As a response to various regulatory developments in recent years, and in order to protect licence holders, the market and ultimately, stakeholders and customers, the Malta Financial Services Authority (‘MFSA’) has issued the Shareholding Policy for Credit Institutions and Insurance Companies (the ‘Policy’) on 24th June 2020. The new Policy repeals a previous policy dated 13th February 2012 and provides an overview of the MFSA’s assessment process of shareholding structures of credit institutions and insurance companies, and also sheds light on the Authority’s risk appetite, in relation to the assessment of shareholding structures of these institutions.
From the Policy it is clear that the MFSA has no risk appetite for limited shareholding structures that may adversely impact the overall governance, financial soundness, and resilience of a licence holder.
The Importance of Diversification in Shareholding Structures
The MFSA considers a relevant institution which lacks diversification in its overall shareholding structure as posing risks to the good governance, soundness, and resilience of that institution. The key-risks identified by the MFSA with respect to such structures are two-fold: (1) there is an increased risk of dominance by a single beneficial owner or shareholder; and (2) there is increased dependence on a small number of shareholders for any capital injection requirements, which may make the funding of the institution by its shareholders more difficult. Given these risks, the MFSA expects credit institutions and insurance companies to have a reasonably diversified and balanced shareholding structure.
Qualifying Shareholding Structures of Credit Institutions and Insurance Companies
A qualifying shareholding is defined in EU Regulation 575/2013 and in Article 2(1) the Insurance Business Act as a direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking.
When assessing the proposed qualifying shareholders for a credit institution, the MFSA will base its assessment on the following frameworks:
- The Joint Guidelines on prudential assessment of acquisitions and increases of qualifying holdings in the financial sector: these guidelines identify the assessment criteria applicable to a proposed qualifying shareholding. These include an assessment of the proposed qualifying shareholders’ reputation, financial soundness as well as an assessment of the money laundering risks posed by such person.
- The Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders: these guidelines identify the fitness and properness criteria which are to be met by a qualifying shareholder. These include an assessment of time commitment, calculation of number of directorships, the member’s knowledge, skill and experience, reputation, and independence.
The MFSA has established the following assessment criteria in order to determine the suitability of qualifying shareholders of Credit Institutions and Insurance companies:
- The reputation of the proposed qualifying shareholder
- The reputation, knowledge, skills, and experience of directors in charge of credit institutions
- The financial soundness of the proposed qualifying shareholder
- Whether the credit institution will be able to continue complying with prudential requirements applicable to credit institutions, including adequate internal controls, risk management, as well as AML/CFT and compliance requirements
- A detailed explanation by the proposed qualifying shareholder to the MFSA regarding the reasons and foreseeable intentions for acquiring that qualifying shareholding
Furthermore, with respect to credit institutions, the qualifying shareholders will be assessed on their past performance and knowledge of credit institutions, particularly, their ability of understanding the licensable activities conducted by credit institutions.
The MFSA emphasizes that qualifying shareholders, irrespective of whether these are of credit institutions or insurance undertakings, may be subject to additional assessment criteria not laid out in the Policy paper. The MFSA may impose additional criteria as it deems fit.