Malta Virtual Financial Asset Rules for VFA Service Providers

Jonathan Galea

3 months ago
Malta Virtual Financial Asset

Below please find an overview of Chapter 3 of  Malta Virtual Financial Assets Rulebook (the “Rulebook”): Virtual Financial Assets Rules for VFA Service Provider , published by the Malta Financial Services Authority (the“MFSA”) on the 25th of February 2019.

This Chapter applies to VFA Service Providers licensed in terms of the Virtual Financial Assets Act (Chapter 590 of the Laws of Malta, the“VFA Act”) and Applicants seeking Licensing as VFA Service Providers under the Act (the“Applicant”), as applicable.
Malta Virtual Asset Rules
Any person offering one or more of the following services shall be deemed to be a VFA Service Provider:
  • Reception and Transmission of Orders
  • Execution of orders on behalf of other persons
  • Dealing on own account (trading against proprietary capital)
  • Portfolio Management
  • Custodian or Nominee Services
  • Investment Advice
  • Placing of virtual financial assets
  • The operation of a VFA Exchange
A person seeking to license under the Act to provide any service falling within the Second Schedule to the Act in relation to
Virtual Financial Assets (“VFAs”) shall appoint a VFA Agent duly registered with the MFSA and listed in the MFSA Financial
Services Register. VFA Service Providers benefitting from the transitory period provided under article 62 of the Act must comply with the following:
  • Engage a registered VFA Agent or engage a company intending on applying for registration as a VFA Agent in accordance with Article 14 of the Act, provided that such person has at least three proposed Designated Persons who have successfully completed a course approved by the Authority;
  • Provide evidence to the Authority that it has successfully passed a fitness and properness assessment, conducted by the service provider specified in point (i); and
  • Provide evidence to the Authority that it has appropriate systems in place to satisfy the AML/CFT requirements applicable to VFA Service

Providers

Overview of VFA Service Provider requirements

A person intent on being licensed to provide a VFA Service shall be a legal person established in Malta. Such a person must act in an ethical manner taking into consideration the best interests of clients and the integrity of Malta’s financial system. The MFSA shall consider various factors prior to licensing an Applicant, and such include inter alia the Applicant being ‘Fit and Proper’ to
provide VFA Services i.e. satisfy the following criteria:
  • Integrity: The Authority must be reasonably assured that the Applicant is of good repute and intends to act honestly and in a trustworthy manner
  • Competence: The Applicant must provide reasonable assurance that both collectively and individually, they possess an acceptable level of knowledge, professional experience, and expertise. Such may be brought to the fore in terms of qualifications, skill, and capacity to commit time to carry out functions within the Applicant’s proposed structure.
  • Solvency: The initial capital requirements applicable to Class 4 VFA Service Providers is 730,000 Euro. The Applicant shall maintain such amount as a permanent minimum capital and shall demonstrate that it is financially sound and liquid.
An Applicant pays all MFSA Annual Supervisory Fees on the day of submission of the annual audited financial statements and shall be required to pay the minimum annual supervisory fee for the first year of operation when receiving the license.

Application Process for VFA Service Providers

The application process consists of three phases as denoted below:

Preparatory Phase

At this stage the MFSA is notified by the appointed VFA Agent of intent to apply for a VFA Services License. Such statement shall include:
  • the proposed structure identifying persons intent on holding key positions;
  • a list of VFA Services for which licensing is being sought; and
  • a legal opinion that activity doesn’t fall within traditional financial services legislation.
Once the above is received, the Authority shall set up a meeting with the Applicant – such meeting shall trigger a sixty (60) day deadline for the Applicant to submit its application. Such application shall include all supporting documentation and fully paid up application fees.

Pre-Licensing Phase

The Authority reviews documentation and once satisfied, provides an ‘in principle approval’ which shall be valid for 3 months within which applicants may finalize outstanding issues raised, satisfy pre-licensing conditions and submit original copies of final application with supporting documentation.

Post-Licensing/ Pre-Commencement of business phase

Applicant might have additional post-licensing conditions to satisfy, and must commence VFA Services business within 12 months of the date of issue of the License.

Key Functionaries a VFA Service Provider must appoint

The Applicant must have a clear understanding of the functionaries it must appoint in order to be well equipped to attain the VFA Service Provider license. A non-exhaustive list of the functionaries to be appointed when applying to attain a Category 4 VFA Service Provider License is denoted here under:
  • VFA Agent:

This is a crucial role as such must be appointed prior to the Preparatory Phase taking place. The Agent shall act as a point of liaison between the VFA Service Provider and the Authority.
  • Board of Administration

The Applicant applying to attain a VFA Service Provider license must be managed and directed by at least two (2) individuals in satisfaction of the dual control principle. Such individuals must be of good repute, possess sufficient knowledge and experience and have sufficient time to perform their functions. The Board of Administration’s responsibilities
include, but are not limited to, the following:
  • overall responsibility for the Applicant and for the implementation of objectives, strategy and governance;- integrity of accounting and financial reporting and operational controls and compliance; overseeing disclosure mechanisms are in place;
  • overseeing senior management etc.
The Board’s chairman cannot exercise the supervisory function and role of CEO unless authorised by MFSA.
  • Risk Manager

A Risk Manager must be in place at all time in order to approve, review, and mitigate risks for the Applicant. The Risk Manager’s Role includes establishing, implementing and maintaining adequate risk management policies and procedures, which identify risks relating to the Applicant’s activities. The Risk Management Function must operate independently and must have
sufficient authority to inter alia:
  • Access the Board;
  • Implement policies and procedures;
  • Provide senior management with reports and advice;
  • Develop the Applicant’s risk strategy and participate in risk decisions;
  • Communicate with Board independent from Management.
  • Compliance Officer

