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.
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.
Banking and Financial Institutions
In 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.
The business of banking is regulated by the Banking Act, 1994, together with an array of regulations and directives which reflect the E.U. Directives 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.
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 fulfillment 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. Thus, electronic money institutions now have regulatory parameters and a licensing framework in place.
The directive on electronic money institutions which has been issued by the Malta Financial Services Authority and which is based on EU Directive 2000/46/EC, sets out the regulatory framework for institutions of this kind. Unlike credit institutions, it is not permissible for electronic money institutions 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 electronic money institution is EUR 1 million.
Financial institutions are regulated by the Financial Institutions Act, 1994, together with an array of regulations and directives. The initial own funds requirement for financial institutions is established by the Malta Financial Services Authority 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.
The provisions of the Payment Services Directive (PSD) regulating payment institutions (PIs) were partly transposed into Maltese law by Act II of 2010 which amends the Financial Institutions Act (Chapter 376 of the Laws of Malta) (the "Act") and partly by the MFSA Financial Institutions Rules (FIR/01/2010 and FIR/02/2010). 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.
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.
Malta offers a very favourable tax regime to the shareholders of credit institutions, electronic money institutions and financial institutions. Moreover, advance revenue rulings may be obtained as to the tax treatment of transactions involving financial instruments and international business. Further information may be obtained from the fact sheet entitled 'Malta Companies and Taxation'.
A body corporate set up or constituted in another jurisdiction may be authorised by the Malta Registrar of Companies to continue as a body corporate registered or constituted in Malta, subject to certain criteria being satisfied.
Similarly, the Malta Registrar of Companies is empowered to authorise a Maltese registered body corporate to be continued as a body corporate registered, incorporated or constituted under the laws of a country outside Malta, subject to the fulfilment of certain requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.