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How are the following key activities in the fintech space regulated and what specific legal issues are associated with each? (a) Crowdfunding, peer-to-peer lending; (b) Online lending and other forms of alternative finance; (c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb); (d) Forex; (e) Trading; (f) Investment and asset management; (g) Risk management; (h) Roboadvice; and (i) Insurtech.

Answer ... (a) Crowdfunding, peer-to-peer lending

The only regulated form of crowdfunding in Malta thus far is investment-based crowdfunding, which may qualify as the receipt and transmission of orders and/or handling of clients’ money and/or any other investment services. To this extent, depending on the investment service being provided, a Category 1 or Category 2 licence under the Investment Services Act (Cap 370 of the Laws of Malta) is required.

Investment-based crowdfunding platforms may only offer non-complex instruments, namely:

  • shares in companies, excluding convertible shares, shares in collective investment undertakings and shares that embed a derivative; and
  • bonds or other debt instruments, excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved.

There are also caps on investible amounts:

  • An investor cannot invest more than €5,000 over a period of 12 months in any issuer listed on an investment-based crowdfunding platform;
  • An investor cannot invest more than 20% of his or her net annual income through an investment-based crowdfunding platform over a period of 12 months;
  • An offer of securities made on an investment-based crowdfunding platform cannot exceed the value of €1 million over a period of 12 months; and
  • An issuer shall only be allowed to place a project on one crowdfunding platform.

(b) Online lending and other forms of alternative finance

Lending by way of business is a regulated activity under the Financial Institutions Act; thus, a licence from the Malta Financial Services Authority (MFSA) is needed in order to provide this service. This licence is also required by those offering online lending services to Maltese clients, irrespective of whether their business is situated outside Malta, as well as by businesses situated in Malta which offer lending services. Such a licence could then be passported across the European Union/European Economic Area.

Through the principle of reverse solicitation, businesses not established in Malta may offer online lending services to Maltese clients without a licence, provided that the business is in no way targeting Malta as a jurisdiction where it offers its services.

Alternative forms of financing, including venture and risk capital, financial leasing and money brokering, are also licensable activities under the Financial Institutions Act.

(c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb)

The provision of payment services is regulated under the Second Schedule of the Financial Institutions Act, which transposes the EU Payment Services Directive (2007/64/EC). In order to provide this service, a licence is needed from the MFSA setting out specifically which activities may be carried out by the payment institution. Malta is still in the process of fully transposing the Second Payment Services Directive (2015/2366); therefore, it is expected that further changes to the Financial Institutions Act will be needed in order to accommodate innovations, including changes in the activities which a payment institution may carry out.

Payment institutions and e-money institutions gained popularity in Malta due to its flourishing remote gaming industry, which is heavily reliant on such payment gateways. Interest has spiked in these financial institutions following the rather conservative stance taken by local credit institutions with respect to the servicing of companies carrying out activities in relation to virtual financial assets. The Maltese legislature has acknowledged that this may hinder the development of the fintech industry in Malta; thus, it has sought to provide alternative options to credit institutions and allowed virtual financial asset service providers and subject persons to place clients’ money in payment institutions, e-money institutions and money market funds, provided that clients consent to such placing.

(d) Forex

The provision of foreign exchange services is licensable under the local Investment Services Act (Cap 370 of the Laws of Malta), which transposes the EU Markets in Financial Instruments Directive (2014/65/EU) (MiFID II). The type of licence needed will depend on whether the client intends to act as a market maker, in which case a Category 3 licence will be required. If the applicant does not intend to act as a market maker, a Category 2 licence will suffice.

(e) Trading

With the introduction of ‘tokenisation’, blockchain technology is also promising a revolution in how finance is raised through initial public offerings and trading on secondary markets. Security token offerings are already gaining popularity in Malta and will be one of the areas to be targeted by the MFSA’s fintech strategy. Tokens which bear the qualities of financial instruments as defined in MiFID II will be regulated under the present regimes applicable to various financial instruments. These tokens are often informally referred to as ‘security tokens’. By way of example, where a token represents a share or a debt instrument, it will qualify as a transferable security under MiFID and will thus need a prospectus, unless it qualifies under one of the applicable exemptions in the EU Prospectus Regulation (2017/1129).

(f) Investment and asset management

Malta was one of the first countries to provide a regulatory regime for hedge funds investing in cryptocurrencies. Since early 2018, the Malta Professional Investor Fund Regime allows for cryptocurrencies to be added to a fund’s investments, subject to a number of supplementary conditions to which the fund must adhere, such as having a board which is knowledgeable of cryptocurrencies.

Malta is also attracting interest from companies using technology for wealth management purposes, companies in the business of algo-trading and companies providing investment-based crowdfunding. Although such companies may employ innovative technologies within their business models, this will not exempt them from the need to apply for a licence if they are carrying out a regulated activity. By way of example, algo-trading and investment-based crowdfunding will often qualify as licensable activities under the local Investment Services Act.

(g) Risk management

Financial services entities that carry out a licensable business will generally need to carry out risk management and risk oversight practices to ensure that all decisions are taken in an informed and transparent manner. Risk managers are generally appointed or outsourced by licensed entities.

(h) Roboadvice

Malta has not expressly legislated on the provision of robo-advisory services. Nonetheless, like other interested jurisdictions and stakeholders, it has fostered the ideal conditions for firms seeking to offer robo-advisory services. Until there is greater clarity on the most pertinent issues which should be addressed by the regulator and how these should be tackled from a regulatory perspective, the MFSA’s fintech regulatory sandbox could potentially provide a golden opportunity for firms seeking to operate in a regulated and safe manner.

It is highly probable that the services offered by some robo-advisory firms will fall within the purview of MiFID, the EU General Data Protection Regulation (2016/679) and the Payment Services Directive; nevertheless, regulatory lacunae will emerge with respect to those robo-advisers which use AI.

(i) Insurtech

While no regulations expressly contemplate the use of innovative technologies within the insurance industry, Malta is currently assessing whether regtech solutions can be implemented throughout the insurance industry following the issue of a number of papers by interested stakeholders, such as the International Association of Insurance Supervisors.

Smart contracts are often taken into consideration within discussions involving insurtech, due to the ease of implementing them in straightforward ‘if this, then that’ insurance contracts. Smart contracts are regulated under The Innovative Technologies and Arrangements Act (Cap 592). Insurance firms seeking to implement smart contracts within their systems will need to obtain certification that attests to the stability of the smart contract in question.

Malta is an interesting jurisdiction for insurance, as it is the only jurisdiction to offer insurance and insurance brokerage through protected cell companies or incorporated cell companies. These offer businesses a versatile business model and a relatively rapid route to market.

For more information about this answer please contact: Priscilla Mifsud Parker from Chetcuti Cauchi Advocates