Malta Regulatory Updates – Q2 2020

At Alter Domus, we’re committed to helping our clients stay informed about regulations that could potentially impact their operations. We hope you find value in the below compilation of regulations that went into effect locally in Malta as well as internationally in Q2 of 2020.


MFSA Circulars

ESMA Publishes Consultation Paper on Guidelines on Article 25 of Directive 2011/61/EU

On 27 March 2020, ESMA issued a consultation paper on draft guidelines to address leverage risks in the Alternative Investment Fund (AIF) sector (the “Guidelines”). The scope of the consultation paper is for ESMA to obtain feedback on the proposed principles to set leverage limits under Article 25 of the AIFMD which provides that member states shall “ensure that the competent authorities of the home Member State of the AIFM use the information to be gathered under Article 24 for the purposes of identifying the extent to which the use of leverage contributes to the build-up of systemic risk in the financial system, risks of disorderly markets or risks to the long-term growth of the economy”.

The proposed Guidelines aim at ensuring that National Competent Authorities (NCAs) adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met. In order to ensure that a consistent approach is taken by NCAs in the t assessment of leverage-related systemic risk, the proposed Guidelines include:

  • a common minimum set of indicators to be taken into account by national competent authorities during their assessment;
  • the instructions to calculate such indicators based on the reporting data under Article 24 of the AIFMD.

ESMA has invited AIF managers and their trade associations to respond to the consultation paper on the draft Guidelines by 1st September 2020.

Read the circular here.

 

Update on Circularisation Exercise - R4-3.2.7 of Part BI of the Investment Services Rules

Reference should be made to Rule R4-3.2.7 of Part BI of the Investments Services Rules for Investment Services Providers, which provides that - “where a Licence Holder holds or controls clients’ assets, the letter of engagement shall also require a circularisation exercise by the Auditors in order to reconcile a representative sample of client’s assets in cases where the Licence Holder holds or controls client assets.”

On 16 March 2020, the Authority issued a Circular to provide guidance on the sample sizes and the minimum acceptable response rates required to be carried out when conducting a Circularisation Exercise. Pursuant to the said Circular, the Authority is now bringing to the attention of Licence Holders and practitioners to the publication of the ‘Audit 01/2020 Technical Release’ issued by the Malta Institute of Accountants on 1 April 2020. The aim of this Technical Release is to provide audit practitioners with detailed guidance on the methodology to be applied with respect to compliance with the requirements emanating from the Rule.

Read the technical release here.

Read the circular here.

 

Final Report: ESMA’s Technical Advice to the Commission on the impact of the inducements and costs and charges disclosure requirements under MiFID II

This circular is addressed to Investment Services License Holders licensed in terms of the Investment Services Act. Pursuant to the feedback received by ESMA, following a call for evidence in 2019 seeking input from market participants on the impact of the inducement disclosure requirements under the revised MiFID II - ESMA has published its report to the European Commission on inducement and costs and charges disclosures under MiFID II.

In brief, the advice having been provided by ESMA may be summarised as follows:

  • ESMA encourages the EC to conduct further analysis on the topic of inducements, which is key for the protection of investors and proposes some changes to the regime mainly aimed at improving the clients’ understanding of inducements.
  • In relation to costs and charges disclosure, ESMA has found that the MiFID II disclosure regime generally works well and that it helps investors make informed investment decisions. However, ESMA advises that some disclosure obligations vis-à-vis eligible counterparties and professional investors are scaled back.
  • Other elements of the report relate to trading by telephone, the provision of information to clients in a durable medium and to the possibility to create new categories of clients.

Read the circular here.

 

ESMA publishes the ESEF Conformance Suite

Reference is made to the RTS on the European Single Electronic Format (ESEF), applicable to Annual Financial Reports (AFRs) containing financial statements for financial years beginning on or after 01 January 2020. In this regard, AFRs should be prepared in the Extensible Hypertext Markup Language (XHTML). Moreover, IFRS consolidated financial statements should be marked up using the eXtensible Business Reporting Language (XBRL).

