The Malta Financial Services Centre ("MFSC") was established as an autonomous Government agency by the Malta Financial Services Act, 1994. It is responsible for the regulation of providers of Investment Services and Collective Investment Schemes. It also regulates insurance companies and supervises offshore companies.
At the same time as the MFSC was established, other legislation was introduced to help establish Malta as an important international financial services centre. Key legislative changes in respect of financial services included:
- the Investment Services Act, which established a regulatory regime for Investment Services and Collective Investment Schemes;
- revisions to the law governing companies and partnerships, which introduced the concept of the variable capital company, the SICAV, into Maltese Law;
- the Recognition of Trusts Act, which enabled unit trusts to be governed by foreign trust law while being managed from Malta;
- amendments to the Income Tax Act and the new Taxes Management Act, which revised the tax laws to provide an environment favourable to the development of business falling under the Investment Services Act. (The Investment Services Act also provided certain incentives to Licence Holders and expatriate staff by way of exemptions from social security payments and import duties.)
In addition, new legislation covering insider dealing, the prevention of money laundering and banking regulation generally was introduced. The legislation completely revised Malta's financial services regime and began the process of eliminating the distinction between onshore and offshore business.
The MFSC approach to regulation
The MFSC encourages all potential applicants to approach it informally at first. The conditions attached to each Licence will depend on the circumstances. The MFSC will discuss with the Applicant the nature of its business, its staff, the market for its services, its financial resources, and other matters having a bearing on the conditions of the Licence. Consistent treatment of Licence Holders carrying out the same or similar activities will be achieved by applying the same or appropriately modified Licence conditions.
When preparing these Guidelines, the MFSC was aware that a statement containing simply a list of detailed regulations might be perceived as being too prescriptive and rigid. On the other hand, a series of generalised principles with no specific requirements would be of little value to someone trying to discover what they had to do, firstly to obtain a Licence and then in order to comply with it. Too vague a statement of good practice could also be seen as giving rise to the danger of inconsistency.
As a result, the approach which has been adopted is to explain in general terms the scope and contents of the Act, to set out the applications procedures and the financial resources requirements (in the case of Investment Services Licences), and then to set out the standard conditions which will be applied to a Licence, in the various regulatory areas, in the appropriate circumstances. Where the Licence conditions themselves are not given, an explanation is provided of the approach the MFSC will take when deciding upon what conditions to apply to the Licence.
The MFSC is conscious of the many different products and services which it regulates, and of the very broad range of service providers which it licences. The MFSC is also mindful of the need to provide Licence Holders with the freedom to innovate and to develop new products to meet the changing needs of the market. It is, therefore, very important that the dialogue between an Applicant and the MFSC should begin as early as possible. The MFSC will seek to adapt the Licence conditions as far as possible to meet the needs of the Applicant, whilst maintaining the minimum standards it sets for the conduct of the business concerned. Not all the standard conditions will apply to every Licence Holder, but the general nature of many of the conditions provide sufficient flexibility to allow the Licence Holder to meet the relevant requirements in a way suited to its own circumstances. Where an Applicant believes it can achieve compliance by means other than those set out in these Guidelines, it should discuss the matter with the MFSC.
The MFSC seeks to provide a stable regulatory environment which encourages the development of business falling under the Act in a sound and professional manner. Applicants are reminded that the protection of investors' interests is paramount, and that powers are available to take action against those who trade without a Licence as well as against those who fail to meet the required standards.
The Guidelines are divided into four parts: the first deals with Investment Services, the second deals with Collective Investment Schemes, the third sets out the Standard Licence Conditions, and the fourth contains Copies of Application Documents, Returns and Supporting Documents.
The standard conditions do not deal with all circumstances. Where appropriate they may be supplemented by codes of conduct based upon discussions with Licence Holders in the light of experience.
Questions concerning these Guidelines, the standard conditions, and their practical application should be addressed to the Investment Services Unit of the MFSC.
As part of its Licence, each Licence Holder will receive details of any conditions which are not to be applied, and the text of any additional conditions. Annual fee payments will cover the annual cost of updating one copy of the Guidelines, including the standard conditions.
Additional copies of the Guidelines are available to be purchased at Lm25 a copy (excluding postage and packing). This charge will entitle the purchaser to any replacement or additional pages issued up to 31st December, 1995. A small annual charge, set each year, will be made for replacement or additional pages issued after that date.
PART A - INVESTMENT SERVICES
The Meaning of "Investment Services"
The Act provides a statutory basis for regulating the provision of Investment Services. The following sections make reference to various parts of the Act but do not attempt to reproduce it, and therefore should not be treated as a substitute for reading the Act itself.
An "investment service" is defined as "any service falling within the First Schedule to this Act when provided in relation to an instrument."
The First Schedule to the Act lists the following services:
"1. Dealing as Principal or Agent
Buying, selling, subscribing for or underwriting instruments as principal or agent.
