Malta: an ideal location to set up a Financial Institution unde

Anton John Mifsud | 02 Feb 2012

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Introduction

The Payment Services Directive (Directive 2007/64 of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market) has been implemented into Maltese Law by way of amendments to the Financial Institutions Act and the enactment of a Directive under the Central Bank of Malta Act. The former Act regulates the licensing aspect while the latter implements the substantive provisions of the Payment Services Directive.

The whole aim of the PSD is to create one market for payment services within the European Union providing more transparency and faster execution of payments.

 

Legal Framework

Regulatory Authority

The Malta Financial Services Authority (MFSA) is responsible for the licensing, regulation and supervision of all financial institutions operating in or from Malta – including Payment Service Providers.

The MFSA was established on the 1 October 2002 by the Malta Financial Services Authority Act (“MFSA Act”) as an autonomous public authority. It succeeds the Malta Financial Services Centre (MFSC) which was established in 1994. The Authority aims to provide seamless supervisory oversight for financial services and to provide a regulatory framework which is both robust and simultaneously adaptable to allow promoters to innovate and develop new products to meet the changing needs of the market. The MFSA also houses the Registry of Companies.

The MFSA requires the highest standards of probity and honesty. Every licence is issued subject to standard conditions which may be adapted to suit certain circumstances so long as standards are not compromised.

Principal Legislation

The Financial Institution Act 1994 (the Act or the FIA) can be considered as being an “offshoot” of the Banking Act 1994. It covers institutions that undertake activities as listed in the Schedule to Article 2 of the Act but do not take deposits from or other funds repayable to the public. Indeed this is one of the main differences between a bank (credit institution) and a financial institution. The Financial Institutions Act, 1994, (FIA) regulates companies carrying on the business of –

  • Lending (including personal credits, mortgage credits, factoring with or without recourse, financing of commercial transactions including forfaiting);
  • Financial leasing;
  • Venture or risk capital;
  • Payment Services;
  • Issuing and administering means of payment (e.g. credit cards, travellers’ cheques and bankers’ drafts);
  • Guarantees and commitments;
  • Trading for own account or for account of customers in:
    • money market instruments (cheques, bills, Certificates of deposits, etc.);
    • foreign exchange;
    • financial futures and options;
    • exchange and interest rate instruments;
    • transferable instruments;
  • Underwriting share issues and the participation in such issues;
  • Money broking.

 

The FIA gives financial institutions enough elbow-room to operate by allowing them a degree of flexibility of operations whilst at the same time constantly supervising and regulating their various activities. Various statutory requirements and obligations of financial institutions are delineated in the FIA. Although these are specific and are clearly laid down, they are less onerous when compared to those included in the Banking Act 1994. Such criteria coupled with the powers conferred upon the MFSA to issue Directives, ensure a regime that can be applied to any type of a 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, in fact, the competent authority retains the powers to adopt Banking Directives 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.

 

Definitions

Financial Institutions are defined as any person whose regular or habitual occupation and business is the acquisition of holdings or of carrying out of any activities listed in the Schedule to the Act. Such activities are undertaken for the account and at the risk of the person carrying out such business.

Essentially, a person who regularly or habitually undertakes the carrying out of payment services (i.e. provides and executes payment services in relation to banknotes, coins, scriptural money and electronic money) qualifies as a payment institution, and as such, needs to be licensed as a financial institution, more precisely as a Payment Services Provider.

 

Allowable activities of Payment Services Providers

Payment Service Providers may engage in the following activities:

  • Services enabling cash to be placed on a payment account as well as all the operations required for operating a payment account;
  • Services enabling cash withdrawals from a payment account as well as all the operations required for operating a payment account;
  • Execution of payment transactions, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider:
    • execution of direct debits, including one-off direct debits;
    • execution of payment transactions through a payment card or a similar device;
    • execution of credit transfers, including standing orders;
  • Execution of payment transactions where the funds are covered by a credit line for a payment service user:
    • execution of direct debits, including one-off direct debits;
    • execution of payment transactions through a payment card or a similar device;
    • execution of credit transfers, including standing orders;
  • Issuing and/or acquiring of payment instruments;
  • Money remittance;
  • Execution of payment transactions where the consent of the payer to a payment transaction is transmitted by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator, acting solely as an intermediary on behalf of the payment service user and the supplier of the goods and services.

