Ecosystems for financial services are characterized by technological advances, new and stricter regulatory frameworks furthered by local and global developments. A number of recent financial scandals have adversely affected public trust and confidence around the world. Admission of these challenges and regulatory advancements seek to establish a robust and effective framework to protect domestic economies and their respective financial systems. As a result, the Maltese financial regulator aims to enhance public confidence, enhance the integrity and stability of the local financial market, and promote a healthy and competitive financial and economic environment.
The financial sector in Malta is regulated and supervised by the Malta Financial Services Authority, the MFSA. Its main functions include the protection of consumers, integrity of financial markets, financial stability and the supervision of all financial services activities. The authority is responsible for the licensing, regulation and supervision of supervised credit institutions, electronic money institutions and financial institutions. Aside from these activities and responsibilities, the MFSA also serves as a resolution authority for financial institutions in distress and acts accordingly alone or in collaboration with other local regulators and the European Central Bank (ECB).
Bank regulation and compliance with MFSA standards applies to authorized and supervised financial institutions in Malta. The authority has exclusive jurisdiction over domestic and institutional matters while the ECB considers a broader perspective by direct supervision of significant credit institutions, also referred to as systemically important financial institutions, and less significant credit institutions whose operation has an adverse effect on the stability of the financial part of the European single market.
Malta Financial Services Authority Act (CAP. 330)
The MFSA seeks to enhance public value, safeguard the integrity and stability of local markets, and promote healthy competition in the marketplace. Its authority originates from a special act of Parliament. This Malta Financial Services Authority Act (Chapter 330) of 1989 established the MFSA from 2002 as the single regulator for financial services in Malta. As a result the authority protects consumers of financial services, prevents misconduct in the marketplace, promotes a stable growth of the financial services sector and thus advances integrity of the local economy.
The MFSA is a body corporate with distinct legal personality. The authority can therefore among other things enter into contractual agreements and sue or be sued. However, following article 29 of the Act, the authority including its members, bodies, committees, and other staff members shall not be liable in damages unless the act or omission is proven through willful misconduct. Third parties who are impacted by acts or omissions of the MFSA must first approach their contract party for relief and can under exceptional circumstances take the MFSA to court. However, the exclusive outcome in case of proven wrongdoing by the MFSA is a restoration to annul the statutory administration of the bank. As revealed in the matter of Satabank plc this is not an easy task and certainly not an established outcome.
The financial sector is plagued by fraudulent behavior and misconduct by obscure actors. The activities, motives and objectives of these market players differs from legitimate users of the financial system. As a result, illicit proceeds do not necessarily behave in accordance with normal market principles and contribute little to economic growth. Misconduct by licensed entities erodes trust in the financial market and threatens the integrity and stability of the market. From a regulatory perspective, abuse of the financial system furthers social disintegration, undermines government structures, and violates community cohesion and therefore allows the MFSA to intervene and invoke restrictions and statutory administration.
Bank Failure, Resolution and Account Holder Repayment
Following the licensing and regulation of financial institutions, supervision may lead to statutory intervention. Violations of the Banking Act, and the related regulations and rules allow the MFSA to impose measures and restrictions on supervised institution. As in most regulatory environments, the systemic nature of a financial institution and the public interest determine the resolution strategy. Detrimental acts by financial institutions that operate in Malta must be rectified by the designated financial institution within a reasonable time after the discovery. This often applies to a devaluation of the own funds and minimal capital requirements of a financial institution. However, the MFSA may also revoke the license of a supervised financial institution.
Following Article 9(2) of the Banking Act, the mandate of the MFSA allows the authority to impose restrictions on a licence or may revoke this licence in any of the following circumstances:
- if any document or information accompanying an application for a licence or any information given in connection therewith is false in any material particular or if the holder of a licence conceals from, or fails to notify to the competent authority any document or information or change therein which it was its duty to reveal or notify under the Banking Act or any regulations or Banking Rules or Electronic Money Rules made thereunder; or
- if the holder ceases to carry on the business of banking in Malta for more than six months; or
- if the holder fails to comply with any of the provisions of the Banking Act or any regulations or Banking Rules or Electronic Money Rules made thereunder or with the conditions under which the licence is granted; or
- if the holder no longer possesses sufficient own funds; or
- if the holder is likely to become unable to meet its obligations or can no longer be relied upon to fulfil its obligations towards depositors and creditors; or
- if the holder has insufficient assets to cover its liabilities; or
- if the holder has suspended payment or is about to suspend payment; or
- if the competent authority considers that, by reason of the manner in which the credit institution is conducting or proposes to conduct its affairs, or for any other reason, the interests of the depositors of the credit institution are threatened.
- require the credit institution forthwith to take such steps as the competent authority may consider necessary to remedy or rectify the matter;
- appoint a competent person to advise the credit institution in the proper conduct of its business;
- appoint a competent person to take charge of the assets of the credit institution or any portion of them for the purpose of safeguarding the interests of depositors;
- appoint a competent person to assume control of the business of the credit institution and either to carry on that business or to carry out such other function or functions in respect of such business, or part thereof, as the competent authority may direct;
- require the credit institution to wind up its business or to wind up its business in Malta;
- appoint a competent person to act as liquidator for the purpose of winding up the affairs of the credit institution;
- fix the remuneration to be paid by the credit institution to any competent person appointed under Articles 9(2) and 29(1).
Recovery and Resolution Regulations (330.09)
Recovery and resolution regulation is addressed in the First Schedule, Article 7B of the Malta Financial Services Authority Act. It follows European directives (575/2013) and regulation (2013/36/EU) and the BRRD. Early intervention of financial institutions in distress aims to reduce institutional damage and spillover effects to other financial institutions, as well as the economy at large. Resolution measures are intended to structure these financial difficulties. The resolution objectives include safeguarding the continuity of the critical functions of the financial institution, minimizing risks to financial stability, protecting public funds by reducing the need for extraordinary public support, protecting depositors and investors, and protecting the funds and assets of account holders and other creditors. Available measures to meet the objectives contain the sale of business, a bridge institutions, asset separation, and bail in.
A resolution committee and unit are established. The resolution unit shall assess in collaboration with the MFSA whether a supervised financial institution is failing or is likely to fail. The unit also draws up resolution plans for institutional and consolidated, group failure, and carries out resolvability assessments of supervised financial institutions. Deposit protection and investor compensation in Malta is triggered when a licensed financial institution is failing or likely to fail and there is no realistic prospect of rapid changes in this situation. Only the MFSA or the relevant court can determine whether a financial institution is unable to repay its account holders and creditors on demand for reasons directly related to its financial circumstances.
Malta Financial Services Authority:
Triq l-Imdina, Zone 1
Central Business District, Birkirkara
CBD 1010, Malta
Telephone: +356 2144 1155