Banking and Financial Institutions

The financial services sector is considered to be one of the main pillars of the Maltese economy and is also its fastest growing sector, even more so after the accession to the EU, to the extent that Malta has become one of the leading European financial centers.

Malta has established itself as a reputable financial services jurisdiction which adopts a serious approach to regulation with embedded flexibility. Furthermore, Malta's very favourable tax regime and effective double taxation relief mechanisms together with the single passport regime, ensure an extremely attractive environment for financial services operators to carry on business.

The Malta Financial Services Authority (MFSA) being the country's single regulator for financial servicesm responsible for issuing, authorising and supervising credit and financial instritutions.

Malta, banking business is primarily regulated by the Banking Act 1994 which provides a modern regulatory regime with all the flexibility necessary in a dynamic banking environment. This Act also makes provision for authorisation procedures relating to the opening of branches and representative offices of foreign banks in Malta and in addition provides for the regulation of electronic money institutions. Financial institutions other than the aforesaid, are primarily regulated by the Financial Institutions Act, 1994.

Credit Institutions

The business of banking is regulated by the Banking Act, 1994, together with an array of rules and regulations which reflect E.U. legislation in this field.

In recent years, a number of foreign credit institutions have established a presence in Malta, the majority of which operate in specialised niche markets in the banking sector.

Authorisation Criteria

The minimum own funds requirement for a credit institution is EUR 5 million and the adequacy of own funds is measured on a risk-weighted asset basis. The Banking Act, 1994, recognises the importance of measuring and monitoring concentration of risk through establishing and limiting large exposures in relation to a bank's own funds. The 'four-eyes' principle is another criterion which must be adhered to. Moreover, the following requirements must be satisfied: prudent conduct; fit and proper persons; integrity and professionalism; adequate flows of information; and the possibility of consolidated supervision.

European Passport Regime

In terms of the European Passport Rights for Credit Institutions Regulations, 2004, credit institutions may take advantage of the single passport regime, and upon the fulfilment of the prescribed formalities, passport into Malta or out of Malta from/to an EU or EEA state through the establishment of a branch or by providing services on a cross border basis.

Electronic Money Institutions

The Banking Act, 1994 introduced the concept of electronic money and electronic money institutions. Although credit institutions were already given the opportunity to undertake the business of electronic banking, this possibility has now been extended to 'stand alone' institutions, making Malta the first EU country to launch a solid regime for standalone Electronic-Money Institutions (EMIs). Thus, EMIs now have regulatory parameters and a licensing framework in place.

The directive on EMIs which has been issued by the MFSA is based on EU Directive 2009/110/EC, and sets out the regulatory framework for institutions of this kind. Unlike credit institutions, it is not permissible for EMIs to carry out lending and other bank related activities and they can only invest in very liquid marketable assets.

The minimum own funds requirement for an EMI is EUR 350,000.

In accordance with paragraph 21 of Financial Institutions Rule FIR/03, the own funds requirements of an EMI 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 to between 4% and 0.25% of the payment volumes multiplied by a scaling factor ranging from 0.5 to 1 and calculated in accordance with Financial Institutions Rule FIR/02.

EMIs should finally compare the amounts derived as explained above, 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 requirements that applies

Financial Institutions

Financial institutions are regulated by the Financial Institutions Act, 1994, together with an array of rules and regulations. The initial own funds requirement for financial institutions is established by the MFSA on application, with each case being considered on its own merits. In accordance with the first schedule of the Financial Institution Act, the activities of a financial institution include amongst others: lending; financial leasing; issuing and administering means of payment; guarantees and commitments; money transmission services; foreign exchange dealings and broking and issuing of electronic money.

Payment Institutions

The provisions of the Payment Services Directive (PSD) regulating payment institutions (PIs) were partly transposed through amendments to the Financial Institutions Act (Chapter 376 of the Laws of Malta) (the 'Act') and the MFSA Financial Institutions Rules (FIR/01/2011 and, FIR/02/2011). The revised Payment Services Directive (Directive 2015/2366/EU amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010 and repealing Directive 2007/64/EC) which will come 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 PSD regime.

The Second Schedule to the Act sets out, amongst others, the activities in which a PI may engage and these can be broadly divided into four categories:

• Services in relation to a payment account, which services enable cash to be deposited in or withdrawn from a payment account or the execution of payment transactions by direct debit, through a payment card (or similar device) or a credit transfer;
• Issuing and/or acquiring payment instruments;
• Money remittance;
• Execution of payment transactions where the consent of the payer to execute a payment transaction is given by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or network operator. However, the operator must act only as an intermediary for the payment services user.

A PI is also allowed to provide ancillary services and may operate payment systems and business activities other than the provision of payment services. The primary difference between a PI and the other categories of payment services providers (particularly credit institutions and electronic money institutions) is that PIs are not allowed to receive deposits or other repayable funds from the public and must use funds solely to provide payment services. The Act makes it clear that where a PI receives funds from a payment services user, with the view of providing payment services, this will not constitute a 'deposit or other repayable funds'. The Act requires any company intending to commence the business of a financial institution, including that of a PI, in Malta to apply for MFSA authorisation. In the case of a PI, the MFSA has to communicate its decision on the application within 3 months of receipt of a complete application.

Due to the fact that the scope of activities that PIs are allowed to carry out is relatively limited, the regulatory and supervisory requirements for PIs are less stringent than those applicable to banks. The Act, based on the PSD, adapts the payment services regime to the lower risks involved in a PI's business.

Payment Institutions are to hold, at the time of authorisation initial capital which depending on the activity the payment institution will be providing, ranges from EUR 20,000 to EUR 125,000.

Financial institutions undertaking payment services in terms of the Second Schedule to the Act must hold, at all times, own funds which shall amount to between 4% and 0.25% of the payment volumes multiplied by a scaling factor ranging from 0.5 to 1 and calculated in accordance with Financial Institutions Rule FIR/02. Payment and electronic money institutions should compare the amounts in the mentioned methods to the initial capital requirement established in the licence letter. The higher amount between that calculated and the one stipulated in the letter should be the ongoing own funds requirements that apply.

Authorisation Criteria

The following are the minimum criteria for authorisation: prudent conduct; fit and proper persons; integrity and professionalism; adequate flows of information; and the possibility of consolidated supervision. The 'four-eyes' principle is another criterion which must be observed.