News

Financial Services and Fintech Update

Malta Financial Services Authority (MFSA) Updates

MFSA issues Circular to Companies and Individuals providing Directorship Services

The MFSA has issued a circular reminding those companies and individuals who provide directorship services of the importance of observing all their obligations, both under the Companies Act as well as the appropriate legislative and regulatory framework.

One way of ensuring that directors are indeed acting in the best interests of the company and that their duties are performed in an honest and transparent manner is by complying with Article 183 and Article 184 of the Companies Act. Respectively, both articles deal with the company’s obligation to prepare and submit annual accounts and annual returns and require that submissions are to be complete and precise.

Moreover, directors are also to ensure that their client companies adhere to reporting obligations. This is echoed in the MFSA’s Rules for Company Service Providers, whereby such rules oblige anyone acting as a director within a company to keep proper records, to observe the minimum record retention period and to file and return accounts as prescribed by the law.

The MFSA therefore prompts that those providing directorship services will be in breach of not only the Act but, the licensed entity’s applicable respective legislative and regulatory framework, if found in breach of the above obligations. The MFSA is authorised, moreover, to exercise the appropriate enforcement actions in such circumstances.

For more information: https://www.mfsa.mt/publication/circular-addressed-to-companies-and-individuals-providing-directorship-services/

MFSA issues Circular on the Submission of Source of Wealth and Source of Funds

The MFSA has reminded authorised persons and applicants for a financial services authorisation of its Guidance Note on the submission of the Source of Wealth (‘SOW’) and Source of Funds (‘SOF’) declarations. The Note aims to help individuals who are requested by the MFSA to provide a SOW/SOF declaration by underlining the Authority’s expectations with regards to the contents that these documents should include.

The Authority’s due diligence process, when examining the fitness and properness of an individual taking up a position of influence in an authorised entity, comprises the assessment of the individual’s reputation, integrity and solvency. Anti-money laundering and the combating of financing of terrorism (AML/CFT) considerations are also an important aspect of this specific assessment, especially vis-à-vis those persons holding significant or controlling interests with authorised persons or who may be Potentially Exposed Persons.

Individuals being asked by the Authority to submit a declaration with respect to their SOW/SOF are therefore asked to follow the Guidance Note mentioned above. The SOW declaration should entail a detailed overview of an individual’s net worth, alongside relevant information with how such wealth was acquired, to be verified by a qualified accountant or auditor in his/her professional capacity. Moreover, the SOF declaration is to draw out the origin of the particular funds, or assets, which are the subject of a given business relationship or transaction.

For more information: https://www.mfsa.mt/publication/circular-on-the-guidance-note-on-the-submission-of-the-source-of-wealth-and-source-of-funds/ 

European Securities and Markets Authority (ESMA) Updates

Assessing Risks to the Financial Sectors After the Outbreak of COVID-19

In their first joint risk assessment Report of the financial sector since the outbreak of the COVID-19 pandemic, the three European Supervisory Authorities (‘ESMA’, ‘EBA’ and ‘EIOPA’) assessed how the pandemic has brought on profitability concerns across the board and amplified liquidity challenges in segments of the investment fund sector. The Report distinctly identifies economic and market uncertainty as a key-challenge looking forward.

The crisis has impacted EU banks’ asset quality and has prompted uncertainty about the time and size of recovery. The Authorities perceive a risk of decoupling of financial market performance from the underlying economic activity, as well as a prolonged ‘lower for longer’ interest rate environment. Indeed, such factors are bound to weigh on the profitability and solvency of financial institutions and continue to contribute to the congestion of valuation risks.

The Authorities have thus affirmed the need to implement the following policy actions:

  • To monitor risks and perform stress testing, such as valuation, liquidity, credit and solvency risks which have increased across financial sectors;
  • To foster flexibility where and when needed, as per the existing regulatory framework, including the use of capital and liquidity buffers to absorb losses;
  • To support the real economy, by using capital relief to support continued lending in downturns;
  • For the EU financial institutions to be well-equipped for disruptions they and their clients may face at the end of the UK’s transition period of leaving the Union; and
  • The supervision of digital transformations, as it is crucial for financial institutions and their service providers to cautiously manage their ICT and security risks.

For more information: https://www.esma.europa.eu/press-news/esma-news/eu-financial-regulators-assess-risks-financial-sector-after-outbreak-covid-19

ESMA Publishes Outcomes of MAR Review

ESMA has published a review of the Market Abuse Regulation (‘MAR’). So far, the MAR has been implemented well in practice.

In its report to the European Commission, ESMA proposes targeted amendments to the Regulation, on issues such as:

  • Market soundings, which should clarify that the Regulation requirements comprise obligations for disclosing market participants that when complied with, shall protect them from the allegation of having unlawfully disclosed inside information;
  • Benchmark provisions and the interplay between the Regulation and collective investment undertakings, which should clarify the responsibility of management companies in relation to the disclosure of inside information; and
  • Withholding tax reclaim schemes, which should remove the legal limitations for NCAs to exchange information with tax authorities.

ESMA has also suggested that the following areas should be complemented with further guidance:

  • Inside information and disclosure; and
  • Pre-hedging.

For more information: https://www.esma.europa.eu/press-news/esma-news/esma-publishes-outcomes-mar-review

ESMA Issues Proposals to Help Prevent and Detect WHT Reclaim Schemes

ESMA has published a Report on its inquiry into Cum/Ex, Cum/Cum and withholding tax (‘WHT’) reclaim schemes. ESMA proposes that national competent authorities (‘NCAs’) for securities markets should be encouraged to share information with the tax authorities, in order to aid in detecting WHT reclaim schemes.

