Any entity providing “Trustee, Custodian or Nominee Services”, in relation to “instruments” as defined in the Investment Services Act (Chapter 370 of the Laws of Malta) (the “ISA”), in or from within Malta, is required to hold an investment services licence issued by the Malta Financial Services Authority (“MFSA”). Likewise, entities acting as trustee or custodian of a collective investment scheme must also apply for an investment services licence.
There are different categories of investment services licences, depending on the nature of the investment services carried out and/or the nature and classification of clients to whom such services are provided. A custodian of a collective investment scheme requires a Category 4 Licence. Investment firms or credit institutions providing custody services to collective investment schemes may also apply for a licence which allows them to provide services complementary to the safe-keeping functions of a custodian, such as the execution and/or receipt and transmission of orders on behalf of its clients.
Custodians of retail collective investment schemes (UCITS and non-UCITS)
The custodian or depositary of a Maltese UCITS scheme or of a Maltese retail non- UCITS scheme should be based and have an established place of business in Malta and should be in possession of a Category 4 Investment Services Licence issued by the MFSA.
Custodians of both types of retail schemes are required to keep under custody the assets of the relevant scheme and, additionally (as a ‘core’ custodial function), to monitor the activities of the investment manager of the scheme to ensure compliance with the investment and borrowing powers set forth in the prospectus and otherwise in accordance with the provisions of the constitutional document of the scheme and the licence conditions.
Custodians of Professional Investor Funds
Maltese Professional Investor Funds (PIFs) are not required to appoint a custodian with an established place of business in Malta. Therefore such custodian could be foreign-based. Foreign-based custodians, may, provided such custodian is of sufficient standing and repute, be exempted from the requirement to obtain a Category 4 licence under the ISA, by virtue of the Investment Services Act (Exemption) Regulations (L.N.329 of 2007).
PIFs are not even required to appoint a custodian (foreign or local), provided they have alternative adequate safe-keeping arrangements for the custody of their assets. The only exception to this is with respect to PIFs targeted to Experienced Investors, which due to the lower degree of investment knowledge of the investor, as opposed to the other forms of investors (Qualifying and Extraordinary), require the appointment of a custodian to keep the assets of the PIF under custody and also to monitor the activities of the investment manager.
However, the aforesaid position shall be subject to review pursuant to the transposition of the Alternative Investment Fund Managers (AIFM) Directive, where a custodian may be required even for PIFs, irrespective of the type of investor to whom the PIF shall be targetted.
Local Presence Requirements
The Investment Services Rules for Investment Services Providers issued by the MFSA prescribe that custodians are required to have an established place of business in Malta. However, some flexibility is ensured in terms of the forms of establishment that the custodians can take providing that the custodians are:
a credit institution, constituted and licensed under the laws of Malta; or
a branch established in Malta, of a credit institution authorised in a EU Member State or EEA State; or
a branch established in Malta of an overseas credit institution which is subject to prudential requirements at least equivalent to the requirements applicable to Maltese credit institutions; or
a company incorporated in Malta which is wholly owned by a credit institution, provided that the liabilities of the Licence Holder are guaranteed by the credit institution and the credit institution is either a Maltese credit institution or is an overseas credit institution which is subject to prudential requirements at least equivalent to the requirements applicable to Maltese credit institutions; or
a company incorporated in Malta which is wholly owned by a Maltese or foreign institution or company which is deemed by the MFSA to be an institution or company which provides unit-holders with protection equivalent to that provided by a Licence Holder fulfilling the requirements of the aforesaid grounds and provided the liabilities of the company acting as custodian are guaranteed by the institution or company and the institution or company has paid-up share capital of EUR five million (EUR 5,000,000) or its equivalent in foreign currency.
A custodian of a Maltese UCITS or non-UCITS retail scheme and any other custodian licensed under the ISA is required to have an established place of business in Malta, effectively meaning that the business organisation, systems, and appropriate expertise and experience necessary for the carrying out its functions must be in Malta. The custodian must ensure that it has adequate financial resources and liquidity at its disposal to enable it to conduct its business effectively and to meet its liabilities. The nature and extent of required resources (particularly local staff requirements), will depend on the number, nature and extent of mandates to be taken on by the custodian.
