In the previous Bi-Annual Update, the MFSA delineated the changes brought about by the revisions affected to the Capital Requirements Regulation (‘CRR’) and the Capital Requirements Directive (‘CRD’), collectively known as the ‘CRDV Package’. Furthermore, the MFSA issued a Circular on 8 July 2021 to provide credit institutions with an update on the status of the transposition process of the CRDV into national legislation. Parliamentary discussions on the Various Financial Services Laws (Amendment No. 2) Bill, 2021, which brings into force amendments transposing the CRDV, amongst others to the Banking Act (Cap. 371), have been concluded and such amendments shall be published and shall enter into force shortly.

The purpose of this update is therefore to provide a summary of the main amendments which are to be introduced in national law to transpose the CRDV. The changes delineated hereunder shall not be construed to be a substitute for a reading of the relevant legal provisions themselves and should be read in conjunction with the Banking Act and with the relevant regulations and Rules issued thereunder.

Amendments to the Banking Act

Primarily, the Banking Act shall be amended to bring into force certain provisions of the CRDV. The most salient amendments in the Banking Act include the introduction of the new regime of approval or exemption from approval of certain financial holding companies and mixed financial holding companies having as a subsidiary a credit institution. The incorporation of such companies within banking regulation and the remit of supervision is a major change brought about by the CRDV and shall be transposed through articles 11B and 29AA of the Banking Act. Holding companies of credit institutions shall therefore assess whether they fall within scope of such requirement, and whether they shall apply for the MFSA’s approval or exemption from approval. Upon such determination, such holding companies shall without delay apply to the MFSA accordingly.  Those holding companies which are approved are to be held directly responsible for ensuring compliance of the banking group with the applicable provisions on a consolidated basis.

The amendments brought about by the CRDV also impact banks which form part of third-country groups. In terms of article 11C of the Banking Act, which shall come into force to transpose Article 21b of the CRD, credit institutions forming part of third-country groups, within which there exists one or more other credit institution or investment firm licensed in Malta or in another Member State, must have a single intermediate EU parent undertaking established within the EU. This requirement however shall only apply to those third-country groups which have more than €40bn. as total assets within the EU. If by 27 June 2019, a credit institution satisfies the conditions of such requirement and hence falls within its remit, it will be required to establish the intermediate EU parent undertaking by 30 December 2023. The MFSA advises such credit institutions which are licensed in terms of the Banking Act to contact their respective supervisors in order to ensure compliance with such requirement without delay.

From an authorisation perspective, the amendments to the Banking Act require further documentation by prospective credit institutions at licensing stage. The amendments here therefore impact prospective credit institutions since, in transposing the CRDV, the Banking Act shall be amended to require credit institutions applying for a licence in terms of such Act to submit an indication of the parent undertakings and a description of internal governance arrangements.

Where branches of credit institutions which have their head office outside the EU are concerned, the Banking Act amendments shall introduce new annual reporting requirements. Such reporting is both quantitative and qualitative, as it relates to the amount of total assets, own funds and liquid assets of such branch whilst also requiring information on the governance arrangements of the branch and its recovery plan. Branches with head offices in third countries must therefore establish adequate arrangements to ensure accurate submission of the information set out in article 11A(1A) of the Act which shall be published as part of the Act’s amendments transposing the CRDV.

Amendments to Subsidiary Legislation

Worth noting is that, amongst others, the following Regulations, amongst others, shall also be amended in order to transpose certain provisions of the CRDV and parts of Article 62 of the Investment Firms Directive amending the CRD:

Administrative Penalties, Measures and Investigatory Powers Regulations

The Administrative Penalties, Measures and Investigatory Powers Regulations shall be amended to introduce administrative penalties which will be imposed by the MFSA against financial holding companies and mixed financial holding companies which fail to adhere to the new approval regime introduced in the Banking Act and to allow the MFSA to impose penalties on those credit institutions which were previously regulated as investment firms where these fail to seek the licence in terms of the Banking Act. The relevant firms and holding companies falling within scope of such requirements must therefore be aware of the introduction of such penalties in ensuring adherence with the applicable authorisation obligations.