The inquiry has affirmed that WHT schemes are primarily tax-related issues and, any response should be sought within the confines of the tax legislative and supervisory framework. Moreover, thanks to an extended remit under national legislation, NCAs are better able to exercise supervisory activity for WHT schemes.

ESMA went on to determine a number of measures adopted by various Member States to limit the risk of WHT reclaim schemes being pursued. The Authority, therefore, recommends legislative change to remove the legal limitations on NCAs which exchange information garnered through other NCAs with tax authorities.

A common legal basis should, furthermore, be developed to ensure a coherent and uniform approach on the exchange of information acquired by NCAs in their supervisory activity with tax authorities.

For more information: https://www.esma.europa.eu/press-news/esma-news/esma-makes-proposals-help-prevent-and-detect-wht-reclaim-schemes

European Central Bank (ECB) Updates

ECB to accept Sustainability-Linked Bonds as Collateral

The European Central Bank has confirmed that bonds with coupon structures linked to specific sustainability performance targets will become eligible as collateral for Eurosystem credit operations, as well as for Eurosystem purchases for monetary policy purposes if they meet certain criteria.

The coupons must, in turn, be linked to a performance target referring to environmental objectives set out in the EU Taxonomy Regulation and/or to one of the United Nations’ Sustainable Development Goals dealing with climate change and environmental degradation.

It is furthermore important to note that such a decision is applicable as from the 1st of January 2021. 

For more information: https://www.ecb.europa.eu//press/pr/date/2020/html/ecb.pr200922~482e4a5a90.en.html

ECB Issues In-Depth Analysis and Implications of Stablecoins

The ECB, in its paper Stablecoins: Implications for monetary policy, financial stability, market infrastructure and payments, and banking supervision in the euro area, determines the outcome of an analysis of stablecoins undertaken by the ECB Crypto-Assets Task Force.

Although stablecoins are not a new development, new initiatives have brought about a new pattern in the public debate on this payment innovation, as different types of stablecoins have emerged. Based on their design, they have been classified into four types:

  1. Tokenized Funds;
  2. Off-chain collateralised stablecoins;
  3. On-chain collateralised stablecoins; and
  4. Algorithmic stablecoins

Stablecoin arrangements fulfill multiple functions that vary from the stabilization of the value of stablecoins to the transfer of value and interaction with users. The implications of these new initiatives would then depend on the uptake of stablecoins, with the paper identifying three different scenarios, being:

  1. Crypto-assets accessory function that allow securing crypto-asset revenues in less volatile assets without leaving the crypto-ecosystem; or
  2. A new payment method; or
  3. An alternative store of value.

Such scenarios would then depend on the specific features of stablecoins, with the second and third scenarios being dependent on stablecoin types that offer high levels of price stability and credible redemption policies. Continuing on the second scenario of stablecoin arrangement, the paper shows that it could reach a scale of operations such that fragilities within the arrangement itself and its links to the financial system may give rise to financial stability risks. This is because stablecoins are vulnerable to liquidity ‘runs’ and, when a stablecoin is exchanged/redeemed at the market value of its collateral, a run could occur if end users are confronted with the possibility that the stablecoin’s collateral may lose its value.

As a part of their transfer of value function, under certain conditions, stablecoins also have implications for the safety and efficiency of payment systems and can even pose system risk, as part of their transfer of value function. Such risks and inefficiencies would then depend on the design of the transfer system, ranging from the legal basis to governance, cyber risks, operational complexities and the arrangement’s choice of settlement asset. 

There can be significant implications for monetary policy, as in this particular scenario, stablecoin types hold safe assets as collateral to achieve high levels of stability of the stablecoin’s value. Their significant uptake could increase the demand for safe assets by stablecoin arrangements and can have a negative impact on price formation, collateral valuation, money making functioning and the monetary policy space.

Moreover, the paper asserts that the implications of stablecoins in these plausible scenarios can be managed by the Eurosystem, as it would cover stablecoin arrangements that qualify as payment systems regardless of the technology used and their organisational setup. As such, the EU and Eurosystem regulatory and oversight response should follow the principle of “same business, same risks, same rules” in order to ensure a level playing field by applying existing requirements as appropriate and closing gaps. There is also potential in fostering central bank innovations, to cater for a change in environment in the payments space and altered conditions for the exercise of a central bank’s core mandate.

For more information: https://www.ecb.europa.eu//pub/pdf/scpops/ecb.op247~fe3df92991.en.pdf

International Organization of Securities Commissions (IOSCO) Updates

IOSCO issues Measures to reduce Conflicts of Interest in Debt Capital Raising

The Board of IOSCO has published a final guidance aimed at aiding its members to deal with potential conflicts of interest and associated conduct risks market intermediaries may face during the debt capital raising process. The guidance, moreover, scouts specific concerns observed by certain regulators, brought on by the COVID-19 pandemic, which have the potential to affect the integrity of the capital raising process. It is important to note that this specific guidance focuses on traditional corporate bonds.

The report analyses the potential benefits and risks of Blockchain technology in addressing conflicts of interest in the debt capital raising process, as well as the crucial stages of the debt raising process and determines where the role of intermediaries may lead to conflicts of interest. Indeed, the guidance includes nine measures that tackle potential issues when issuers are preparing to raise debt finance, such as the use of risk management transactions, the quality of information available to investors and the allocations process.

For more information: https://www.iosco.org/news/pdf/IOSCONEWS576.pdf

For more information on the updates above please contact Dr Ian Gauci and Dr Cherise Abela Grech.

This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.