The Compliance Officer must implement and maintain adequate policies and procedures designed to detect any risks of failure by the Applicant to comply with its obligations under the Act, Regulations or Rulebook or any other applicable legislation. The compliance function shall include inter alia the obligation to:
  • Monitor and assess adequacy and effectiveness of policies and procedures put in place;
  • Implementation of the compliance monitoring plan;
  • Advise and assist the individuals carrying out the VFA Services to comply with the Applicant’s regulatory obligations;
  • Have the necessary authority, resources, expertise and access to all relevant information. The role of the Compliance Officer may only be outsourced to the VFA Agent appointed by the legal entity licensed, or applying to be licensed, as a VFA ServiceProvider.
  • Money Laundering and Reporting Officer (MLRO)

The Applicant shall appoint and have in place at all times a MLRO. Such role
shall be occupied by an individual who:
  • fully understands the extent of responsibilities attached to the role;
  • has a senior role within the company applying for the VFA Service Provider License;
  • is well-versed with the provisions of Part I of the Implementing Procedures and sector-specific Implementing Procedures of the FIAU.
  • Auditor

The Applicant must appoint an Auditor approved by the MFSA as long as such auditor is not in any way an officer or employee of the Applicant. The Applicant shall prepare Audited Annual Financial Returns and Interim Financial Returns which must be signed by at least two administrators, the auditor and any other persons authorized to sign by way of a Board Resolution.

Other ongoing licensing obligations for VFA Service Providers

A VFA Service Provider License holder has several ongoing obligations once the license is attained. Such include, but are not limited to the following:
  • Notifying the MFSA There are several instances where the Applicant, at this stage License Holder, must notify the MFSA in writing for approval of certain actions. Such include:
  • Change of address and/ any changes to contact details;
  • Any proposed acquisitions or disposals of Units which fall within the disclosure provisions of the Act;
  • Any proposed material change to its business at least one (1) month before the change is to take effect;
  • Any evidence of fraud or dishonesty by a member of the Licence Holder’s staff;
  • Any evidence of hacking, fraud or other serious malpractice suffered by the Licence Holder;
  • Any decision to make a material claim on its professional indemnity insurance or on any other insurance policy held in relation to its business; Any actual or intended legal proceedings of a material nature by or against the Licence Holder;
  • Any material changes in the information supplied to the MFSA;
  • Any other material information concerning the Licence Holder, its business or its staff in Malta or abroad;
  • Any breach of the Rules, the Act or regulations issued thereunder, as soon as the Licence Holder becomes aware of the breach; and
  • Any decisions to make an application to a Regulator abroad to undertake any form of activity outside Malta.

Insurance

The Applicant shall make every effort to take out and maintain an insurance policy that covers loss of money or loss or damage to any other asset or property belonging to the company or which is in the case, custody or control of the company. Such professional indemnity insurance shall cover:
  • Legal liability in consequence of any negligent act, error or omission in the conduct of business or any person employed;
  • Legal defence costs which may arise in consequence of any negligent act, error or omission in the conduct of business;
  • Covering the whole territory of the EU;
  • Dishonest, fraudulent, criminal or malicious act, error or omission;
  • Libel slander and defamation;
  • Loss of and damage to documents and records belonging to the Applicant which are in the case, custody or control of the Applicant or for which the Applicant is responsible; and
  • Liability arising from any breach of a provision of the Act, Regulation or Rulebook.

Yearly Compliance Certificate

The Applicant must submit a Compliance certificate drawn up by its Compliance Officer stating that the Applicant complies with the provisions of the Act and the VFA Regulations arising therefrom and the Rules issued thereunder. Such shall be prepared yearly and be made available to the MFSA and the FIAU upon request.

Financial Instrument Test

Unless the Issuer has already carried out a Financial Instrument Test, the Applicant shall, prior to offering a VFA or a VFA service to its clients, undertake a Financial Instrument Test which shall be signed by the Board and Compliance Officer. Provided that in case of doubt, the Applicant shall obtain a legal opinion. It is recommended that the Financial Instruments Test is supplemented with reasoning as to why the final classification has been reached.

Clients’ Assets

If the Applicant holds or controls clients’ assets, it shall hold such assets/ money in specially created and segregated accounts which must be identified separately from any accounts used to hold money/ assets belonging to the Applicant. The Applicant shall obtain a written declaration from the entity with whom the Applicant has deposited clients’ money /assets stating that the Applicant renounces and will not attempt to enforce or execute any charge, right of set-off or other claims against the account.

Supplementary conditions applicable to VFA Exchanges

Chapter 3 of the Rulebook sets out a list of supplementary conditions applicable
to VFA Exchanges, which includes rules governing:
  • Listing Criteria;
  • Custody;
  • Settlement;
  • Order matching;
  • Pre-trade and post-trade transparency;
  • Synchronisation of business clocks;
  • System resilience;
  • Bye laws;
  • Disciplinary actions; Reporting of suspicious transactions;
  • Suspension and removal from trading;
  • Client record keeping;
  • Inability to discharge functions; and Compliance certificate
Obtaining a VFA Service Provider license is a regulatory stamp of approval of the highest standard, due to the extensive monitoring and license application process, thus guaranteeing the adequateness of the operations of the VFA Service Provider and offering peace of mind to users, investors, and operators alike making use of such regulated services.

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