Financial Institutions

Legal, Tax, Advisory, Corporate

Financial institutions are regulated by the Financial Institutions Act, 1994 (the “Act”) together with an array of rules and policy papers. The initial own funds requirement for financial institutions is established by the Malta Financial Services Authority (MFSA) on application, with each case being considered on its own merits. The activities of a financial institution could include amongst others: lending; financial leasing; money transmission services; issuing and administering means of payment; money broking; venture or risk capital; foreign exchange dealing and other money market activities.

Why Malta

  • A pro-business regulator and a stable macro-economic environment
  • English is an official language
  • A serious yet approachable regulator
  • A robust regulatory regime
  • An extensive double tax treaty network
  • State of the art telecommunications infrastructure
  • A multilingual, efficient and increasingly specialised workforce
  • EU Member State
  • Euro is the official currency
  • A gateway to Europe, North Africa and the Middle East
  • Competitive regulatory fees and operational costs

Payment Institutions

The Act regulates payment institutions in Malta and transposes the European Payment Services Directive. The revised Payment Services Directive (Directive 2015/2366/EU) which came into force on 13 January 2018, is designed to make payments safer, increase consumer protection, foster innovation and competition while ensuring a level playing field for all players, including those payment service providers which were not being regulated under the previous PSD1 regime. The second Payment Services Directive (PSD II) will contribute to a more integrated and efficient European payments market as well as promote competition through a regulatory framework which encourages the emergence of new players (e.g. FinTechs) and the development of innovative mobile and internet payment services in Europe.

PSD2 applies not only to banks but to all providers of payment services within the European Economic Area (EEA). including Third Party Payment providers (TPP). These are payment service providers which do not hold customer payment accounts. PSD2 identifies two types of TPPs: Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISP). PISPs are a type of payment service provider which can initiate a payment from a customer’s payment account held with a bank, after seeking the customer’s consent. AISPs are a type of payment service provider which provide, with the customer’s consent, an aggregated view of a customer’s payment accounts held with different banks.

While PSD1 was applicable to payments made in euro, or in the currency of an EU/EEA State and to payments where the payment service providers of both the payer and the payee are situated within the EU/EEA, the scope of PSD2 has been extended to also cover all currencies as long as one payment service provider is located within the EU/EEA.

A. Payment Services

Article 2 of the Second Schedule of the Act , lists the activities which can be carried out by a licensed payment institution:

  1. Services enabling cash to be placed on a payment account as well as all operations required for operating a payment account;
  2. Services enabling cash withdrawals from a payment account as well as all operations required for operating a payment account;
  3. 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:
    1. execution of direct debits including one-off direct debits;
    2. execution of payment transactions through a payment card or a similar device;
    3. execution of credit transfers, including standing orders;
  4. Execution of payment transactions where the funds are covered by a credit line for a payment service user:
    1. execution of direct debits including one-off direct debits;
    2. execution of payment transactions through a payment card or a similar device;
    3. execution of credit transfers, including standing orders;
  5. Issuing and/or acquiring of payment instruments;
  6. Money remittance;
  7. 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.

B. The following additional activities may also be carried out by a payment institution:

  1. 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;
  2. The operation of payment systems;
  3. Without prejudice to the provisions of article 5(6) of the Act, business activities other than the provision of payment services;
  4. When payment institutions engage in the provision of payment services, they may only hold payment accounts used exclusively for transactions; any funds received by payment institutions from payment service users with a view to the provision of payment services shall not constitute a deposit or other repayable funds within the meaning of article 2 of the Banking Act, or electronic money within the meaning of article 2 of the Banking Act;
  5. Payment institutions may grant credit related to payment services referred to in paragraph (d), (e) or (g) of paragraph A above, provided the following requirements are met:
    1. the credit is ancillary and granted exclusively in connection with the execution of a transaction; and
    2. 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
    3. such credit is not granted from the funds received or held for the purpose of executing a payment transaction; and
    4. the own funds of the payment institution are at all times, appropriate in view of the overall amount of credit granted, to the satisfaction of the MFSA.

Payment Institutions are to hold, at the time of authorisation, initial capital as follows:

  • where the institution provides only the payment service listed in paragraph A (f), its capital shall at no time be less than 20,000;
  • where the institution provides the payment service listed in paragraph A (g), its capital shall at no time be less than 50,000; and
  • where the institution provides any of the payment services listed in paragraph A (a) ‾ (e), its capital shall at no time be less than 125,000.

Initial capital is the paid up capital and reserves as defined in Financial Institutions Rule FIR/01/2011.

