Transposing the ‘CRDV’

On 28 December 2021, the Capital Requirements Directive (EU/2019/878) (hereinafter referred to as ‘CRDV’) as well as the changes enacted to it by virtue of Article 62 of the Investment Firms Directive (EU/2019/2034) (hereinafter the ‘IFD’) were transposed into national legislation by means of Act No. LXXI of 2021 and Act. No LXXII of 2021, respectively.

The CRDV forms part of the so-called ‘CRDV Package’ adopted in May 2019 and consisting of i) the Capital Requirements Regulation (‘CRRII’), and ii) the CRDV. Building on the existing prudential regime for credit institutions, the CRDV Package strives for enhanced resilience of the EU Banking sector intended to absorb economic shocks while continuing to facilitate the financing of economic activity and growth.

To that end, amendments have been affected to the Banking Act (Chapter 371 of the Laws of Malta) (hereinafter the ‘Act’) and to several Banking Rules (hereinafter referred to as the ‘Rules’) issued thereunder by the Malta Financial Services Authority (‘MFSA’) as the national competent authority. The said amendments have already been brought into force.

In addition, changes are soon to be enacted to various Subsidiary Legislation (‘S.L.’) under the Act, in particular to S.L. 371.05, 371.11 and 371.16 of the Laws of Malta, while a new S.L. specific to the transposition of the CRDV and relating solely to credit institutions, namely 371.22 of the Laws of Malta, is expected to be introduced shortly. The said amendments will, inter alia, (i) empower the MFSA’s supervisory capacity both in terms of regulatory review of credit institutions and administrative action to be taken when necessary; and (ii) introduce changes to the additional own funds requirements to be met by credit institutions.

The key amendments brought upon the credit institutions’ framework by virtue of transposing the CRDV are as follows:

Amendments to the Act

• (Mixed) Financial Holding Companies

The Act, under Article 11B, stipulates a new approval (or exemption from approval) requirement for Financial Holding Companies and Mixed Financial Holding Companies falling within the definitions set out in the CRRII (collectively referred to as [‘(M)FHCs’].

In particular, (M)FHCs having a credit institution as a subsidiary and fulfilling the conditions stipulated in the CRDV are required to a) seek the approval or the exemption from approval of the competent authority, acting as the consolidating supervisor; b) ensure compliance with the consolidated prudential requirements on an ongoing basis given their direct responsibility; and c) adhere to any supervisory measure/administrative penalty that may be imposed by the competent authority.

• Intermediate EU Parent Undertaking

Article 11C of the Act establishes a new prerequisite for credit institutions licensed in terms of the Act and forming part of a third-country group, which has as part of the same group one or more other credit institution or investment firm, licensed in Malta or in another Member Stat. Such credit institutions are required to have a single intermediate EU parent undertaking established in Malta or in another Member State provided that the total value of assets of the third-country group in the EU exceeds €40bn.

• Investment Firms to be licensed as Credit Institutions

Article 6A of the Act now requires investment firms licensed in terms of the Investment Services Act (Chapter 370 of the Laws of Malta) (hereinafter ‘ISA’) and having a value of average monthly total assets exceeding €30bn to seek a license as a credit institution under the Act.

• Other Amendments

Other amendments to the Act include, inter alia, (i) the establishment of new reporting obligations to be fulfilled on an annual basis by branches of credit institutions operating in Malta, while having their head office in a third country; (ii) the establishment of gender-neutral remuneration policies and practices; and (iii) the MFSA’s empowerment to replace auditors of credit institutions when in breach of duties.

Amendments to MFSA’s Rules

• BR/01 - Application Procedures & Requirements for Authorisation of Licenses for Banking Activities

This Rule has been amended to the extent that it no longer incorporates the list of entities falling out of CRDV’s scope. Instead, such list is now annexed to the Act as a Schedule. Additionally, the Personal Questionnaire, which ought to be submitted by individuals intending to occupy influential positions within credit institutions and once found under the said Rule, has now been deleted. Such Personal Questionnaire may be accessed through MFSA’s dedicated webpage.

• BR/15 – Capital Buffers of Credit Institutions Authorised under the Act

Revisions have been made to reflect the restrictions on the composition of the combined buffer requirement put forward by the CRDV along with insight to the calculation of such requirement. A provision has been introduced relating to the failure of credit institutions to meet the leverage ratio buffer requirement. Furthermore, the section on ‘Global and Other Systematically Important Institutions’ (hereinafter ‘G-SIIs’ and ‘O-SIIs’) has been updated to provide the identification methodology for G-SIIs and incorporate changes to the implementation of an O-SII buffer being higher than 3% of the total risk exposure amount.

• BR/21 – Remuneration Policies and Practices

Changes have been made to this Rule in view of the amendments enacted to the Act concerning the establishment of gender-neutral remuneration policies and practices, which have now been defined under the revised Rule. A list of staff members considered as having a material impact on credit institutions’ risk profile has been laid down, while the principles on variable elements of remuneration and the exceptions thereto have been updated, diverging from MFSA’s previous approach, in an endeavor to ensure proportionality in this regard.

• BR/24 – Internal Governance of Credit Institutions Authorised under the Act

This newly introduced Rule stipulates, inter alia, that credit institutions be required to document and make available to the MFSA all information concerning loans given to members of the management body and their related parties. The said Rule serves as a capstone not only of the amendments brought upon by virtue of the CRDV but also of the European Banking Authority’s (‘EBA’) Guidelines on Internal Governance (EBA/GL/2021/05) issued thereunder.

Deloitte Malta will be closely monitoring developments in the furtherance and transposition of the CRDV.