On 23 March 2020, the European Securities and Markets Authority (ESMA), published the ESEF Conformance Suite (“The Suite”). The Suite specifically targets XBRL software developers and aims to facilitate adherence to the ESEF Regulation and the corresponding requirements. The Suite helps to determine whether the software tool being used to create and/or consume filings can detect and flag noncompliance with the ESEF requirements. Market participants can access the Suite, packaged in a zip file, and the accompanying test cases through the ESMA website.

Read the circular here.

 

ESMA Publishes Guidelines on Performance Fees in UCITS and Certain Types of AIFs

On 3 April 2020, ESMA published the Guidelines on Performance Fees in UCITS and certain types of AIFs (the “Guidelines”) to ensure supervisory convergence of performance fee structures and the circumstances where performance fees may be charged, whilst ensuring that supervisory convergence with respect to performance fee models is achieved at EU Level and to prevent undue costs being charge to a Fund and its investors.

The Guidelines provide comprehensive guidance to fund managers when designing performance fee models for the funds they manage, including the assessment of the consistency between the performance fee model and the fund’s investment objective, policy and strategy, particularly when the fund is managed in reference to a benchmark.

In brief, the Guidelines cover, inter alia, the following areas:

  • The methodology for the calculation of the performance fee;
  • Consistency between the performance fee model and the fund’s investment objectives, strategy and policy;
  • The frequency for the crystallisation of the performance fee;
  • Negative performance (loss) recovery; and
  • The methods of disclosure of the performance fee model.

The Guidelines will become applicable within two months of their publication.

Investment Managers of funds with a performance fee existing before the date of application of these Guidelines should apply these guidelines in respect of those funds by the beginning of the full financial year following 6 months from the application date of the Guidelines.

Read the circular here.

 

Circular to Recognised Fund Administrators on the submission of regulatory reporting in relation to Non-Malta domiciled funds administered in Malta

The MFSA Licence Holder Portal (LH Portal) will start facilitating the upload of regulatory reporting in relation to Non-Malta domiciled funds administered in Malta. Returns covering the period ending 31 March 2020 are to be submitted through the LH Portal and no longer by email to . Recognised Fund Administrators (RFAs) that have already submitted the March 2020 return via email are not required to re-submit the return to the LH Portal but should start doing so from Q2 2020.

RFAs will be granted access to the project ‘RFAs - Non-Malta Domiciled Funds Administered in Malta’ within the LH Portal, which can be accessed through the following link, https://lhportal.mfsa.com.mt. In this regard, RFAs need to fill in the form enclosed with this Circular with the details of the person/s who will be submitting the return and send it by email to by not later than 24 April 2020. This person/s will then receive an automated email communicating the access to the project. If this person/s is not yet registered on the LH Portal, one can find a step-by-step guideline explaining the registration process in Appendix 1 of the guideline document enclosed with this Circular.

Read the circular here.

Read the guidelines here.

 

Updated Investment Services Rules applicable to Fund Managers and Collective Investment Schemes licensed as Money Market Funds in view of Regulation (EU) 2017/1131 of the European Parliament and of the Council (“the MMF Regulation”)

On 23 July 2019, the MFSA issued a circular on ESMA’s guidelines on (i) Stress-testing of money market funds (the “MMF Stress Testing Guidelines”); and (ii) reporting by Investment Managers on money market funds to National Competent Authorities (NCAs) (the “MMF Reporting Guidelines”). To this effect, the MFSA has updated the Rulebooks applicable to Fund Managers managing Money Market Funds (“MMFs”) and Collective Investment Schemes licensed as MMFs (the “Rulebooks”) to include the above-mentioned ESMA guidelines.

The MMF Stress Testing Guidelines provide common reference parameters of the stress test scenarios to be included in the stress tests that Fund Managers managing MMFs and self-managed MMFs are required to conduct.

In terms of Article 37 of the MMF Regulation, Fund Managers managing MMFs (including self-managed ones) are required to report information to the MFSA on the activities undertaken by MMFs. The MMF Reporting Guidelines cover the general principles regarding the reporting and the reporting periods as well as specifications on how to complete the reporting template. Until further notice, MMF Reports should be submitted through the LH Portal under the section ‘Fund Manager Reporting’ for Fund Managers and ‘Collective Investment Schemes and Recognised Persons Reporting’ for self-managed MMFs.

