Bank accounts for ‘fintechs’ – New Guidelines

Luckily, at least in so far as client funds are concerned, the law does not limit the placing of such funds to EU credit institutions or authorized banks in third countries. Subject to certain limitations, Regulation 16 of the Virtual Financial Assets Regulations, Chapter 590.01 of the Laws of Malta (the ‘VFA Regulations’) allows entities to place client money in money market funds, electronic money institutions or payment institutions. (Clarity is sought here as to whether ‘Issuers’ may place client funds in money market funds, electronic money institutions or payment institutions. The words ‘subject persons’ in Regulation 16 read in conjunction with the definition of the term ‘subject persons’ in Article 2 of the VFA Regulations (I.E ‘persons who are ‘in possession of a license under the (VFA) Act(…)’), seem to imply that Issuers are excluded from the scope of Regulation 16).

The need of many to open accounts with banks or other institutions has led the Malta Financial Services Authority (‘MFSA’) and the FIAU to issue, on 27 March 2019, guidance for credit institutions, payment instructions and electronic money institutions (hereinafter collectively referred to as ‘Institutions’) opening accounts for ‘fintechs’ (the ‘Guidelines’). For the purpose of the Guidelines, ‘fintechs’ are ‘persons operating within the financial services sector and harnessing technological advancements’ and includes issuers of Virtual Financial Assets (‘VFAs’) and VFA service providers licensed in terms of the VFA Act, Chapter 590 of the Laws of Malta. Therefore, the Guidelines are extremely relevant in the context of the Maltese VFA framework.

The Guidelines give guidance on the following:

1. 1. General guidance for Institutions opening accounts for fintechs
      Supplementary guidance for Institutions opening accounts for DLT exchanges
   2. Supplementary guidance for Institutions opening accounts for Issuers of DLT assets
   3. Supplementary guidance for Institutions opening accounts for VFA service providers
   4. Supplementary guidance for Institutions opening accounts for fintechs accepting DLT assets as means of payment.

While for the time being local banks are apparently reluctant to open accounts for entities that are not yet licensed, the Guidelines seem to suggest that non-possession of an authorization or a license should not, on its own, act as a basis for refusing an applicant an account, or at least, an application for an account. The Guidelines encourage Institutions to obtain declarations from applicants as to whether they are ‘authorized or intend to apply for authorization’. However, in as much as this specific guideline (G2-2.2.2.1.1) implies that applications for accounts prior to obtaining an authorization or a license is acceptable, it should not be taken to be understood as an obligation on the part of any Institution to accept such application.

As a general rule, when applying for an account with an Institution, an applicant should ensure to provide detailed description of its organization setup, business activity and projected volume of business, organizational chart showing key individuals, confirmation as to what substance it will have in Malta, declaration that it has assessed the risks involved in its business and that it has taken appropriate measures to mitigate such risks, and where the applicant intends to operate in a foreign jurisdiction, a declaration that it will comply with the applicable laws of that jurisdiction. As Institutions are required to assess the technology used too, it would be advisable that applicants provide in advance detailed information about the developers of the technology and whether the technology used is (or was) subject to a systems audit.

The complexities of certain technologies used by applicants has led the authorities to propose that in the case that a systems audit has been carried out in respect of a particular technology used by an applicant and such systems audit concludes that the technology can actually deliver what the customer states, then ‘the risk from the technological side’ would be considered to be low’ (see G2-2.2.2.3.3). It is not at all unlikely that some Institutions will interpret this guideline restrictively and ask applicants to submit, in addition to other documentation, a systems’ audit report carried out in accordance with the guidelines issued by the Malta Digital Innovation Authority (‘MDIA’). For some applicants this will not be an issue for they would have already engaged a systems auditor for the purpose of registering a whitepaper or applying for a license with the MFSA.

DLT exchanges – which may not necessarily be VFA exchanges licensed under the VFA Act – are subject to other supplementary requirements. Institutions are being encouraged to request details about the exchanges’ operational set-up, custodial arrangements, bye-laws and information as to whether they are linked to other exchanges.

In opening accounts for Issuers of DLT assets (including, but not limited to, VFAs), Institutions are being asked to consider not only the regulatory status of the Issuer but also the nature and features of the DLT asset being considered in view of the fact that certain features may render a DLT asset riskier from an AML/CFT point of view.

In submitting an application for an account, Issuers should be forthcoming on a number of other points – namely information on the investors they target, the technology used, the reliability of the project financed with the funds collected in the ICO, as well as information concerning the organizational setup of the Issuer (including information on the functionaries appointed by the Issuer, financial projections and refund mechanisms where an Issue fails to reach its targets).

Ultimately the Guidelines are not intended to place any kind of obligation on Institutions to open accounts for FinTechs. Unquestionably, the processes and evaluations upon which Institutions determine whether a potential client falls within their risk appetite will remain entirely subject to the Institutions’ policies and procedures. The Guidelines are only intended to assist Institutions to better understand the risks FinTechs involve and to complement existing due diligence procedures. In no uncertain terms, the Guidelines state that such guidelines ‘do not provide any person with any claim to the opening of an account’.

Assuming that the Guidelines provide more clarity in the minds of Institutions as to the risks fintechs involve and the ways these can be addressed through the provision of detailed information, one would hope that the overall effect of the Guidelines will be that banks and other institutions become more receptive to the idea of onboarding fintechs, thus overcoming one of the main challenges local fintech players currently face.

After taking everything into account, the Court’s final computation of damages (after a correction due to a mathematical error) amounted to €64,869.69. This judgement confirms previous case law clearly indicating that the Maltese Courts take into account every aspect of the case and aim to ensure that the aggrieved party is restored as much as possible to the position they were before the accident occurred and that they would be compensated accordingly for any hardship caused.