Payment institutions may also engage in the following activities:

  • The provision of operational and closely related ancillary services such as ensuring execution of payment transactions, foreign exchange services strictly in relation to payment services, safekeeping activities, and storage and processing of data;
  • The operation of payment systems;
  • When payment institutions engage in the provision of payment services, they may only hold payment accounts used exclusively for transactions;
  • Payment institutions may grant credit related to payment services only if the following requirements are met:
    • the credit is ancillary and granted exclusively in connection with the execution of a transaction; and
    • notwithstanding national rules on providing credit by credit cards, the credit granted in connection with a payment and executed with the act shall be repaid within a short period which shall in no case exceed twelve months; and
    • such credit is not granted from the funds received or held for the purpose of executing a payment transaction; and
  • the own funds of the payment institution are at all times, to the satisfaction of the supervisory authority, appropriate in view of the overall amount of credit granted.

Licensing

No business of a Payment Services Provider can be carried out without a licence. The competent authority can conclusively determine whether the business of a Payment Services Provider is being carried out or not. Application for a licence is to be in the format as required in Financial Institutions Directive (FID/01).

Statutory licence requirements include minimum own funds (capital) in Euro or in the equivalent in foreign currency, acceptable to the competent authority, or established by it.

Requirements also include the four eyes principle, the ‘fit and proper’ criteria and close links ‘criteria’. The licence application is to be determined within 3 months of application extended by a further 3 months on additional information but not more than 6 months. Failure to determine a licence by the competent authority means a refusal.

There are also specific occurrences upon which the competent authority could restrict, vary or revoke a licence and instances where a licence automatically ceases to have effect. The FIA also provides for procedures to be followed where the revocation of a licence affects other foreign regulators.

Criteria

In assessing an application for the obtainment of a Payment Services License, the MFSA will carry out a “fit and proper” test on the applicant. This is a fundamental regulatory concept which is extremely important and which the licensee and its service providers (if any) must satisfy. This test requires that licensees and their senior staff (which may include directors) – both at licensing stage – and on an on-going basis thereafter must demonstrate solvency, competence and integrity in all their dealings.

In determining whether an applicant licensee is fit and proper, the MFSA will take account of (inter alia) the applicant’s compliance track record, the quality of internal control systems and procedures, financial status and the due diligence procedures which the applicant employs in accepting new customers.  In this regard, the prospective Directors of the Payment Services Provider must submit a duly filled Personal Questionnaire (“PQ”) form.

 

Obligations of the License Holder

Once a licensed Payment Services Provider becomes aware of any changes in the information provided under the Financial Institutions Act, it is obliged to provide the competent authority the relevant particulars of such changes.

 

Opening of Branches

A Payment Services Provider can open branches in Malta simply by informing the competent authority. However it needs prior authorisation for cross border establishments.

 

A One-Stop-Shop Solution

Malta enjoys high levels of political and economic stability and has enjoyed steady growth in recent years in the financial services sector. Following its 2004 EU accession the jurisdiction has aligned its financial services regulatory regime with the relevant EU directives, meaning that the country presents a familiar legal landscape to businesses originating in Europe. In addition, the country can boast of a diverse and multi-lingual workforce, a competitive fiscal regime, and an attractive Mediterranean lifestyle, making it an excellent domicile for Payment Service Providers looking for EU levels of integrity and professionalism at competitive costs.

Chetcuti Cauchi prides itself of in-depth expertise in all aspects of financial services regulation, based on a thorough understanding of specific businesses and of the particular needs peculiar to different types of operators. Our team is typically composed of lawyers with expertise in financial services law, corporate law, banking, and international tax. This positions us as the leading financial services law firm for operators seeking a one-stop-solution provider in Malta; we provide a wide variety of services in-house, and are able to source other non-legal services through our network of trusted partners.


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