The Malta Financial Services Authority (MFSA) has recently proposed a number of significant amendments to the Trusts and Trustees Act as well as changes to the way the trust and fiduciary services sector is regulated, and these possible changes are examined in this feature.
The Trusts and Trustees Act 2004 (Cap 331), which became effective in January 1, 2005, amended the Offshore Trusts Act 1988 and allows Maltese residents and firms to use local trusts, while also furthering Malta's international obligations on non-discrimination, transparency and the prevention of money laundering.
The Act eliminated the nominee company regime, and introduced a licensing regime for professional trustees. The legislation was intended by the Government to create a more streamlined and simplified trust regime, making Malta much more attractive to both international and domestic clients by offering greater flexibility and certainty.
As observed in the MFSA’s consultation paper released for comment on December 14, 2012, the consolidation of the law relating to trusts did indeed create certainty and this is reflected in the significant increase in the number of authorised trustees operating in Malta. However, the regulator is of the view that a number of new amendments are needed to bring certain provisions of the legislation into line with other laws in Malta, align Malta’s trust laws with changes taking places internationally, and to clarify aspects of the legislation. Some of the more notable proposals are as follows:
Authorisation of Trustees
Under one of the most significant changes proposed in the consultation paper, only a company will be permitted to obtain authorisation from the MFSA to act as a trustee. The Authority is considering such a restriction primarily in the light of the risks involved in the trustee business and the onerous obligations imposed on trustees in terms of the Act. Furthermore, in the authorisation of trustees, the Authority applies the “four eyes” requirement which provides that at least two individuals must effectively direct the business of the undertaking. This is a requirement which can only realistically be fulfilled where the trustee is backed by a corporate set-up. This restriction is also being imposed in the case of mandatories. However, the MFSA is not proposing to introduce such a restriction in the case of persons acting as administrators, directors or other functionaries of a foundation.
In another key change, the Authority is proposing to extend the perpetuity period of trusts to 125 years from its current duration of 100 years. It is thought that this measure is intended to bring Malta into line with trust law changes taking place in other jurisdictions.
Settlor Reserved Powers
The Authority is proposing the introduction of a new article on settlor reserved powers with the aim of regulating specific circumstances wherein the settlor may reserve powers under the terms of the trust. The following are the proposed powers that may be reserved or granted by the settlor under the terms of the trust: any beneficial interest in the trust property; any powers to appoint, add or remove any trustees, protectors or beneficiaries; any powers to appoint an investment adviser or investment manager.
In terms of the duties of trustees, the proposed amendments to the Act include a general express duty of trustees to avoid conflicts of interest, and an obligation on authorised trustees (an obligation which currently applies to private trustees only) to draw up an inventory of the trust assets.
Limitation of Actions
It is also being proposed that the limitation of 30 years within which action can be taken against trustees for fraud, or for the recovery of trust property, be removed.
Minimum Share Capital
The Authority is also proposing to introduce a minimum share capital requirement for trustees. The MFSA is of the view that trustees should have a minimum share capital requirement amounting to EUR25,000 apart from that referred to in the Companies Act for the registration of a company. The consultation paper also notes that all reputable trusts jurisdictions have a minimum financial resources requirement applicable to trustees aimed at protecting beneficiaries. Very often this financial resources requirement is tailored in accordance with the size and structure of the trustee and the range of activities provided by it.
Duty of Auditors
The MFSA is proposing to introduce a new Section within the Trusts and Trustees Act dealing with the duty of auditors to notify the Authority of specific circumstances which they become aware of in their capacity as auditors of corporate trustees. The Authority intends to supplement this new section with further guidance included in the Code of Conduct for Trustees.
In the area of compliance, the Authority is proposing that as part of its licensing process, potential applicants should identify an individual who will act as Compliance Officer and be responsible for ensuring the Trustee’s compliance with the requirements imposed by the Act. However, the consultation paper notes that the role of Compliance Officer “is onerous due to the extent of responsibility and the possibility of censure by the Authority where problems arise.”
The Identification of Courts
The Trusts and Trustees Act defines the term “Court” as meaning “the Civil Court in its Voluntary Jurisdiction unless otherwise indicated or unless the context refers to any court seized of a matter in which case it is the court where the matter arises.” Whilst the decision concerning the choice of the Civil Court in its Voluntary Jurisdiction was intentional, the Authority feels that at times there can be confusion as to whether an individual should proceed before the Civil Court in its contentious jurisdiction or in its voluntary jurisdiction. The Authority is therefore consulting with the industry as to whether the current Article 38 should be revised. Any proposed amendments would prescribe the procedure regulating contentious and non-contentious matters which may arise during the operation of a trust. Whilst the Civil Court in its Voluntary Jurisdiction would remain the competent court in matters relating to trusts and trustees, the Authority is considering whether to introduce the principle that where, upon commencement of the proceedings these become of a contentious nature, the Civil Court in its Voluntary Jurisdiction shall, at its own discretion and after having heard representations from the parties: either opt to remain seized with the matter and thereafter assume the role of the First Hall Civil Court and decide the matter; or acknowledge that the proceedings have become of a contentious nature and transfer the case before the First Hall Civil Court.
