Corporate and Mergers & Acquisitions (M&A)

MFSA Corporate Governance Code

24 Aug 2022

5 min read

On the 5th of August 2022, the Malta Financial Services Authority (the “MFSA”) published the Corporate Governance Code (the “Code”) applicable to all persons authorised by the MFSA to provide financial services in or from within Malta (“Authorised Persons”), apart from natural persons and listed entities falling in the scope of the Capital Market Rules issued by the MFSA (the latter have their own Code of Principles of Good Corporate Governance for Listed Entities. The Code is accompanied by the MFSA’s Feedback Statement which outlines the feedback received from relevant stakeholders on the Code, together with the MFSA’s way forward in response to such feedback.

Whilst the Code defines “financial services” as the business of credit institutions, financial institutions, payment institutions, insurance companies, pensions and retirement funds, regulated markets, central securities depositories, investment firms, collective investment schemes and virtual financial assets, the Feedback Statement has clarified that the Code shall also apply to Trustee and Corporate Service Providers (“TCSPs”), since TCSPs fall within the supervisory and regulatory remit of the MFSA.

The Code set out principles to enhance the corporate governance, culture and conduct of Authorised Persons in four areas: the Effective Board; Internal Controls; Stakeholders Engagement; Corporate Culture, Corporate Social Responsibility (“CSR”) and Environmental and Social Governance (“ESG”). The main principles of the Code are set out hereunder:

  • To enhance governance structures, improve relations, and strengthen trust with stakeholders;
  • To ensure the effective operation of Authorised Persons’ boards and management;
  • To assist directors and senior management to fulfil their duties;
  • To ensure that Authorised Persons have adequate and effective internal controls, and procedures to discharge their responsibilities and monitor outcomes;
  • To enhance stakeholder and public confidence in the financial services sector in general;
  • To assist entities to put in place improved governance standards to achieve enhanced resilience and sustainable operations going forward, as well as ensuring ethical behaviour.

The MFSA also emphasised that the Code does not override the applicable laws, regulations or rules which are to prevail in the case of conflict with the Code.

Given the wide range of entities falling within its scope, the Code’s application is based on the principle of proportionality. Therefore, rather than providing a rigid set of rules, the Code is comprised of principles complemented by supporting provisions which Authorised Persons are expected to comply with on a ‘best-effort basis and in a manner that is proportionate to their business model, nature, size, risk appetite, and complexity. 

The Feedback Statement also outlines the changes carried out to the Code following the feedback received from stakeholders on the previous draft version. These can be noted particularly in the provisions relating to Board duties and responsibilities, the role of the Chairman and CEO, evaluation of Board performance by external third parties, reporting of directors’ attendance at Board meetings, and conflicts of interest. Finally, the MFSA Code emphasises that the Boards of Authorized Persons should endeavour to embrace ESG standards and CSR principles in their business strategies which will ultimately lead to an enhanced focus on sustainable finance activities and projects, and long-term value creation for all stakeholders.

CSR is a business model that assists companies to be more socially accountable to themselves, their stakeholders and the public, and it covers the overarching social, environmental, and economic concerns in a company’s policies, practices, and decision-making. CSR aims to make companies conscious of their social responsibility through, inter alia, volunteer work, donations to charitable causes, and fundraising. ESG on the other hand uses environmental, social, and governance factors to facilitate a company’s transition to a sustainable model as well as provide stakeholders and investors with a means of evaluating how far advanced companies are with their ethical and sustainability practices. The ESG regulatory framework provides investors with quantifiable measures on how companies manage their supply chain, respond to climate change, reduce carbon emissions and increase diversity and inclusion within their company, allowing investors to determine whether they are investing in companies that are integrating ESG considerations, and thus minimising their investments’ negative impact or maximising their positive impact on social concerns and the environment. Given the increased interest from various stakeholders, and the changing regulatory landscape in this respect, directors are now more than ever required to know what CSR and ESG entail.

The MFSA believes that the increased supervisory focus and the policy initiatives that the MFSA is implementing such as this Code are conducive to steering Board members and practitioners alike to adopt good judgement in guiding Authorised Persons in the right direction to achieve a strong corporate governance ethic. The Code will invariably serve as a benchmark when the MFSA will be evaluating any changes that may be required in the MFSA rules and existing codes and guidelines.

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