2. Arranging deals
Arranging for another person to buy, sell, subscribe for or underwrite instruments.
3. Management and Administration
Acting as manager, administrator, secretary or registrar in relation to any instrument, or to any scheme or arrangement involving an instrument or in relation to any of the assets or investments represented by or otherwise connected with an instrument, or in relation to a collective investment scheme.
4. Trustee, Custodian or Nominee Services
a. Acting as trustee, custodian or nominee holder of an instrument, or of the assets represented by or otherwise connected with an instrument, where the person acting as trustee, custodian or nominee holder is so doing as part of his providing any investment service in paragraphs 1, 2, 3, or 5 of this Schedule; or
b. Holding an instrument or the assets represented by or otherwise connected with an instrument as nominee, where the person acting as nominee is so doing on behalf of another person who is providing any investment service in this Schedule or on behalf of a client of such person, and such nominee holding is carried out in relation to such investment service; or
c. Acting as trustee or custodian in relation to a collective investment scheme.
5. Investment Advice
Giving, or offering or agreeing to give, to persons in their capacity as investors or potential investors:
- advice on the merits of their purchasing, selling, subscribing for or underwriting an instrument, or exercising any right conferred by an instrument to acquire, dispose of, underwrite or convert an instrument; or
- advice in relation to a scheme or arrangement involving an instrument."
An "instrument" is defined as "any instrument, contract or right falling within the Second Schedule to this Act and whether or not issued in Malta".
The Second Schedule to the Act lists the following instruments:
"1. (1) Securities, including shares and stock in the capital of a company, debentures, debenture stock, loan stock, certificates of deposit, bonds, notes and any other instruments creating or acknowledging indebtedness.
(2) Sub-section (1) above shall not apply to:
(a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray, the consideration payable under a contract for the supply of goods or services;
(b) a cheque or other bill of exchange, a banker's draft or a letter of credit; or
(c) a banknote, a statement showing a balance in a current, deposit or savings account or (by reason of any financial obligation contained in it) to a lease or other disposition of property, or an insurance policy.
2. Units in a collective investment scheme.
3. Warrants, options, certificates or other instruments, including any record whether or not in the form of a document, entitling the holder to subscribe for, acquire, sell or otherwise dispose of, underwrite or convert any instrument or an interest in any instrument falling within this Schedule or for any currency.
4. Certificates or other instruments which confer property rights in respect of any instrument falling within this Schedule.
5. Futures and foreign exchange contracts entered into for investment purposes or foreign exchange acquired or held for investment purposes.
6. Rights under a contract for differences or under any other contract the purpose or intended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property of any description or in an index or other factor designated for that purpose in the contract."
Requirement for an Investment Services Licence
Section 3 of the Act states :
"3 (1) No person shall provide, or hold himself out as providing, an investment service in or from within Malta unless he is in possession of a valid investment services licence.
(2) No body corporate, unincorporated body or association formed in accordance with or existing under the laws of Malta, shall provide or hold itself out as providing an investment service in or from within a country, territory or other place outside Malta unless it is in possession of a valid investment services licence."
The effect of section 3 is to require an Investment Services Licence to be held whether the Investment Service is being provided in Malta or overseas. If the Investment Service is being provided overseas from Malta, a Licence is required whatever kind of legal "person" is involved, including an individual. If the Investment Service is being provided overseas, from overseas, under section 3(2) an Investment Services Licence is required if the service is being provided by a body corporate, unincorporated body or association formed, established or constituted under the laws of Malta. The purpose of section 3(2) is to make it illegal for an entity to use Malta as a base for providing Investment Services overseas without having an Investment Services Licence. In practice, the MFSC is unlikely to grant an Investment Services Licence in respect of overseas activities unless they are conducted in a territory which is adequately regulated. To do otherwise would leave Malta vulnerable to unscrupulous operators with no recourse through the Maltese courts. The MFSC will not itself be regulating operations carried out overseas.
Under section 12 (1) (g) of the Act, certain exemptions have been granted from the requirement to have an Investment Services Licence. Copies of the Legal Notices containing the exemptions are available from the MFSC or can be obtained from your professional adviser.
Criteria to be applied when granting an Investment Services Licence
Section 6 of the Act prohibits the MFSC from granting an Investment Services Licence unless it is satisfied that the Applicant is a fit and proper person to provide the Investment Services concerned and that the Applicant will comply with and observe the appropriate rules and regulations.
When considering whether to grant or refuse an Investment Services Licence, the MFSC has, in particular, to have regard to :
(a) the protection of the public;
(b) the protection of the reputation of Malta; and
(c) the best economic interests of Malta.
The scope of the Act is wide; it covers many different kinds of business. However, in all cases the MFSC applies the same standards to the "fit and proper" status of the Applicant, the track record of the Applicant and those associated with it, and the nature of the business.