Nonetheless, the policy of the MFSA has been to adopt a flexible approach in assessing proposals for new local custody operational set-ups regard being had to start-up costs and allowing an incubation period, conducive towards the growth of the business. For this reason, the MFSA shall be minded to accept small set-ups with reliance on outsourcing/ delegation arrangements, until the volume of business to be carried out by the custodian grows, conditional to adherence to:
The MFSA’s Investment Services Rules for Investment Services Providers; and
The Investment Services Act (Control of Assets) Regulations
Delegation is permissible to custodians established outside Malta, whether in the EU or not and may also be the parent undertaking or a group or affiliated undertaking of the Maltese delegating entity. However, where the delegation concerns custodial core activities, the mandate may only be given to undertakings which are duly authorised or licensed and, in all cases subject to prudential supervision.
Where the custodian proposes to delegate the custody function to a third party custodian the MFSA would generally accept the following minimum staffing arrangement:
- one (1) Maltese resident Director;
- at least one full time employee who has a strong custody background responsible for compliance, Anti-Money Laundering and monitoring the activities of the sub-custodian.
The Board of Directors of the custodian should be made up of at least three (3) members (one of whom should be resident in Malta). Furthermore, the MFSA generally expects the majority of Board meetings to be held in Malta, in line with MFSA’s general expectation that the business is effectively managed and controlled from Malta.
The custodian will generally be required by the MFSA to have an office space dedicated to its activities, within Malta. The custodian may acquire its own offices in Malta or alternatively share offices with other entities (including other local service providers to funds for whom the custodian acts, such as the administrator). Whatever option the entity decides to take on, it is essential that such office space be equipped with an independent telephone line; a facsimile machine connected to a direct telephone line; an internet connection; and filing space.
The custodian would also need to appoint a local Compliance Officer (to ensure and report on the extent to which the custodian has complied with its licence conditions) and Money Laundering Reporting Officer (to assist the custodian in complying with, and to report on the extent to which the custodian has complied with its statutory anti-money laundering obligations). Both roles may be assumed by the same person (who could be, for example, the local Director of the custodian).
Likewise, flexibility is afforded to custodians establishing a place of business in Malta through a local branch. However, in order to preserve the good reputation of Malta and to ensure suitable protection to consumers, the branch must be properly and adequately organised with staff who are suitable, aptly trained and properly supervised. A Senior Branch Manager should be appointed to manage the affairs of the local branch operation as well as such other staff members as may be required to enable the branch to carry out its duties and fulfill its responsibilities in an adequate manner, including the appointment of a local Compliance Officer and Money Laundering Reporting Officer. Preferably, these officers should be distinct from the Senior Branch Manager although a transitional period may be permitted during which the Branch Manager may also assume these offices.
The custody of fund assets may be entrusted by the branch to its Head Office or third party sub-custodians. Subject to MFSA agreement, certain monitoring duties (where these form part of the custodian’s responsibilities as is the case with retail UCITS or non-UCITS schemes) can be carried out by the branch’s Head Office on its behalf. The MFSA would however expect the branch to have the systems and procedures in place to carry out some of the monitoring duties itself. The branch should also provide the MFSA promptly upon request, with all information that it or its Head Office or other delegates have obtained whilst discharging their duties in relation to the relevant fund/s and which is necessary for the MFSA to supervise the branch and (where applicable) the local fund/s it services.
The rental of office space on an office-sharing basis is again permitted (subject to need to safeguard the confidentiality of documentation). As regards to services provided by the branch’s Head Office, the MFSA would expect the branch to have adequate communication and reporting arrangements in place to enable it to satisfy itself that such services are being properly performed as well as to enable it to report to the MFSA as may be required and also to comply with the outsourcing requirements set out in the MFSA’s Investment Services Rules for Investment Services Providers (which are based on the MiFID outsourcing requirements). All these measures are enacted to circumvent the creation of a “brass plate” office by ensuring sustance in Malta.
