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 2014 ("MiFID II") and the Undertakings for Collective Investment in Transferable Securities Directive ("UCITS") as well as any related updates and legislative developments.

The Investment Services Act ("ISA") requires that no person shall provide investment services without issuance of an MFSA licence in line with the proposed services. Such services can include:

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

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.

When considering whether to grant or refuse a license, the Malta Financial Services Authority ("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.

The application process may be summarised in three phases namely:

1. the Preparatory Stage
2. the Pre-Licensing Stage
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, which includes the following:

• detailed business plan
• board resolution
• audited accounts (where applicable)
• projected financials (3 years) + auditors' confirmation
• memorandum and articles of association
• auditors' confirmation of acceptance of appointment
• auditors' opinion on statement of financial resources
• PQs of key individuals + evidence of competence
• representation agreements
• insurance policies
• shareholding structure
• IT questionnaire (where applicable)

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

There are four categories of Investment Services Licences as follows:

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 EU 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.

Both for a category 2 and a category 3 an investment services licence holder is required to have an initial capital of €730,000 The main difference in the requirements between categories 2 and 3 are that in the case of a category 2 licence, the risk management function may be outsourced to a local entity providing such services and in the case of a category 3, a full time dedicated risk manager needs to be employed.

Undertakings for Collective Investment in Transferable Securities ("UCITS")

The UCITS IV Directive was implemented in 2011 and allowed for 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. UCITS IV led to efficiency gains in the UCITS market, 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 has enhanced 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
• strengthened the supervision of UCITS Funds and management companies

The adoption of the UCITS V Directive by the EU in 2014 has introduced new rules on UCITS depositaries, such as the entities eligible to assume this role, their tasks, delegation arrangements and the depositaries' liability as well as general remuneration principles that apply to fund managers.

UCITS can be structured as an open-ended collective investment scheme with variable share capital (SICAV), a limited partnership with variable share capital, a unit trust, or a contractual fund.

A UCITS scheme in Malta can be self-managed (capital requirement: €300,000) or third-party managed (capital requirement: €125,000).

A UCITS scheme in Malta must have a custodian to which the assets of the scheme are entrusted, an auditor, and may have an administrator. All such third-party service providers are subject to MFSA approval.

A UCITS scheme in Malta must have a minimum of three (3) directors (with one director independent from the manager and custodian) – with the appointment of directors subject to MFSA approval.

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.

The Malta 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 EU on 1st July 2011. The transposition deadline for this directive together with is Implementing Measures stands on 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 EU. The directive introduces a harmonised regulatory and supervisory framework for AIFMs in the EU. For the purposes of the directive, Alternative Investment Funds ("AIFs") are defined as all funds that are at present not harmonised under the UCITS Directive.

Professional Investor Funds ("PIFs") and Private Collective Investment Schemes do not fall within the scope of AIFMD as AIFs, unless licensed as a "de-minimis" self-managed AIF, or where the PIF is managed by a "de-minimis" AIFM where assets under management do not exceed €100 million (when leveraged) or do not exceed €500 million (no leverage, and where investors may not effect redemptions for a 5-year period).

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
• 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.