On the 9th April 2020, the Malta Financial Services Authority (the “MFSA”) issued its Feedback Statement (the “Feedback Statement”) regarding its Consultation Document (the “Consultation Document”) issued on 22nd October 2019 which sought feedback from stakeholders on the proposed changes to the Company Service Providers (“CSPs”) regulatory framework and their supervision.
1. Extending the Role of CSPs
In the Consultation Document, the MFSA proposed the extension of the CSP’s role to include the service of providing guidance on the submission of documentation of all prospective applicants for authorisation, licensing, registration and recognition with the MFSA. However, following the feedback received from stakeholders, the MFSA has revised its position and agreed that the provision of such professional assistance should be considered as a service separate and distinct from the of a CSP and will therefore consider adopting an ad hoc standard which would be subject to a separate consultation exercise.
2. Categorisation of CSPs
The MFSA had also proposed in its Consultation Document to categorise CSPs into three different classes. Following the feedback received from stakeholders, the MFSA decided to uphold its categorisation proposal however, the MFSA will be amending the activities allowed for each class of CSPs. The MFSA shall be categorising CSPs into the following classes:
Class A CSPs
A Registered person authorised to provide, by way of its business, the following services to third parties:
i. formation of companies or other legal entities;
ii. provision of a registered office, a business correspondence or administrative address and other related services for a company, a partnership or any other legal entity.
Minimum Capital Requirement: € 10,000
Class B CSPs
A Registered person authorised to provide, by way of its business, the services of acting as, or arranging for, another person to act as director or secretary of a company, a partner in a partnership or in a similar position in relation to other legal entities.
Minimum Capital Requirement: € 15,000 + Mandatory PII
Class C CSPs
A Registered person authorised to provide, by way of its business, any or all CSP services mentioned under Class A or Class B, to third parties.
Minimum Capital Requirement: € 25,000 + Mandatory PII
The MFSA also confirmed that as provided in the Consultation Document, it will introduce further guidance on what constitutes an ancillary activity and what is excluded from the service of a CSP.
Although the MFSA has lowered the minimum capital requirement for CSPs to be registered proposed in the Consultation Document, it still maintains that the capital requirement is to be fully paid up and maintained at all times. The MFSA noted that these capital requirements are the minimum a CSP may hold and while higher capital requirements may be imposed, with regards to particular CSPs who may require a lighter approach due to their nature, business and complexity, a lower capital requirement may be imposed.
3. Market Entry Requirements
a. Warranted Professionals
After reviewing the feedback from stakeholders, the MFSA opted to uphold its proposal to remove the existing exemptions from registration for warranted professionals. Therefore, warranted professionals such as advocates, notaries, legal procurators and accountants shall therefore be required to register as a CSP prior to providing any CSP service. The MFSA will however, give due recognition to the professional qualifications and warrants when assessing competence as part of the fitness and properness assessment conducted.
Additionally, those practitioners providing corporate services within a wider portfolio of services may be subjected to less onerous requirements and controls at the discretion of the MFSA. In deciding whether a practitioner would qualify for the lighter touch approach, the MFSA will give due regard to actual and/or projected revenue from CSP activities as part of the total services provided or to be provided.
While the above exemptions will be removed, the MFSA will retain the existing exemption for trustees.Furthermore, the MFSA is also considering proposing waivers from registration for:
i. VFA Agents, registered under the Virtual Financial Assets Act;
ii. Persons who act as director or secretary solely of entities in which they are beneficial owner; and Persons who act as director or secretary solely of entities in which the government of Malta is a shareholder.
Notwithstanding the above, the waivers listed in points (a) and (b), and those falling under the exemption for trustees still require a notification to the MFSA of their intention to provide CSP services.
c. De minimis rule
As the MFSA has changed its position to have all CSPs to be registered, the de minimis rule has also been re-thought. Solely with respect to Class B CSPs, in so far as they are acting as director or secretary of a company, a partner in a partnership or in a similar position in relation to other legal entities having no involvements with MFSA regulated entities, the MFSA has put forward a threshold of 5 involvements. Persons not exceeding such threshold, will still be subject to a registration requirement, however they will be subject to a lighter touch approach.
4. Legal Personality and Internal Governance Requirements
In the Consultation Document, the MFSA had proposed the introduction of a requirement that in order to apply for authorisation, a CSP should be a legal person established in Malta or in another recognised jurisdiction. Following the feedback received from stakeholders, the MFSA recognised the impact that internal governance requirements may have on smaller businesses.Therefore, the MFSA at its discretion, may allow a CSPs to be natural person depending on the nature, size and complexity of the business.
Additionally, the MFSA is also upholding its proposal to strengthen the requirements relating to governance which are set out within the CSP Rulebook. Similarly, the MFSA will uphold its proposal on the establishment of risk management policies by providing additions to the CSP Rulebook.
The MFSA had proposed in the Consultation Document, that CSPs providing the services designated in Class B would be required to appoint a minimum of two Designated Persons. The MFSA has however revised its position and the requirement to appoint Designated Persons is no longer necessitated in the context where the CSP is acting as a director, company secretary or similar positions. However, in the case where the CSP is arranging for another person to act as director or company secretary, the MFSA will be issuing rules for such CSPs to conduct fitness and properness assessments. These assesments shall be conducted both prior to proposing such person as well as on an ongoing basis.
The MFSA will be upholding its proposal for enhanced competence assessments which will be supplementary to the fitness and properness assessment. The enhanced competence assessments will be based on:
experience and educational background; and
where the authority deems it necessary, on the basis of a risk-based assessment, a viva voce assessment.
The enhanced competence assessments are applicable to the proposed Money Laundering Reporting Officer, proposed Compliance Officer and also to natural persons being members of the board of directors of the CSP.
The MFSA shall be retaining its proposal to thoroughly scrutinise CSPs’ client onboarding processes at the authorisation stage. Such processes are to be regularly updated and aligned with legal requirements and should be effectively implemented and the MFSA and/or the FIAU will retain the right to inspect these policies and procedures at any time in terms of the law.
As provided in the Feedback Statement, persons involved in the compliance function of the CSP are not to be involved in the performance of the services which they monitor and in this respect shall neither be client-facing nor involved in client on-boarding. The compliance officer of the CSP shall also draw up a compliance monitoring programme and present regular compliance reports to the CSP’s board of directors.
6. Time Commitment
The MFSA shall also be introducing rules governing CSPs providing services arranging for another person to act as director or company secretary, a partner in a partnership or in a similar position in relation to other legal entities to perform a quantitative and qualitative assessment of time commitment required from the proposed director, company secretary or similar positions. The assessment will be undertaken by the Designated Persons of the CSP.
7. The Institutional Architecture for the Supervision of CSPs
In the Consultation Document, the MFSA considered a revamp of the institutional architecture for the supervision of CSPs proposing a hybrid supervisory model whereby self-regulatory organisations would be jointly responsible with the MFSA to supervise CSPs. However, following the feedback provided by stakeholders, the MFSA has opted to remain the sole regulatory and supervisory authority for the time being.
8. Next Steps
The MFSA is cognisant that certain changes which are being proposed in this document cannot take place overnight and therefore the new framework will provide for a stepped approach which will allow stakeholders sufficient time to align themselves to the new requirements.
Feel free to contact us if you require any further information on the legal framework for Company Service Providers.