The licensing process for custodians may be summarised as follows-
(i) Phase One – Preliminary: preliminary meeting and discussions with MFSA regarding the proposal (which clients wishing to set up business in Malta are strongly encouraged to do); submission of draft application form and supporting documentation; the MFSA will consider the nature of the proposed activity and the type of investors to whom and the markets to which the investment services are to be provided and will decide which “Standard Licence Conditions” (SLCs) should apply.
(ii) Phase Two – Pre-Licensing: once the review of the draft application and supporting documents has been completed and the draft licence conditions have been agreed, the MFSA will issue its ‘in principle’ approval for the issue of a licence. The licence will be issued once the outstanding matters are resolved, including the incorporation of the company (where applicable), submission of signed copies of final application and final supporting documents and any other issues raised during the application process.
(iii)Phase Three – Post-Licensing/Pre-Commencement of Business: the MFSA may require the applicant to meet certain post-licensing requirements prior to formal commencement of business (e.g. adherence to the licence requirements, submission of financial statements).
The application for an investment services licence must be submitted to the MFSA and should include the following documents:
- the completed form “Application for an Investment Services Licence”;
- covering letter (template included in the Application form);
- auditor’s Confirmation (template included in the Application form);
- supporting Board Resolution;
- a completed financial resources statement form;
- projected profit and loss account and balance sheet for the three years after the licence is issued;
- where appropriate, copies of the last three years audited accounts of the applicant and other relevant related companies;
- Memorandum and Articles of Association of applicant;
- specimen copies of the insurance policies and draft schedule/cover note (where applicable), and ‘Insurance Checklist’;
- completed Personal Questionnaire forms for each shareholder, director, and senior officer of the applicant (the PQs should include a certified copy of the person’s passport and a conduct certificate);
- Memorandum and Articles of Association of corporate shareholders of the applicant;
- chart which illustrates the internal operational structure of the applicant’s business (this should show names, reporting lines and roles);
- where the applicant Company forms part of a Group, a diagram showing the relationships between the applicant and other members of the Group. The “family tree” submitted should give details up to the ultimate beneficial owner(s), showing percentage sizes of holdings in each entity; unless (a) the entity has one ultimate beneficial owner with a holding of over 50% of the voting rights or (b) no less than fifty ultimate beneficial owners who between them account for over 50% of the voting rights. If (a) or (b) apply, it will only be necessary to give details of the ultimate beneficial owners with holdings of 10% or more;
- Detailed Business Plan (which should include background details about the promoters, the applicants’ target clients, the operational set up as well as the applicant’s plans for the future).
In the case of a branch, the above-mentioned licence documentation will be adapted to the branch scenario as appropriate.
In terms of timing, ISA prescribes a period of six (6) months for MFSA to decide whether or not to grant a licence applied for. In practice, however, it is possible, provided the adequate supporting documentation are submitted to MFSA, for the licensing process to be expedited within 8 to 10 weeks.
Share Capital Requirements
Holders of a Category 4 licence are required at all times to maintain own funds which are equal to or in excess of their Capital Resources Requirement, and this constitutes their Financial Resources Requirement summaried as being the higher of (1) and (2) below:
Initial Capital, which for custodians is €125,000 (comprising (a) equity capital (i.e. paid up share capital plus share premium accounts but excluding cumulative preferential shares) and (b) reserves (i.e. revenue reserves, interim net profits/retained profits for the year, unrealised fair value movements in held for trading financial instruments and other reserves); and
the higher of the following:
a. the sum of the non-trading book business risk components, the trading book business risk components, the commodities instruments – risk component, the large exposures risk component and the foreign exchange risk component; and
b. the Fixed Overhead Requirement.