Read the circular here.

ESMA News

ESMA updates Q&As on MiFID II investor protection

The Q&As on MiFID II and MiFIR investor protection and intermediaries’ topics includes a new answer on ‘MiFID inducements’, which provides clarification on the application of the MiFID definition of “acceptable minor non-monetary benefits”. In this respect, ESMA clarified that the definition attributed to “acceptable minor non-monetary benefits” in paragraph 3 of Article 12 of MiFID II Delegated Directive, should also be taken into consideration when providing investment or ancillary services other than portfolio management and independent investment advice.

The purpose of the MiFID II/MiFIR investor protection Q&As is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR.

Access the publication here.

Access the Q&A here.

 

ESMA updates its Q&As on MiFID II and MIFIR transparency and market structures topics

ESMA has updated its Q&As regarding market structures and transparency issues under the Market in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). The purpose of these Q&As is to promote common supervisory approaches and practices in the application of MiFID II and MiFIR. They provide responses to questions posed by the general public and market participants in relation to the practical application of level 1 and level 2 provisions relating to transparency and market structures issues.

The Q&As provide clarification on the following areas:

  • the default liquidity status, SSTI and LIS thresholds of non-equity instruments;
  • the publication of transactions in an aggregated form;
  • the conversion of LIS/SSTI thresholds in lots (amendments to an existing ESMA Q&A); and
  • multilateral systems facilitating the execution of repurchase agreement (repo) transactions.

Read the publication here.

Read the Q&A here.

MFSA Circulars

Circular to Less Significant and Financial Institutions on timing of Regulatory Reporting

Less Significant Institutions

By virtue of this circular, the MFSA is granting an extension of two months for the submission of the Less Significant Institutions’ (LSIs) audited annual financial statements, the copy of the auditor’s management letter including the LSIs’ management reply thereto, the ICAAP and ILAAP documentation and the Recovery Plan document. The LSIs that have a financial year ending December should therefore submit the above-mentioned documentation, excluding the copy of the auditors’ management letter and the LSIs’ management reply thereto, for the financial year ended 31 December 2019, by not later than 30 June 2020. A copy of the auditors’ management letter including the LSIs’ management reply thereto, should be submitted by note later than 31 August 2020.

Those LSIs having a financial year end other than December, are required to make an official request for an extension to the submission deadlines to the MFSA. Such requests will be treated on a case by case basis.

 

Financial Institutions

Similarly, the MFSA is hereby granting an extension of two months for the submission of the financial institution’s audited annual financial statements, the copy of the auditors’ management letter including financial institutions reply thereto.

Financial Institutions that have a financial year ending December should therefore submit the above mentioned documentation, for the financial year ended 31 December 2019, by not later than 30 June 2020. Financial Institutions having their financial year end other than December are required to make an official request for an extension of submission deadlines to the MFSA and such request will be treated on a case by case basis.

Access the circular here.

 

Circular to Financial Institutions outlining COVID-19 measures on Timing of Statutory Reporting

The MFSA is monitoring developments on an ongoing basis and understands that institutions may face increasingly difficult and unprecedented circumstances. In view of this, MFSA is hereby granting Financial Institutions authorised under the Financial Institutions Act, one additional month for the submission of the below listed statutory reporting:

  • Financial and Statistical Information Data Requirements pursuant to BD/06, with reference date end-March 2020;
  • Other Banking Rules Data Requirements (Other BRs), with reference date end-March 2020;
  • Prudential data requirements specific to the type of activity, with reference date end-March 2020;

This means that the remittance date for the above statutory obligations is now set to 15 May 2020. For the time being, the postponement of remittance dates is only being considered for the specific reporting obligations as listed in this circular (i.e. for reference date end-March 2020).

The MFSA will continue monitoring this extraordinary situation and may decide to grant further extensions as deemed necessary, informing institutions accordingly. In case resubmissions are required to amend data quality issues, the timeframe for updating, correcting and resubmitting the data will be analysed on a case-by-case basis and communicated bilaterally.

Access the circuar here.

