Malta: Governance Initiatives in the Investment Services Sector

By Dr Josianne Brimmer, Partner, Fenech & Fenech Advocates (07/07/2015)

The Maltese financial services industry has experienced strong growth in the years following the recent global financial crisis.  This is in no small part owing to the approach adopted by the Malta Financial Services Authority (the MFSA), the single regulator for financial services in Malta, which is an accessible regulator, always ready to meet with promoters, and which strives to be open to developments – practising “innovation through regulation”, to quote Professor Joseph Bannister, Chairman of the MFSA. 


The investment services field has been one of the fastest growing sectors of the financial services industry in Malta.  Malta was an early adopter of the Alternative Investment Fund Managers Directive thereby facilitating market access to alternative investment funds managed.  The net asset value of Malta-domiciled funds and of funds managed from Malta continues to increase, with an increase in the number of licenced collective investment schemes, be they alternative investment funds or professional investor funds, and the number of investment service licence holders.


Such steady success and the accessibility and openness of the regulator do not however come at a cost to governance.  The MFSA has always been a strong proponent of sound structures and good corporate governance, which have been in the spotlight across the financial world particularly in the wake of the financial crisis.


The Regulator has sought to build on this by taking a number of initiatives to strengthen the corporate governance structures of its licenced entities.


The Corporate Governance Manual

In September 2014, the MFSA revised its Corporate Governance Manual for Directors of Investment Companies and Collective Investment Schemes. First issued in 2013, the aim of such Manual is to provide directors of licenced financial services entities with clear guidance on their obligations, to act as a blueprint of the standards by which they are expected to abide, and to assist them with developing their own best corporate governance practices for the companies on whose Boards they sit.


Corporate Governance is considered to be a tool which reassures investors in a company that the company’s objectives and operations will be carried out in a manner that benefits the best interests of the company and the investors as a whole. 


Although the MFSA approves each of the directors and senior officers of a licenced entity before these can take up office, and directors are required to satisfy the fitness and properness and due diligence checks imposed by the MFSA, the MFSA requires that directors properly take up the challenges offered by their roles and to take such steps as are necessary towards the proper running of the company’s investment business whilst abiding by the regulatory requirements by which the company is bound and safeguarding the best interest of investors.


The Manual deals with matters ranging from the acceptance of appointment to the office of director, the due diligence procedures which directors are encourage to undertake with respect to the promoters of the company; the appointment of service providers to the company, the conduct of board meetings and the level and frequency of information which the directors should ask of the service providers to the company so that the directors can properly carry out their role as the body in charge of the running of the company, and in order to be in a position to properly supervise the service providers to the company.


The Manual emphasises the importance of the proper handling of conflicts of interest, particularly in the context where certain directors acting on the Boards of management companies, also act as directors on the Boards of the funds which the aforementioned management companies manage. 


In addition, the Manual stresses the importance of directors having the proper training pertinent to their field of operation and being properly apprised of all pertinent regulatory developments in order that they are able to properly fulfil their obligations.  To this end, the MFSA encourages continued professional development initiatives, and also itself runs director-specific conferences on an annual or bi-annual basis thereby ensuring that directors are kept apprised of current and upcoming regulatory developments.


Amendments to the Investments Services Rules: the Introduction of Limitations on the Number of Directorships

Principles of good corporate governance require that a person not only be “fit and proper” to occupy the role of director when taking up such office with a regulated entity, and has the relevant expertise, but also that such person dedicate sufficient time to the performance of his obligations as director of any specific entity.


This is one of the reasons behind the introduction of the limitations on the number of directorships that can be held at any one point by a single director, which were brought in as a result of the implementation of the Capital Requirements Directive IV into the Maltese Investment Services Rules.


Members of the Board of Directors of an investment services licence-holder that is “significant” in terms of internal organisation and the nature, the scope and the complexity of its activities are, as a result of these rules, barred from holding more than either (i) one executive directorship with two non-executive directorships or (ii) four non-executive directorships.  This is subject to the caveat that directorships within the same group, or within institutions which are members of the same institutional protection scheme, or within undertakings in which a licence holder holds a qualifying holding, would be considered as one directorship.


Furthermore, directorships of organisations which do not pursue predominantly commercial objectives are disregarded. 


Without undermining the importance of the above rules, a balanced approach was adopted taking into account the smaller market players and the realities of the market in which the latter operate.  Thus, the investment services licence holders which are considered to be “significant” and therefore subject to the above rules are entities which have balance sheet assets in excess of €43 million, annual turnover relating to its investment services activities in excess of €50 million, hold or control in excess of €100 million in client moneys, and which hold or control in excess of €3 billion in client assets in the course of, or in connection with, its investment services activities. 


In addition, the MFSA has retained the discretion to allow directors of investment service providers which are deemed to be “significant” to hold one additional non-executive directorship.  Furthermore, the MFSA is empowered, taking into account the specific circumstances of an investments services licence holder, to exempt a “significant” licence holder from the directorship limitation (amongst others) where the MFSA believes that the application of such limitation could be disproportionate to the licence holder, taking into account the size, internal organisation and the nature, scope and complexity of its investment services and activities.



The MFSA Conduct Supervisory Unit and the Proposed Conduct of Business Rulebook

Testament to the importance which the MFSA places on the proper governance of financial services licence holders in the best interest of investors, is the creation of a new Conduct Supervisory Unit within the MFSA.  This Unit has been tasked with the setting up and the implementation of a regulatory framework aimed at securing appropriate consumer protection in financial services through a supervisory regime seeking to address potential or emerging risks for financial services consumers.


This specialised Unit will be tasked with conduct of business supervision of relevant licenced entities, with prudential supervision remaining within the remit of the Securities and Markets Supervision Unit with respect to investment services licence holders, and the Insurance and Pensions Supervision Unit with respect to insurance business entities. 


The MFSA intends to implement a new Conduct of Business Rulebook regulating the matters relative to client disclosures, selling practices, conflicts of interest and the proper governance of licenced entities, amongst others.  Within the investment services world, the Conduct of Business Rulebook will build on the “voluntary” regime implemented by means of the Corporate Governance Manual, and is expected to impose mandatary governance obligations on investment firms across the whole spectrum (with the exception of Alternative Investment Fund Managers and custodians of collective investment schemes).


The Conduct of Business Rulebook is still in the drafting stages, and consultation on certain parts of the Rulebook has just commenced.  Once completed, it will, no doubt, serve to strengthen the corporate governance structures of all players within the investment services field in Malta, irrespective of their size.  It will be a step in the right direction particularly with respect to the smaller licence holders which, whilst not necessarily “significant” for the purposes of the Capital Requirements Directive IV and the rules implemented by the MFSA as a result thereof, still have substantial influence if not control, over the assets of perhaps smaller investors, who should also benefit from the imposition of mandatary licence-holder governance and client-oriented rules.


Whilst the growth of the financial services industry has been significant over the past years, it is a testament to the Regulator and the players within the field that such growth has not come at a cost to discipline and integrity, the importance of which remains paramount within the financial services field.  Through a balance of disciple and reasonableness, the MFSA continues to ensure that service providers understand the importance of having the necessary governance structures in place that will foster continued confidence in the stability and reputation of the investment services industry in Malta.