The "fit and proper" test is one which an Applicant and a Licence Holder should meet on a continuing basis. Each case is assessed on its own merits on the basis of the relevant circumstances. The onus of proving that it meets the required standards is on the Applicant and Licence Holder. It is not the task of the MFSC to prove the converse before it can refuse or cancel an Investment Services Licence. The MFSC's approach is cumulative. It may decide that a Licence Holder has failed the test on the basis of considering several situations, each of which on its own would not lead to that conclusion. An open and honest relationship with the MFSC is essential. When arriving at its decision as to whether a Licence Holder is fit and proper the MFSC will take account both of what is said and of what is not said (for example in respect of a director's criminal record). It should be noted that it is an offence to provide inaccurate, false or misleading information.
In general terms, there are three criteria which should be met, before the "fit and proper" test has been satisfied:
(a) integrity;
(b) competence; and
(c) solvency.
Integrity involves the Licence Holder and its employees acting honestly and in a trustworthy fashion in relation to its clients and other parties.
Competence involves those carrying out the business of the Licence Holder acting in a knowledgeable, professional and efficient way, in compliance with the regulations. The nature and extent of the competence required will depend upon the job being performed. The MFSC will take into account the qualifications and experience of those involved, and the actual handling of business. 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. Individuals should have a sufficient understanding of the business, and of the Investment Services and Instruments (including the related markets) with which they are dealing.
Solvency involves ensuring the proper financial control and management of the business, which should have sufficient financial resources to meet not only the financial demands on the business but also the financial resources requirements established by the MFSC.
Applications
Copies of the Application Forms and related documents are available from the MFSC. Sample copies are set out in Part D.
Applicants should approach the MFSC as early as possible to discuss their applications. Initially, a draft Application Form and supporting documents, may be submitted as a basis for discussion. Once discussions have been completed, final signed copies of the Application Forms and other documents will be required.
The MFSC will give as much advice and assistance as possible on the application. However, the completion and submission of the Application Form and supporting documents is the responsibility of the Applicant, who should be prepared to seek professional advice on questions which may confront it.
The following should be submitted when applying for an Investment Services Licence:
a) Application Form (see Schedule A)
b) Supporting Board Resolution (where appropriate)
c) Covering Letter (see Schedule A)
d) Business Profile (see Schedule B)
e) Financial Resources Statement (see Schedule C)
f) Individual Questionnaires for the appropriate individuals (see Schedule D)
g) Memorandum and Articles of Association or partnership agreement (as appropriate)
h) Projected profit and loss account and balance sheet (at year end) for three years following the granting of the Investment Services Licence
i) A copy of the latest audited accounts of the Applicant
j) A copy of an agreement of the kind to be entered into with representatives
k) Copies of insurance policies
l) The auditor's confirmation letter set out in Schedule I to the Application Form
m) The appropriate fee.
Documents should be provided in Maltese or English, or should be accompanied by a translation into one of these languages. The MFSC may require third party certification of the accuracy of any translation or copy. The MFSC may call for further information and may make such further enquiries as it considers necessary. The MFSC has complete discretion as to whether or not to grant an Investment Services Licence.
The Application Form should be attached to the Covering Letter which should be signed on behalf of the Applicant by a director authorised to do so by a resolution of the Board. If the Applicant is a partnership all partners should sign the Application Form. If the Applicant is a sole trader he should sign personally.
The MFSC may require further information to be provided to assist it in its deliberations. The Applicant should expect to hold several meetings with the MFSC and to have its operations inspected by the MFSC before an Investment Services Licence is granted or refused.
Fees
The Application Fee is payable on submission of the Application Form (or the draft Application Form if this is submitted initially) and is not refundable. The Annual Fee is payable on the date of granting the Investment Services Licence and thereafter annually, upon the anniversary of that date.
Fees for Investment Services Licences are payable in accordance with the category of the Investment Services Licence. The categorisation, which also determines the Licence Holder's Financial Resources Requirements, reflects very broadly the degree of risk to investors. This, in turn, has an effect on the amount of time the MFSC will have to devote to supervising a Licence Holder's affairs.
Details of current Investment Services Licence Fees are available from the MFSC.
The Fees are subject to alteration.
Variation of an Investment Services Licence
Requests for a variation of a Licence should be submitted to the MFSC in writing, giving details of the variation requested and the reasons.
Cessation of Investment Service business
The MFSC may require a Licence Holder to delay the cessation of its Investment Service business, or to wind-up such business in accordance with conditions imposed by the MFSC, in order to protect the interests of customers and investors.
Standard Licence Conditions
The following sections provide an introduction to the standard conditions for an Investment Services Licence which are set out in Section I of Part C. These begin with standard condition 3.01 concerning financial resources. Conditions 1 and 2 of each Licence will contain a glossary of terms and details of the services which the Licence Holder may provide.