The difference between a payment institution and a credit institution is that a payment institution is not able to receive deposits or repayable funds from the public and can only use its funds for the provision of payment services.

Electronic Money Institutions

The European Union promoted the conept of e-money alongside massive strides in technology to bolster the status of e-commerce in Europe

Stand-alone electronic money institutions (EMIs) are authorised to undertake the activity of issuing electronic money through a licence issued in terms of the Financial Institutions Act (Chapter 376 of the Laws of Malta). Specific regulation of Electronic Money Institutions is provided for under MFSA’s Financial Institutions Rule (FIR/03).

The Third Schedule to the Financial Institutions Act (the “Act”) defines an Electronic Money Institution as “a financial institution that has been licensed in accordance with this 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.” Clearly, this shows that the law targets “stand-alone” e-money institutions, that is to say companies desiring to undertake the business of electronic money institutions, to the exclusion of any other regulated activities. Credit institutions are explicitly excluded in the interest of avoiding the duplication of licensing requirements ‾ credit institutions would automatically be authorised to issue means of payment in the form of electronic money in virtue of their banking licence.

Electronic money is defined in the Third Schedule to the Act as: “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 as defined in paragraph 1 of the Second Schedule and which is accepted by a natural or legal person other than the financial institutions that issued the electronic money.”

Types of e-money include pre-paid cards and electronic pre-paid accounts for use online.

In accordance with paragraph 21 of the Financial Institutions Rule FIR/03, the own funds requirement of an electronic money institution for the licensed activity of issuing electronic money shall amount to at least 2% of the average outstanding electronic money.

In the event that an EMI also undertakes payment services not related to the issuance of electronic money, the own funds requirements for this activity shall amount between 0.25%- 4%.

EMIs should compare the amounts derived from the above mentioned methods, to the initial capital requirement established in the MFSA authorisation letter. The higher amount between that calculated and the one stipulated in the letter should be the ongoing own funds requirement that applies.

Licensable Activity

Under their licence, EMIs in addition to issuing electronic money, electronic money institutions (as defined above) in and from Malta, may also engage in the following activities in terms of the Third Schedule to the Financial Institutions Act:

  1. the provision of payment services listed in paragraph 2 of the Second Schedule of the Act (Paragraph A under “Payment Services” above); the granting of credit related to payment services referred to in Paragraph A subsections (d), (e) or (g), where the following conditions are met:
    1. the credit is ancillary and granted exclusively in connection with the execution of a transaction; and
    2. 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
    3. such credit is not granted from the funds received or held for the purpose of executing a payment transaction; and
    4. the own funds of the Electronic Money Institution are at all times appropriate in view of the overall amount of credit granted, to the satisfaction of MFSA.
  2. the provision of operational services and closely related ancillary services in respect of the issuing of electronic money or the provision of payment services referred to in paragraph (a) above;
  3. the operation of payment systems as defined in the Second Schedule of the Act;
  4. business activities other than the issuance of electronic money, having regard to the applicable law regulating such activities.

Credit referred to in paragraph (b) above shall not be granted from the funds received in exchange for electronic money and held in accordance with the prescribed safeguarding requirements.

EMIs based in Malta are allowed to outsource certain services subject to the MFSA`s evaluation.

As explained above, payment services are regulated by the same Act, so an EMI licensed to provide payment services would thereby avoid duplication of compliance procedures and duplication of related fees and expenses.

Although the difference between a PI and EMI is not always clear, the following two distinguishing features must be evident in order for an entity to qualify as an EMI rather than a PI:

  1. The prepaid feature of electronic money
  2. The ability to freely transfer electronic money to third parties

Furthermore, an EMI is required to maintain own funds amounting to at least 2% of the average outstanding electronic money (which percentage may be increased in proportion to the risk loss and risk management procedures presented by the applicant, and in the case of companies with no history, based on percentages of their business plan).

Main Requirements

  • The initial capital required to set up in Malta is a minimum of 350,000;
  • There must be at least two individuals who will effectively direct the business of the EMI in Malta;
  • These individuals must be of sufficiently good repute and have sufficient experience in the opinion of the MFSA to perform such duties;
  • EMIs are allowed to issue debit cards (such as a chip device) as well as issue credit cards;
  • EMIs based in Malta are allowed to outsource services subject to the MFSA’s evaluation.

Small Electronic Money Issuers

Small EMIs are defined as companies:

  1. whose head office is in Malta;
  2. that issue electronic money in Malta;
  3. the total business activities of the institution generate average outstanding electronic money that does not exceed two million euro ( 2,000,000), and
  4. none of the natural persons responsible for the management or operation of the business have been convicted of offences relating to money laundering or terrorist financing or other financial crimes.

