WH Financial Services Newsletter July - August


16 Sep 2019

MFSA issues a Consultation Paper on Security Tokens Offering

The Malta Financial Services Authority (‘MFSA’) has issued a Consultation Paper on Security Tokens Offering (“STOs”) which aims to provide legal certainty for STOs. This Consultation Paper seeks to link traditional securities with technology driven businesses, whilst also safeguarding investor protection, financial stability and market integrity. Further clarification as to which DLT Assets qualify as Security Tokens and how their issuance and listing on trading platforms should be regulated is made. Differentiation between ‘Traditional STOs’ and ‘Other STOs’ is also proposed.

Initially, the MFSA is to introduce a framework for Traditional STOs, whereas it proposes that further analysis is to be undertaken prior to introducing a framework for Other STOs. The MFSA is also distinguishing between centralised and decentralised exchange systems which, in the context of DLT, may be utilised as trading venues.

Furthermore, the Consultation Paper dedicates a section to the Market Abuse Regulation (MAR) (Regulation (EU) 596/2014) as being applicable to security tokens as a type of financial instrument, and another section to post-trade settlement.

The Consultation Document can be accessed here.

MFSA publishes Consultation Document on the provision of Independent Compliance Audits

On the 22 July 2019, the MFSA issued a Consultation Document on the provision of Independent Compliance Audits, which seeks to strengthen the MFSA’s supervisory engagement, maintaining Malta’s reputation as a jurisdiction of choice when it comes to the financial services sector, whilst also safeguarding consumer interests.

This Consultation Document proposes how MFSA intends to introduce a new supervisory tool, which will allow the Authority to appoint, or to require licensees or other persons to appoint, qualified persons to undertake independent compliance audits in relation to the firm’s activities.

The Consultation Document can be accessed here.

Approval of Consultation Paper and Q&As pertaining to the New Prospectus Regulation

On the 12 July 2019, ESMA published a Consultation Paper concerning draft Guidelines on disclosure requirements under the New Prospectus Regulation, which aims to ensure that there is a common understanding of the relevant disclosure requirements and to assist national authorities when assessing the completeness, comprehensibility and consistency of information contained in the prospectuses.

This will be achieved by: (i) clarifying the content of the indebtedness statement; (ii) by providing new guidance on working capital statements to clarify how offerings should be considered when determining if an issuer can provide a clean working capital statement; and (iii) by providing guidance relating to working capital statements prepared by credit institutions and (re)insurance undertakings. Stakeholders may submit feedback to ESMA until the 04 October 2019.

Furthermore, ESMA has also published 25 Q&As on its website, with the intent of promoting uniform supervisory approaches and practices to be undertaken in the application of prospectus supervision. ESMA is also to publish a further 22 Q&As in relation to the new Prospectus Regulation which have already been published in relation to Prospectus Directive.

ESMA’s Consultation Paper can be accessed here.

MFSA publishes guidance relating to “fit and proper” assessments

On the 12 July 2019, the MFSA issued a Guidance Document entitled ‘Guidance on the Fitness and Properness Assessments applied by the Authority’ which serves to provide further detail on the areas which the MFSA’s assessments are carried out on. The MFSA assesses fitness and properness against the following criteria:

  • competence;
  • reputation;
  • solvency;
  • conflicts of interest and independence of mind; and
  • time commitment.

Applicants or licence holders should only propose individuals for approved positions who in their opinion are fit and proper persons and the MFSA expect such entities to carry out their own due diligence and assessment of such persons, not only prior to proposing such person but also on an ongoing basis. These guidelines along with the establishment of the Financial Crime Compliance team serve to further strengthen MFSA’s supervisory processes.

The Guidance Document can be accessed here.

MFSA encourages new and innovative business models through the development of a Regulatory Sandbox

Following the release of its FinTech Strategy in May 2019, on the 04 July 2019, the MFSA issued a Consultation Document on the Regulatory Sandbox Pillar 1 – Regulations, which proposes initiatives on the first of six pillars identified within MFSA’s FinTech Strategy. The Sandbox will give the opportunity to participants to test the commercial and regulatory viability of their innovations for a specified period of time, and in a fully functional financial services environment. The MFSA will constantly monitor these participants who will operate under a set of conditions and limitations, in order to contain any risks to the said consumers and the financial system. The proposed Regulatory Sandbox is to be set up to further encourage innovative business models and start-ups to be involved in the financial services sphere.

The Consultation Document considers the various proposals under the MFSA Regulatory Sandbox Framework, including, amongst others, how the Sandbox is to operate, the eligibility of the participants, the participation structure, and consumer protection matters that are to be implemented. Moreover, the MFSA is also proposing to set up a framework for the regulatory certification of RegTech solutions.

