Malta Financial Services Authority (MFSA) Launches Corporate Governance Code

Scope

Emphasis on ensuring that Boards of Authorised Entities adopt a governance system that delivers satisfactory and high quality outcomes.

• Applicable cross-sector to all unlisted entities authorised by the MFSA.
• The Code does not apply to Listed Entities falling within the scope of the Capital Market Rules, and neither shall it apply to Authorised Entities which are also Listed Entities falling within the scope of the Capital Markets Rules.
• This Code shall also not apply to Authorised Persons who are natural persons.

Objectives

• To set out best practice in corporate governance for entities falling within the MFSA’s regulatory remit;
• To enhance governance structures, improve relations, and strengthen trust with stakeholders;
• To ensure effective operation of Authorised Entities’ Boards and management by assisting Directors and Senior Management to fulfil their duties, including in advancing the growth and development of the entities they are entrusted to direct and manage;
• To ensure that Authorised Entities have adequate and effective internal controls, and procedures to discharge their responsibilities and monitor outcomes; and
• To enhance stakeholder and public confidence in the financial services sector in general by assisting entities to put in place improved governance standards to achieve enhanced resilience and sustainable operations going forward, as well as ensuring ethical behaviour.

Code to be proportionate to size, scale and nature of operations

Authorised Entities should, inter alia, consider the following criteria:

1. the size of the institution in terms of the balance sheet total, client assets held or managed, and/or the volume of transactions processed by the institution or its subsidiaries within the scope of prudential consolidation;
2. the legal form of the institution;
3. the type of authorised activities and services performed by the institution;
4. the geographical presence of the institution and the size of the operations in each jurisdiction;
5. the underlying business model and strategy, the nature and complexity of the business activities, and the institution’s organisational structure;
6. the risk strategy, risk appetite and actual risk profile of the institution, also taking into account the result of the annual capital adequacy assessment;
7. the type of clients; and
8. the nature and complexity of the products, contracts or instruments offered by the institution.

High Level Principles of the Code of Corporate Governance

Authorised Entities are inter alia also expected to:

1. conduct their business with integrity;
2. conduct their business with due skill, care, and diligence;
3. manage conflicts of interests;
4. organise and control their affairs effectively, inter alia establishing an adequate risk management framework;
5. maintain adequate financial resources; and
6. disclose to the MFSA any information which the Authority would reasonably expect to be made aware of.

Core Elements of good governance

Effective Board

1. Authorised Entities should be led and controlled by an effective Board that is collectively responsible for the entity's long-term sustainable success.
2. The Board of Directors are entrusted with the ultimate and overall responsibility for an entity’s corporate governance arrangements.
3. The Board therefore has the first level responsibility for executing the following essential pillars of corporate governance:

a. accountability;

b. oversight and monitoring;

c. risk management;

d. transparency;

e. legal and regulatory compliance;

f. strategy formulation; and

g. policy development

Internal Controls

The Board should ensure that appropriate internal control mechanisms are in place in order to ensure that if an entity is exposed to risks that these are identified, understood, managed and, where appropriate, disclosed.

The Board should also be responsible to oversee all business lines and internal affairs.

Stakeholder Engagement

The Board should serve the legitimate interests of the entity and account to shareholders fully and use the general meetings to communicate with shareholders.

Corporate Culture

The Board is responsible for establishing a corporate culture aligned with the entity’s strategy, which enhances trust, integrity and ethics and preserves the enterprise's long-term value.

The Board should also cultivate a robust compliance culture.

ESG & CSR

The Board should endeavour to embrace Environmental, Social and Governance (“ESG”) standards and Corporate Social Responsibility (“CSR”) principles in the entity’s strategy, leading to an enhanced focus on sustainable finance activities and projects, and long-term value creation for all stakeholders.

ESG-specific criteria should be incorporated into strategies, business models and overall governance practices with the aim of supporting economic efficiency, sustainable growth and financial stability.