The Financial Institution Act 1994 (the Act) 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 the difference between a bank
(Credit
Institution) and a financial institution.
The Financial Institutions Act, 1994, (FIA)
regulates companies carrying on the business of amongst other things
-
1. Lending (including personal credits, mortgage credits,
factoring with or without recourse, financing of commercial transactions
including forfaiting);
2. Financial leasing;
3. Venture or risk capital;
4. Money transmission services;
5. Issuing and administering means of payment (e.g. credit cards, travellers’
cheques and bankers’ drafts);
6. Guarantees and commitments;
7. Trading for own account or for account of customers in:
(a) money market instruments (cheques, bills, Certificates of deposits, etc.);
(b) foreign exchange;
(c) financial futures and options;
(d) exchange and interest rate instruments;
(e) transferable instruments;
8. Underwriting share issues and the participation in such issues;
9. Money broking.
The FIA gives the Financial Institutions
enough elbow-room to operate by giving them enough 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.
The Act also provides for the competent authority to take over the control
of financial
institutions under certain conditions. In providing for this, the Act
provides for the
respect of full confidentiality with gateways for lifting of
confidentiality as necessary,
while establishing offences and penalties for non-compliance.
Definitions
Financial Institutions are defined as any person whose
regular or habitual occupation and business is the acquiring 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. There are exceptions in subarticle 2(2).
This definition carries a proviso in the sense that a
financial institution is not to be funded through the taking of deposits or
other repayable funds from the public as defined in the Banking Act 1994. A
second proviso exempts any activities indicated above that are regulated by the
Investment Services Act 1994.
Licensing Requirements
The
Malta Financial Services Authority as the competent
authority in terms of the Act fulfils its obligations under these provisions
through its Banking Unit.
No business of a financial institution can be carried out without a licence. The
competent authority can conclusively determine whether the business of a
financial institution 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 Maltese Liri 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.
Obligations of the License Holder
Once a licensed financial institution becomes aware of any
changes in the information provided under the Financial Institutions Act, it
shall provide the competent authority
the relevant particulars of such changes.
Once authorised a financial institution can open branches in
Malta simply by informing the competent authority. However it needs prior
authorisation for cross border establishments.
Companies licensed under the Financial Institutions Act
cannot enter into agency agreements with third companies without the
authorisation of the competent authority. Furthermore, there are certain
limitations in the activities of such agents. The competent authority can also
refuse an authorisation for an agency agreement on certain stipulated grounds.
Any changes in shareholding involving a qualifying
shareholding (in tranches of 20%, 33%, 50% or subsidiary) requires authorisation
of the competent authority. This includes mergers or re-structuring. Separate
obligations lie on both the investor and the financial institutions themselves.
Unless prior authorisation is obtained, the competent authority has the right to
restrain or cancel the transaction. The competent authority has to approve and
authorise the controllers of a financial institution.
the FIA also limits certain activities and transactions that
can be undertaken by licensed financial institutions. These include:
- Granting of credit facilities against own shares or other securities;
- Granting unsecured credit facilities where there would be conflict of
interest;
- Granting unsecured facilities to its own staff; and
- Investment by acquisition of equity in other entities in relation to the
financial institution’s own funds and investees’ capital.
A financial institution has to inform in unity the competent
authority and the Central Bank when it is unable to meet obligations. The
Central Bank and the competent authority have to inform each other of the
situation, if they b come aware of such
situations in the course of their responsibilities under the Act.
Regulatory and Investigatory Powers
The
Malta Financial Services Authority, as the competent
authority in terms of the Act fulfils its supervisory responsibilities through
its Banking Unit on an off-site and onsite basis. The former is carried out
through monthly and quarterly information filed by financial institutions. This
information is analysed and monitored on a trend
basis. The latter is carried out through planned and ‘ad hoc’ visits to
financial institutions. Examination ‘on-site’ covers asset quality, capital
adequacy, internal controls, risk management and other areas.
Our firm assists in identifying the clients’ licensing needs in relation
to the FIA, in obtaining the necessary approvals from the
Malta
Financial Services Authority and in assisting the client in all legal
aspects involved in this project.
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