In the operation of payment institutions, safeguarding client funds is a fundamental regulatory requirement. Traditionally, this has been achieved through the segregation of client funds in separate accounts. However, Maltese law recognises alternative mechanisms, including comparable guarantees, which allow payment institutions to meet their regulatory obligations while providing equivalent protection to clients.
A comparable guarantee is a financial instrument whereby a third party, such as a credit institution or an insurance company, undertakes to cover the funds that would otherwise have been segregated. Under Article 7(1)(b) of the Financial Institutions Act (Safeguarding of Funds) Regulations, SL 376.04, and Rule R3-2.9.8 of Chapter 3 of the Financial Institutions Rulebook, payment institutions may rely on such guarantees to fulfil their obligations under Article 10B of the Financial Institutions Act. In effect, the guarantee ensures that, in the event the payment institution cannot meet its obligations to clients, the guarantor will pay the corresponding amount, thereby maintaining client protection at a level equivalent to that provided by segregated accounts.
The practical purpose of comparable guarantees is twofold. Firstly, they secure client funds in accordance with regulatory requirements, mitigating the risk of loss if the payment institution encounters financial difficulties. Secondly, they provide operational flexibility, allowing the institution to manage liquidity without having to physically segregate large amounts of client funds. By utilising a guarantee issued by a reputable credit institution or insurance company, a payment institution can comply with statutory safeguarding requirements while maintaining efficient use of its resources.
Comparable guarantees are therefore an essential tool for payment institutions seeking to balance regulatory compliance, client protection, and operational efficiency. These instruments must be carefully structured to reflect the exact amount of funds covered, ensure enforceability in the event of the institution’s inability to meet its obligations, and comply with the detailed requirements set out in the Financial Institutions Act and its implementing regulations.
At Zerafa Advocates, we provide comprehensive advice to payment institutions on the use of comparable guarantees. We assist in determining whether such a guarantee is appropriate in a particular context, review existing guarantees to ensure compliance with the relevant regulatory provisions, and draft guarantees that are enforceable, precise, and aligned with both the Financial Institutions Act and the operational needs of the institution.
By leveraging our expertise, payment institutions can implement comparable guarantees that provide robust client protection while maintaining regulatory and operational efficiency.