Supervisory Consolidation (Credit Institutions) Regulations

The Supervisory Consolidation Regulations shall be revoked and replaced by these Regulations and the Investment Services Act (Supervisory Consolidation Regulations (Capital Requirements Directive)) in order to cater for the consolidated supervision of credit institutions and investment firms separately. These new regulations will also introduce new criteria for the establishment of the MFSA as the consolidating supervisor of credit institutions in transposing the CRDV and the IFD. Such change, amongst others, may have an impact on which credit institutions are supervised on a consolidated basis by the MFSA.

Banking Act (Supervisory Review) Regulations

Furthermore, amendments which shall be introduced in the Banking Act (Supervisory Review) Regulations include changes to the additional own funds requirement which the MFSA may impose as a result of the SREP assessment. Credit institutions which are found to fail to meet the internal governance requirements or satisfy any other conditions laid down in regulation 9A(1) of these regulations will be subject to the additional own funds requirement, which would be imposed by the MFSA following the SREP. Such credit institutions would be required to meet the additional own funds requirement to address risks with own funds that satisfy certain conditions.  Furthermore, the amendments which shall come into force will require the MFSA to regularly review the level of internal capital of credit institutions as part of the SREP process and to issue guidance on the additional own funds which credit institutions must adhere to.

Amendments to Banking Rules

In order to transpose the CRDV in the applicable national legal framework, the MFSA shall also issue revisions to a number of Banking Rules, some of which are also amended to implement certain EBA Guidelines.

These amendments incorporate changes in Banking Rule BR/12 to transpose the relevant provisions of the CRDV on the supervisory review and evaluation process. Such changes mainly relate to the level of application of certain requirements, including internal governance and ICAAP requirements. By way of example, requirements of internal arrangements, processes and mechanisms shall apply to subsidiary undertakings of credit institutions which are not subject to the CRD on an individual basis. Such undertakings must therefore ensure the appropriate adherence with these requirements accordingly.

Amendments to Banking Rule BR/15 are aimed at transposing CRDV provisions relating to the calculation of the combined buffer requirement. Credit institutions shall therefore satisfy the combined buffer requirement in line with such amendments. Furthermore, credit institutions which are classified as O-SIIs may be required by the MFSA, acting together with the Central Bank of Malta, to maintain an O-SII buffer higher than 3% of the total risk exposure amount.

Banking Rule BR/21 shall be revised in view of the CRDV amendments in relation to remuneration policies and practices of credit institutions. Through such revisions to BR/21, an element of proportionality shall be introduced in the application of principles on variable elements of remuneration. This is reflected in the fact that the requirement of a portion of the variable remuneration component to be deferred over three to five years shall be inapplicable where certain thresholds of assets of the institution are met, or where a staff member’s remuneration does not exceed a specific threshold. This is a notable change (brought about by a direct transposition of the CRDV) to the MFSA’s previous approach to proportionality in the context of variable remuneration, which had been communicated to institutions in the Circular dated 10 November 2015. Further to the CRDV amendments, BR/21 shall also be amended to implement the EBA Guidelines on sound remuneration policies under the CRD (EBA/GL/2021/04).

Banks will also be expected to adhere to the new requirements related to internal governance which will be introduced in the new Banking Rule BR/24. This new Rule incorporates new provisions transposing the CRDV requirements on internal governance of credit institutions. In this respect, banks will now be required to document and make available to the MFSA upon request the data on loans to members of the management body and their related parties. Additionally, the new Rule shall implement the EBA Guidelines on internal governance (EBA/GL/2021/05), hence introducing obligations with respect to the roles of the members of the board of directors, remit of committees of credit institutions and requirements relating to the internal control framework of credit institutions. Annex I to this Rule will also be introduced to implement the EBA Guidelines on Product Oversight and Governance Arrangements for Retail Banking Products (EBA/GL/2015/18). In terms of this Annex, banks will be required to establish, implement and review their product oversight arrangements to ensure that the interests of consumers are taken into account and to avoid potential consumer detriment. Boards of directors and senior management of banks shall be responsible for the establishment of and compliance with such arrangements and their reviews.