On February 13 2012 the Financial Services Authority announced a review of certain criteria regarding the licensing of credit institutions and insurance companies. This update focuses on those amendments that concern credit institutions.

Banking Rule 01/12 details the application procedures and requirements for the authorisation of licensing of banking activities under the Banking Act. Paragraphs 21 to 24G of the rule specifically refer to the minimum criteria for authorisation of a credit institution.

In its recent policy document the authority announced amendments to Paragraph 24 of the rule. The rationale for these changes was:

  • the recent global financial crisis, which resulted in increasing demands on regulatory authorities to maintain financial stability; and
  • the widening of the grounds for recourse under the bank depositor compensation scheme.

As as result of this review, the following condition has been added to Paragraphs 24D to 24G of the rule:

"where the applicant for business is from countries outside the EU intending to set up a branch or subsidiary, the [authority] will not entertain applications from institutions except from countries who are signatories to the Basle Concordat."

Paragraph 24D of the rule provides that where the applicant for business is not authorised as a credit institution (either in Malta or in its own country) and is therefore not subject to supervision, when considering whether to grant authorisation the authority may require active participation both by way of shareholding interest and by way of management by an authorised credit institution of repute. The level of participation is left to the discretion of the authority. In the case of participation by a foreign credit institution, the authority will apply the criteria established in Paragraph 24B to that institution.

Applicants for a credit institution licence should assume that the participation by another regulated entity by way of shareholding and/or active participation in the management of the proposed entity is applicable at the outset and may be waived by the authority on a case-by-case basis, depending on the assessment carried out of the perceived risks involved in the proposal under consideration.

The authority further indicated that the following factors will be taken into account when considering the waiver of the participation for the start-up of any credit institution:

  • shareholding structure;
  • quality and track record of the management team (promoters ideally should demonstrate several years of competence with reputable institutions to the satisfaction of the authority);
  • target market;
  • due diligence investigations;
  • proposed capital structure;
  • level and nature of business risk involved; and
  • impact on deposit compensation scheme.

These factors should not be interpreted as an exhaustive list of the aspects that could be taken into account by the authority when assessing the risk presented by a proposal. Each application is assessed on its own merits, but the regulator reserves the right to impose any condition as may be deemed necessary with regard to the level of participation by way of shareholding and/or management required.

For further information on this topic please contact Adrian Cutajar at Simon Tortell and Associates by telephone (+356 21 227974), fax (+356 21 223567) or email ([email protected]).