The MFSA is considering whether to issue regulations to provide for the setting up of collective investment schemes in the form of umbrella unit trusts with one or more sub-trusts. It is also mulling the use of a “sub-trust” concept in relation to the establishment of retirement schemes in the form of a trust.
In essence, the MFSA is seeking to introduce two new reporting requirements for persons authorised to provide trust and other fiduciary services in Malta: the completion and submission of an Annual Compliance Return; and the submission of the audited financial statements to the Supervisory Unit for review. The consultation, which was launched on March 12, 2013, also asks respondents to assess whether these new rules, if adopted, should be included in the Code of Conduct for Trustees and should be binding on trustees and other persons.
As the competent authority for the supervision of the activities of persons acting as trustees or other fiduciaries in terms of the Trusts and Trustees Act the MFSA has a number of tools at its disposal to ensure effective regulation of the sector. At present, the main supervisory methods used by the regulator are on-site compliance visits and regular meetings with management. However, the Authority is of the view that the provision of up-to-date and regular information will make this risk-based approach to regulating the sector more effective and efficient.
“The Authority feels that the current supervisory tools should be complemented with additional information flow to enhance off-site supervision,” it states. “The Authority [therefore] intends to adopt a more clearly defined and enhanced risk-based approach to on-site compliance visits.”
In the consultation paper the Authority is proposing that as from 2014 onwards, authorised persons should be required to complete and submit an Annual Compliance Return, which will include information relevant to the reporting period and which will be defined as the twelve months prior to the reporting date. The Authority is proposing that the reporting date should be the anniversary date of the authorisation of the authorised person. Consequently the reporting period will be the twelve months ending on the reporting date.
It is proposed that the information collated should be submitted in electronic format in the first instance to a dedicated e-mail address which the Authority will designate. It is being suggested that the deadline for the submission of this information should be one month after the reporting date. Following the electronic submission, a paper copy signed by two directors should be mailed to the Authority together with supporting documentation by not later than two weeks after the electronic submission.
The Authority is also soliciting views on the introduction of an additional requirement, whereby authorised persons acting as trustees and/or other fiduciaries in terms of the Trusts and Trustees Act shall be required to submit a full set of audited financial statements to the MFSA for review. It is being proposed that this new requirement is applied to all authorised persons acting as trustees and/or other fiduciaries in terms of the Trusts and Trustees Act with an accounting period commencing on or after January 1, 2013.
The consultation paper states that: “The Authority believes that it is important to have up to date financial information about authorised persons. Linking the submission of accounts with the Annual Compliance Return could have the effect of obtaining financial information that could be up to as much as 18 months old. Rather than linking the submission of accounts with the Annual Compliance return, the Authority is proposing that the audited financial statements are submitted within a specified time after the financial year end of the authorised person.”
The Authority is therefore asking stakeholders whether they are in favour of the introduction of the obligation to submit the audited financial statements to the regulator four months or six months after the financial year end of the authorised person.
The MFSA is of the view that the matter is important enough to justify proceeding with the collection of information in 2013 before the proposed amendments to the Trusts and Trustees Act are approved by Malta’s parliament.
“The Authority does not believe that it should do nothing until the proposed amendments of the Trusts and Trustees Act, which were issued for consultation on the 14th December 2012, receive Parliamentary Approval,” it states. “It is important to collect the information this year in order to enhance off-site supervision through the review of the information submitted by authorised persons and to strengthen with immediate effect the risk-based approach to on-site supervision.”
Therefore, in terms of Article 52 of the Trusts and Trustees Act it is proposed that the revision of the Code of Conduct for Trustees and other Fiduciaries should include a new rule whereby authorised persons shall be required to submit an Annual Compliance Return for 2013.
Any trustee or other fiduciary who fails to submit the Annual Compliance Return within the prescribed time would be considered in breach of the Trusts and Trustees Act and may be subject to an administrative sanction.
For 2013, the Authority is proposing that the Annual Compliance Return should be submitted on a fixed date for all authorised persons. It is being proposed that the first Annual Compliance Return should have a reporting period commencing on the 1st July 2012 up to 30th June 2013, while the reporting date will be the 30th June 2013. The electronic format of the Annual Compliance Return would be submitted by 31st July 2013 and printed format together with supporting documentation should follow by not later than 15th August 2013.
The Authority has drafted the Annual Compliance Return in Excel format to facilitate the input of information for authorised persons as well as the review to be undertaken by the Authority. It is being proposed that a number of sheets are used to categorise the type of information being requested. With respect to the content of the Annual Compliance Return, the intention of the Authority is to better understand the scale and size of the entity concerned, what plans it has for the future, what services the authorised person is offering, details about the operations of the entity and factors which might influence the operations of the authorised person. The Annual Compliance Return should also be seen by authorised persons as a tool to guide them as to what procedures should be in place to adhere to the requirements of the Trusts and Trustees Act and the Code of Conduct for Trustees and Other Fiduciaries.
Tags: Offshore | individuals | retirement | accounting | business | offshore | regulation | licensing | interest | legislation | services | investment | court | law | compliance | audit | trusts | Malta | Compliance