MFSA Circulars

Circular addressed to Companies authorised to act as a Trustee of Family Trusts in terms of article 43B of the Trusts and Trustees Act

Circular addressed to Companies and individuals authorised as Administrators of Private Foundations in terms of article 43(12)(b) of the Trusts and Trustees Act

Circular addressed to Trustees and other fiduciaries authorised in terms of article 43 of the Trusts and Trustees Act

As part of the supervisory work carried out by the Authority, one of the tools used for the collation of information is the Annual Compliance Return (“ACR”). The MFSA has issued these circulars, addressed to: (i) all companies authorised to act as a Trustee of Family Trusts in terms of article 43B of the Trusts and Trustees Act; (ii) all companies and individuals authorised in terms of article 43(12)(b) of the Trusts and Trustees Act; and (iii) all trustees and other fiduciaries authorised in terms of article 43 of the Trusts and Trustees Act - in order to clarify certain issues and questions that were addressed in the industry feedback received by the MFSA about the 2019 ACR. Therefore, on this bases, the Authority has further improved the 2020 ACR by adding further drop-down menus so as to streamline the process of completion.

Once completed, the ACR may be submitted via the LH Portal. It is important to note that the ACR and any supporting documentation must be submitted through the LH Portal within four months from the Authorised Person’s financial year end in the case of companies, and by the end of April in the case of individuals.

Access the circulars here, here, and here.

 

MFSA Circulars

Circular addressed to Companies and individuals registered to act as a company service provider in terms of the Company Service Providers Act

As part of the supervisory work carried out by the Authority, one of the tools used for the collation of information is the Annual Compliance Return (“ACR”). The MFSA has issued this circular, which is addressed to all companies and individuals registered to act as a company service provider in terms of the Company Service Providers Act, in order to clarify certain issues and questions that were addressed in the industry feedback received by the MFSA about the 2019 ACR. Therefore, on this bases, the Authority has

further improved the 2020 ACR by adding further drop-down menus so as to streamline the process of completion.

Once completed, the ACR may be submitted via the LH Portal. It is important to note that the ACR and any supporting documentation must be submitted through the LH Portal within four months from the Authorised Person’s financial year end in the case of companies, and by the end of April in the case of individuals.

Access the circular here.

 

 

FIAU Guidance Note

COVID-19: Remaining Vigilant Against a Changing Criminal Landscape

The FIAU issued a Guidance Note informing subject persons of  the increase in specific types of illicit behaviour and an emergence of new activities related to the pandemic

across Europe. In this respect, the following trends have been noted:

  • Fraudulent sale of medical products, including an increase in fraud relating to marketing and sale of pharmaceutical and healthcare products, either through non-delivery goods for which payment has been made in advance, or the delivery of counterfeit, substandard or defective goods;
  • Benefit and compensation scheme fraud, such that fraudulent applications for compensations schemes intended to assist businesses and employers were being filed by criminal organisations under the guise of an existing company ;
  • Cyber attacks, particularly on online users, including phishing campaigns to try and obtain confidential data such as bank and credit card details;
  • Payment fraud;
  • Exploitation material; and
  • Increase in trade in illegal goods.

By virtue of the Guidance Note, the FIAU highlights the measures that should be adopted by subject persons to mitigate money laundering, including by revising the Business Risk Assessment to consider whether and to what extent their products and services may be misused or exploited by criminals and money launderers, and updating the customer risk assessment/s.

Furthermore, the FIAU also reminds subject persons to:

  • Onboard customers in full compliance with AML/CFT regulations and procedures at all times; 
  • Carry out appropriate ongoing monitoring;
  • Continue providing employees with all necessary resources and training; and
  • Assess transactions and activities for red flags and immediately report suspicious transactions.

Access the publication here.

 

FIAU Guidance Note

COVID-19: Remaining Vigilant Against a Changing Criminal Landscape

The FATF has issued a paper identifying challenges, good practices, and policy responses to new money laundering money laundering threats and vulnerabilities arising from the COVID-19 crisis. The Task Force indicates that the increase in COVID-19 related crimes, such as fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance, is creating new sources of proceeds for illicit actors. The pandemic is also impacting government and private sectors’ abilities to implement AML/CFT obligations from supervision, regulation and policy reform to suspicious transaction reporting and international cooperation.

