Malta financial services legislation establishes the regulatory framework for investment services licences and Collective Investment Schemes Licences. Malta investment services legislation, transpose the EU legislation in this area, including the Markets in Financial Instruments Directive (MIFID) and the UCITS Directive as well as any related updates and legislative developments.

An investment services licence is required whether the investment service is being provided in Malta or overseas. If the investment service is provided in Malta to overseas residents, a licence is required whatever kind of “legal person” (including an individual) is involved. If the Investment Service is being provided overseas, from outside Malta, an Investment Services Licence is required if the service is being provided by a body corporate, unincorporated body or association formed, established or constituted under the Laws of Malta.

A Malta licensable activity takes place when an investment service is offered in respect of an instrument. The term instrument covers a wide range of investments and financial products, including shares, bonds and other securities and foreign exchange dealings. The pertinent legislation lists the following services:

• reception and transmission of orders in relation to one or more instruments;
• execution of orders on behalf of other persons;
• dealing on own account;
• management of investments;
• trustee, custodian or nominee services;
• investment advice;
• underwriting of instruments and, or placing of instruments on a firm commitment basis;
• placing of instruments without a firm commitment basis;
• operation of a multilateral trading facility.

When considering whether to grant or refuse a license, the MFSA is required to consider three criteria set out in the law:

• the protection of investors and the general public;
• the protection of the reputation of Malta taking into account Malta’s international commitments;
• the promotion of competition and choice.

An investment services licence is issued only if the MFSA is satisfied that the applicant is a fit and proper person to provide the investment service concerned and that the applicant will comply with and observe the pertinent Rules and Regulations applicable to the licence holder. The concept of ‘fit and proper’ is a fundamental regulatory concept. This is a rigorous test which requires senior staff and potential and existing licensees - both at licensing stage and on an on-going basis thereafter - to demonstrate solvency, competence and integrity in all their dealings.

There are four categories of Investment Services Licences as follows:

The application process may be summarised in three phases namely:

1. the Preparatory Stage;
2. the Pre-Licensing Stage; and
3. the Post-Licensing/Pre-Commencement of Business Stage.

The speed at which the Preparatory Stage is completed, is reliant on the completeness of the documentation submitted and on the applicant’s efficiency. Stages two and three can be completed in within six to twelve weeks.

Stage 1 - Preparatory Stage

At this stage, it is recommended that the promoters hold a preliminary meeting with the MFSA to outline their proposal. This meeting should be held prior to the submission of an application for a licence. Following this preliminary meeting, promoters usually submit a draft Licence Application Form, together with the pertinent supporting documentation. The Application form and all material submitted should be in English, or if in another language, should be accompanied by an English translation.

The draft application and supporting documentation are reviewed. Preliminary comments are provided to the Applicant who in turn is invited to revert with comments. The MFSA may ask for more information and may make such further enquiries as deemed necessary. The fit and proper checks follow, comprising the follow up of information which has been provided in the Application documents submitted. The fit and proper test ought to be satisfied at the outset and on a continuing basis. The three main criteria which are to be met to satisfy this test are integrity, competence and solvency.

Stage 2 - Pre Licensing Stage

Once the draft application and supporting documents have been reviewed and the draft licence conditions have been agreed to, the MFSA will issue its approval for the issue of a licence. The applicant will then be required to finalise any outstanding matters, such as company incorporation (or registration of partnership), submission of signed copies of the revised application form together with supporting documentation in their final format, together with any other issues raised during the application process. The licence is issued once all pre-licensing issues are resolved.

Stage 3 - Post Licensing Stage

The Applicant may also be required to satisfy a number of post-licensing matters prior to formal commencement of business.

Promethean, through its expertise and good standing with the MFSA can duly assist in all of the above stages.

Undertakings for Collective Investment in Transferable Securities (UCITS)

Directive 2009/65/EC or rather UCITS IV was approved by the European Parliament in January 2009 and adopted by the Council in June 2009. Investment funds authorised in accordance with the provisions of this Directive may be distributed to investors across the EU after following a defined procedure for notifying the pertinent authorities. The UCITS framework has more recently been improved by the transposition of UCITS IV which is aimed at making the UCITS market increasingly efficient, particularly vis-à-vis the cross-border activities of fund management companies. UCITS IV offers the investing public a wider choice of financial products at lower prices through further integration of the Internal Market. Moreover it aims to enhance investor protection through better information and more effective supervision while preserving the competitiveness of the European funds industry by updating the regulatory framework of UCITS funds in order to reflect developments in the global financial market.