However, for the institution to qualify as a “Small Electronic Money Issuer” the conditions listed above in (iii) and (iv) to hold the maximum storage amount on the payment instrument or payment account of the customer, where the electronic money is stored, cannot exceed two hundred fifty euro ( 250).

Small EMIs are subject to less stringent requirements. Where the small EMI generates average outstanding electronic money of less than one million euro ( 1,000,000), it shall be required to hold an amount of initial capital equal to fifty thousand euro ( 50,000). Where a small EMI generates average outstanding electronic money of between one million euro ( 1,000,000) and two million euro ( 2,000,000), it shall be required to hold initial capital amounting to one hundred thousand euro (100,000). Such small EMIs must maintain at all times own funds, equal to or in excess of the applicable initial capital requirement.

Small EMIs may not passport their services into EU/ EEA Member States.

Provisions applicable to EMIs and PIs

Passport rights

Upon having attained a license, the EMI or PI is able to passport such license to any other EEA member state by following the prescribed notification procedures through the establishment of a branch or on a cross-border basis. This means that upon having obtained a Maltese license, the EMI or PI does not need to obtain another license to operate in another EEA state.

Conduct of business rules

An authorised institution shall be considered as conducting its business in a prudent manner if inter alia:

  • It appoints non-executive directors as MFSA considers appropriate having regard to the nature and scale of operations of the institution.
  • Every person who is a director, controller, partner or any other officer of the institution is a fit and proper person to hold that particular position and to carry out business with integrity and skill. In assessing whether a person has the relevant competence, soundness of judgment and diligence, MFSA will consider the experience with similar responsibilities, qualifications and training. The institution shall maintain adequate accounting and other records and adequate systems of control for its business and records that are commensurate with its needs and particular circumstances in such a way as to enable the business of the institution to be prudently managed and for it to comply with the requirements prescribed by law
  • The MFSA will consider the possibility of it receiving adequate flows of information from the institution and relevant connected parties in order to monitor the fulfillment of prudential criteria and to identify and assess any threats to the Maltese financial system. The MFSA must also be satisfied that the institution and group to which it may belong could be subject to consolidated supervision while taking account of any faction which might inhibit such effective supervision.

Regulatory fees

An EMI or PI applying to MFSA for authorisationshall, upon submission of the application, irrespective of whether the licence is eventually granted or not, pay to the MFSA the sum of 3,500 as an application and processing fee.

A financial institution authorised under the Act shall pay the MFSA an annual supervision fee equivalent to 0.0002 of the total assets as reported in the statutory schedules of the year immediately before the year when the fee is payable. The annual amount payable by a financial institution by way of supervision fee shall in no case be less than 2,500.

Taxation

Malta offers a very favourable tax regime to the shareholders of financial institutions. Moreover, advance revenue rulings may be obtained as to the tax treatment of transactions involving financial instruments and international business.

EMD advises and assists clients in the area of electronic money and payments both in the setting up process and on an ongoing basis thereafter.

  1. At set-up stage we would be in a position to assist clients with the following services:
    • assistance with structuring the entity;
    • setting up and registration of the preferred vehicle;
    • assistance with the completion of the application form and the drafting/review of documents forming part of the application form (PQs, Corporate Questionnaires, Internet and Electronic Banking Questionnaire) for a Financial Institution Licence;
    • drafting and reviewing of any agreements and other legal documents;
    • assistance with compiling the Business Plan, Company organigram, 3 year projections (Profit & Loss and Balance Sheet);
    • setting up and attendance to meetings with the MFSA;
    • acting as point of contact for the MFSA throughout the licensing process;
    • professional assistance in connection with the application.
  2. On an ongoing basis we can assist clients with:
    • Tax services;
    • Accounting services;
    • Local Director and/or Company Secretary; and
    • Compliance & AML/CFT services.

For further information kindly contact EMD, Vaults 13 - 16, Valletta Waterfront, FRN 1914, Malta
Tel: (+356) 2203 0000 Fax: (+356) 2123 7277 Email: info@emd.com.mt www.emd.com.mt

The above information is intended to be of a general nature and is not intended to address the circumstances of any individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. EMD Advisory Services Ltd, its officers, staff, associates and related/associated companies/firms shall not be responsible or liable for any action taken on the basis of the above information, or for any errors or omissions contained herein. Professional advice should be sought before any decision based on any matter referred to above is taken.

EN_V07U201410