The Task Force has identified a number of risks and vulnerabilities that could result in:

  • Criminals finding ways to bypass customer due diligence measures;
  • Increased misuse of online financial services and virtual assets to move and conceal illicit funds;
  • Exploiting economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds;
  • Increase use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds;
  • Misuse and misappropriation of domestic and international financial aid and emergency funding; and
  • Criminals and terrorists exploiting COVID-19 and the associated economic downturn to move into new cash-intensive and high-liquidity lines of business in developing countries.

AML/CFT policy responses can help support the swift and effective implementation of measures to respond to COVID-19, while managing new risks and vulnerabilities. In brief, a few examples of such policy responses include:

  • Domestic coordination to assess the impact of COVID-19 on AML/CFT risks and systems;
  • Strengthened communication with the private sector;
  • Encouraging the full use of a risk-based approach to customer due diligence; and
  • Supporting electronic and digital payment options.

Read the full paper here.

FATF News

Statement by the FATF President: COVID-19 and measures to combat illicit financing

In light of the current situation with regards to COVID-19, the FATF encourages governments to work with financial institutions and other businesses to use the flexibility built into the FATF’s risk-based approach to address any challenges posed by the virus whilst remaining alert to new and emerging illicit finance risks. The FATF encourages the fullest use of responsible digital customer onboarding and delivery of digital financial services in light of social distancing measures.

The FATF is informing subject persons to address COVID-19-related financial crime risks by remaining vigilant. FIUs and law enforcement agencies should continue to share information with the private sector to prioritise and address key ML risks, particularly those related to fraud, and TF risks linked to COVID-19. Additionally, criminals and terrorists may seek to exploit gaps and weaknesses in national AML/CFT systems while they assume resources are focused elsewhere, making risk-based supervision and enforcement activity more critical than ever. Financial institutions and other businesses should remain vigilant to emerging ML and TF risks and ensure that they continue to effectively mitigate these risks and are able to detect and report suspicious activity

The FATF notes that the use of digital/contactless payments and digital onboarding reduce the risk of spreading the virus. In line with the FATF Standards, the FATF encourages the use of technology, including Fintech, Regtech and Suptech to the fullest extent possible. The FATF recently released Guidance on Digital ID, which highlights the benefits of trustworthy digital identity for improving the security, privacy and convenience of identifying people remotely for both onboarding and conducting transactions while also mitigating ML/TF risks. When financial institutions or other businesses identify lower ML/TF risks, the FATF Standards allow them to take simplified due diligence measures, which may help them adapt to the current situation. The FATF encourages countries and financial service providers to explore the appropriate use of simplified measures to facilitate the delivery of government benefits in response to the pandemic.

The FATF notes that local institutions and FIUs may provide support, guidance and assistance to the private sector on how national AML/CFT laws and regulations will be applied during the current crisis.

Access the news here.

 

FATF extends its assessment and follow up deadlines in response to COVID-19

The FATF has agreed to temporary postpone all remaining FATF mutual evaluations and follow-up deadlines. The Task Force has informed subject persons that these decisions were taken as a response to the gravity of the COVID-19 situation affecting countries globally and also in light to the measures that countries have adopted, such as lockdowns and travel restrictions.

The FATF recognizes the severe challenges that countries are facing in such a difficult time and the significant impact this situation has on the countries’ ability to participate in mutual evaluation and related follow up processes.

The Task Force is also informing subject persons of its decision to pause the review process for high risk jurisdictions subject to call-for-action and jurisdictions subject to increased monitoring. These jurisdictions are being granted an additional four months for deadlines, thus postponing the June reviews.

The FATF is monitoring the situation as it evolves and will continue to review deadlines as necessary. The Task Force has stated that regardless of the current situation, the FATF will not relax its efforts. It will continue its work with all jurisdictions to ensure effective implementation of standards. The FATF is also monitoring closely the impact of the COVID-19 crisis on measure to combat illicit financing and will remain vigilant to threats of those who seek to exploit this delicate period to further their criminal objectives.

Acess the news publication here.