As a consequence UCITS IV has:

• created an authentic EU passport for UCITS management companies;
• improved investor information through the creation of the Key Investor Information Document;
• facilitated the cross-border marketing of UCITS;
• made possible the cross-border mergers of UCITS;
• introduced a framework for master-feeder structures; and
• strengthened the supervision of UCITS Funds and management companies

The provisions relating to the regulation of the UCITS management company passport were transposed in Malta Investment Services legislation outlining the Standard Licence Conditions applicable to UCITS management companies. The management company passport affords strategic opportunities for management companies in that it allows funds authorised in a member state to be managed by a management company which is established in another member state.

Maltese investment services legislation also caters for the attainment of the regulatory approval required, for a Maltese management company to establish a branch or to provide services on a cross-border basis in another EU/EEA Member State and for a European management company to establish a branch or to provide management services on a cross-border basis in Malta. Such rules define which regulatory authority has jurisdiction to take action in case of breaches of the relevant requirements by a management company which provides services on a cross-border basis or through the establishment of a branch in a member state other than its home member state.

Alternative Investment Fund Managers Directive (AIFMD)

The Directive was published in the Official Journal of the European Union on 1st July 2011. The transposition deadline for this Directive together with is Implementing Measures stands at 22nd July 2013. The rationale of the AIFMD is that of creating a comprehensive and effective regulatory and supervisory framework for Alternative Fund Managers (AIFMs) in the European Union. The Directive introduces a harmonised regulatory and supervisory framework for AIFMs in the EU. For the purposes of the Directive, AIFs are defined as all funds that are at present not harmonised under the UCITS Directive. The objectives of the Directive are to:

• ensure that all AIFMs are subject to appropriate authorisation and registration requirements;
• provide a framework for the enhanced monitoring of macro-prudential risks, e.g. through sharing of relevant data among supervisor;
• improve risk management and organisational safeguards to mitigate micro-prudential risks;
• enhance investor protection;
• improve public accountability for AIFs holding controlling stakes in companies; and
• develop the single market for AIFMs.

These Regulations provide for the procedure pertinent to the attainment of regulatory approval for a Maltese AIFM to establish a branch or to provide services on a cross-border basis in another EU/EEA Member State and for a European AIFM to establish a branch or to provide management services on a cross-border basis in Malta.

Provision of Online Forex Trading Services

The provision of online forex trading services, is by and large provided in the Member State where the entity is established and is also made available to clients resident within the European Union further to the passporting of this service under the EU Markets in Financial Instruments Directive (‘MIFID’). The MiFID is aimed at ensuring a harmonised regime for the authorisation and operation of investment firms within the EU. A service with respect to foreign exchange is licensable under Maltese Law and is passportable under MiFID, if the service relates to contracts for difference, derivatives in relation to foreign exchange, and rolling spot forex. Providing a service with respect to foreign exchange, which is acquired or held for investment purposes is also licensable under Maltese law however this is not considered a MiFID service and cannot therefore be passported under this EU Directive.

Online forex trading is by and large provided in one of two forms, either by dealing on own account or by acting as a riskless principal (often as a ‘white label partner’). With respect to the latter, the entity would be involved in executing two matching trades (one with the client and one offsetting trade with another principal) entered at the same time and price, with the entity acting as counterparty to both transactions. This is considered as execution of orders on behalf of clients. In order for an entity to execute orders on behalf of clients, a category 2 investment services licence is required. On the other hand, an entity which would like to deal on its own account is required to have a Category 3 investment services licence.

The main difference in the requirements which are applicable to a category 2 and a category 3 investment services licence holder relates to the capital requirements which ought to be satisfied. A Category 2 investment services licence holder is required to have an initial capital of Euro 125,000 and has to have own funds which are higher than either:

• initial capital; or
• the sum of all the risk components calculated in terms of the rules but excluding the operational risk component; or
• the fixed overheads requirement.

A category 3 investment services licence holder is required to have an initial capital of €730,000 and should have own funds which are higher than either:

• initial capital; or
• the sum of all the risk components calculated in terms of the rules including the operational risk component.