The Own Funds and Capital Resources Requirements for investment services licence holders and the methodology for calculating same and a Licence Holder’s Financial Resources Requirement are set out in the MFSA’s Investment Services Rules for Investment Services Providers (Appendix 1 thereto) and are based on the EU’s Capital Requirements Directives (Directives 2006/48/EC and 2006/49/EC).
Licence Holders which are a credit institution constituted and licensed under the laws of Malta or a branch (established in Malta) of a credit institution authorised in a EU Member State or EEA State or of an overseas credit institution which is subject to prudential requirements at least equivalent to the requirements applicable to Maltese credit institutions) are exempt from the said Financial Resources Requirement for Category 4 investment firms.
Licensing and supervisory fees
An application fee of €4,000 is payable to the MFSA upon submission of the draft application. Upon obtaining a licence, a licence fee of €10,000 is likewise payable to the MFSA. Annually thereafter, upon submission of the annual audited financial statements, a supervisory fee of €10,000 is payable to MFSA.
Investment Services Licence Holders are subject to the Standard Licence Conditions (“SLCs”) set out in the Investment Services Rules for Investment Services Providers issued by the MFSA and regulate inter alia apart from the aforesaid outsourcing rules, the conduct of business obligations, disclosure requirements, financial resources requirements, accounting and record keeping requirements etc and the extent to which the SLCs are applicable to a Licence Holder depends on the nature of licensable activity which the Licence Holder is authorised to provide.
Custodians of collective investment schemes
Furthermore, the Custodian of a collective investment scheme shall be requested to comply with the following supplementary conditions:
- Monitor and supervise the operation of the fund to ensure that the investment manager complies with the investment restrictions of the fund (this includes the duty to ensure that dealings in units and dealing prices are effected and calculated, and that the income of the scheme is applied, in accordance with the scheme’s constitutional documents and prospectus and MFSA requirements; and ensuring that the scheme only enters into transactions for the sale of assets which it owns and that consideration is remitted to it in accordance with market practice) and the duty of the custodian to report at least annually to investors and the MFSA on such compliance by the manager;
- liability of the Licence Holder for loss suffered by the fund, investment manager or investors as a result of the Licence Holder’s fraud, wilful default or negligence, including the unjustifiable failure to perform in whole or in part its obligations;
- Independence from the investment manager of the fund
Custodians based in foreign jurisdictions as corporate entities can transfer their operations to Malta without the need to wind up their operations, by re-domiciliating the company to Malta, through the procedure set forth in the Continuation of Companies Regulations. Re-domiciliation allows the corporate entity to retain its legal personality and corporate existence (as well as its rights and liabilities under contracts and at law) without having to start afresh.
Taxation of Custodians
Like all companies resident in Malta, custodians would be subject to income tax on company profits at a rate of 35%. However, this is subject to Malta’s full imputation tax system, wherein tax paid by a company in Malta is, on the distribution of a final dividends, imputed to the shareholder as a tax credit against the shareholders’ tax liability. Therefore, a shareholder will, upon a distribution of the dividend, be entitled to a refund in part or in full of any advance tax levied on the distributing company.
The full imputation tax credit thereby renders Maltese companies highly efficient tax vehicles, with a number of applicable refunds to shareholders possible. The default refund applicable to custodians in respect of active trading income, is a refund of 6/7ths.
Furthermore, foreign tax paid can be taken into account for purposes of the refund calculation, subject to the maximum refund not exceeding Malta tax paid. Effectively, it is possible to envisage situations where no Maltese tax leakage would be suffered by the custodian in the manner set forth below:
|Maltese Company||No Foreign Tax||With Foreign Tax|
|Net Foreign Income||2000||2000|
|Grossing up with Foreign Tax||0||105|
|Tax at 35%||700||737|
|Credit- Double Tax Relief||0||105|
|Malta Tax Payable
(tax at 35% less tax credit)
|Shareholder of Maltese Company|
|Refund on distribution
(6/7 of Malta Tax Payable)
|Effective Tax Paid in Malta||100||0|
|Effective Tax leakage in Malta on Net Income||5%||0%|
*632 (6/7ths of 737)
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