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

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 forfeiting);
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:
   • money market instruments (cheques, bills, certificates of deposits, etc.);
   • foreign exchange;
   • financial futures and options;
   • exchange and interest rate instruments;
   • 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 (MFSA) 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 license 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 become aware of such situations in the course of their responsibilities under the Act.

Regulatory and Investigatory Powers

The Malta Financial Services Authority (MFSA), 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 (MFSA) and in assisting the client in all legal aspects involved in this project.