dispose of documents needed for the investigation will be guilty of an offence.
In cases where a credit institution breaches its obligations, a penalty for non-compliance is inflicted. In serious cases, it is also possible for the MFSA to suspend or even withdraw the relevant license. In order to strike an appropriate balance, an appeal to the Financial Services Tribunal is possible in these instances as well as in the following: imposing conditions on the issue of a license, objecting to a proposed name, closure of a representative office or restraining shareholding or control.
The MFSA is also granted the power to take control of credit institutions which find themselves in trouble. Other measures can be availed of, including closing and liquidating the credit institution or else rehabilitating the credit institution in its proper conduct of business.
In this day and age, co-operation between the various regulatory authorities is a must. To this end, the MFSA is empowered to co-operate and share information with foreign supervisory authorities.
In all of its activities, the law imposes on the MFSA the obligation to maintain confidentiality, which obligation is lifted in particular and specific cases. This extends to the officers and agents of a credit institution regarding information obtained in the course of their duties.