The Consultation Document can be accessed here.

Circular on Regulation (EU) 600/2014 on Markets in Financial Instruments Regulation (‘MiFIR’)

On the 29 July 2019, ESMA published an updated version of its Q&As on the requirements for submission of reference data under MiFIR, which serve to promote common supervisory approaches and practices in the application of MiFIR and to provide guidance relating to compliance with the reporting provisions of MiFIR.

This relates to reporting obligations for financial instruments without a defined expiry date (such as, Perpetual FX Rolling Spot Futures). The new Q&As aim to provide clarification on how operators are to populate Field 24 (Expiry date) for a financial instrument without a defined expiry date, under RTS 23, if it is mandatory according to the CFI validation rules.

ESMA’s Q&As on MiFIR data reporting can be accessed here.

Circular on Market Abuse Regulation (EU) 596/2014 (‘MAR’) – List of Insiders

Issuers or any persons acting on their behalf or on their account, are to draw up and promptly update a list of insiders (‘LOI’) who have access to inside information and who are working for them under a contract of employment or otherwise performing tasks which they gain access to inside information. LOIs assist the MFSA in monitoring insider trading, whilst also assist issuers in controlling the flow of inside information, thus, preventing persons with access to inside information from using it for their own gain or for the gain of others. LOIs are to be provided to the MFSA upon request. MAR provides that subject to certain conditions, issuers whose financial instruments are admitted on a small-to-medium enterprise (‘SME’) growth market shall be exempt from drawing up an LOI.

LOIs should provide information including, inter alia, the identity of the persons with inside information, the reason for their inclusion in the list, what information these individuals are privy to, as well as the date and time that such persons have obtained access to said information.

LOIs are to be kept for a minimum period of five years, in electronic format as per Template 1 of Annex I of the Implementing Regulation. LOIs must be set up in a manner that ensures that the information is confidential in the sense that access to the insider list is restricted to specified persons which require such access due to their role. Furthermore, LOIs must ensure that the data stored is accurate, whilst also allowing for access to and the retrieval of previous versions of the data stored. Persons privy to inside information are to acknowledge, in writing, the legal and regulatory duties entitled in having access to such data as well as to be aware of the penalties applicable to insider dealing and unlawful disclosure of inside information in accordance with MAR.

Companies should ensure communication and training programmes are provided to any existing or future employees who have access to inside information.

For more detailed information on the above, refer to MFSA’s Circular which can be accessed here.

ECB revises supervisory expectations for prudential provisioning for new non-performing loans to account for new EU regulation

The European Central Bank (‘ECB’) has decided to revise its supervisory expectations for prudential provisioning of new non-performing exposures (‘NPEs’) specified in the “Addendum to the ECB Guidance to banks on non-performing loans” (‘Addendum’). This revision follows the adoption of an EU regulation, which came into force on the 26 April 2019, outlining the Pillar 1 treatment for NPEs; as well as the ECB’s commitment to reconsider supervisory expectations for NPEs once the new legislation on the Pillar 1 treatment of NPEs has been finalized.

The following changes have been made to the supervisory expectations communicated in the Addendum:

  • limitation in the scope of the ECB’s supervisory expectations for NPEs; i.e. NPEs arising from loans originated before the 26 April 2019 are not subject to Pillar 1 NPE treatment, whilst those arising from the 26 April 2019 onwards will be subject to Pillar 1 treatment;
  • alignment with the Pillar 1 treatment of NPEs as set out in the EU regulation with regards to: (i) the relevant prudential provisioning time frames; (ii) the progressive path to full implementation; (iii) the split secured exposures; (iv) the treatment of NPEs guaranteed/insured by an official export credit agency.

MFSA enhances consumer protection by restricting the sale of Contracts for Difference (CFDs) for Retail Clients

Following the MFSA’s Consultation on the implementation of National Product Intervention Measures in relation to Contracts for Difference (‘CFDs’), and in line with the position adopted by ESMA, the MFSA has updated the Conduct of Business Rulebook (applicable, amongst others, to investment services providers) (‘Rulebook’), to implement important changes aimed at enhancing consumer protection. These changes deal with restrictions in the marketing and the distribution or sale of CFDs to retail investors.

Restrictions introduced in the Rulebook, include inter alia, requirements that ensure that investors do not lose more money than they invest, and restrictions on incentives offered to trade in CFDs. Furthermore, investors are to be provided with intelligible risk warnings to ensure that they are aware of the high risk associated with investing in CFDs. With this respect, the MFSA has introduced standardised warnings on the risk carried out by such investments.

ESMA has issued a formal opinion on the MFSA’s national product intervention measures relating to CFDs, which can be accessed from here.

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