The Application of Administrative Penalties for Breaches of Regulation – MFSA’s Guidance Note

On 9 May 2022, the Malta Financial Services Authority (the “MFSA”) published a Guidance Note on the Methodology to Set Administrative Penalties Imposed on Entities and Individuals (“Guidance Note”).

This Guidance Note sets out the principles and processes for calculating the amount or the quantum of the administrative penalty that may be imposed on MFSA licensed operators[1] or on unlicensed operators. In setting the amount of the administrative fine the MFSA seeks to abide by the principles of effectiveness, proportionality, discipline and deterrence (both specific and general). While specific deterrence refers to the dissuasive effect of the fine on the sanctioned operator, general deterrence refers to the dissuasive impact of the fine on unsanctioned operators.

To give effect to the aforementioned principles in determining the quantum of the administrative fine, the MFSA will take into account: (i) the degree of impact and seriousness of the potential breach while considering aggravating and mitigating factors to classify the impact and seriousness of the breach as very low, low, medium, high and very high; and (ii) the size and financial strength of the entity or individuals including approved persons (such as directors, compliance officers, and money laundering reporting officers) and shareholders. The Guidance Note lays out the methods for calculating the appropriate level of administrative fines for: (i) legal persons; (ii) individuals where the individual holds both the position of a shareholder as well as any other position which requires the MFSA’s prior approval; (iii) individuals where the individual holds a position in the relevant entity which requires the MFSA’s prior approval; and (iv) individuals where the individual holds the position of a shareholder in the relevant entity.

In the case of legal entities the amount of the administrative penalty is calculated following a three-step process. First, the base amount of the proposed administrative penalty is determined by taking into account the maximum fine that may be imposed and the average revenue of the entity in the last three years. In this step, license holders are grouped into six categories on the basis of the average income generated in the last three years.  Second, the potential breach is categorised into one of five categories of risk – very low, low, medium, high and very high – depending on the impact and seriousness of the potential breach while considering aggravating and mitigating circumstances such as the gravity of the breach, the degree of intent, extent of cooperation with the MFSA, the extent of losses, and previous breaches. Third, the quantum of the fine is determined by using the matrix provided in the Guidance Note by taking into account the results obtained in step one (license holder grouping) and in step two (risk categorisation of the potential breach).

In the case of individuals (who hold both the position of a shareholder as well as any other position which requires the MFSA’s prior approval) a similar three-step process is employed. First, the base amount of the administrative penalty is determined by taking into account the maximum fine that may be imposed and the risk categorisation of the potential breach. In this step, the percentage on the maximum administrative penalty is obtained to calculate the base amount of the fine. Second, the applicable percentage on the amount derived in step one is calculated by taking into account the income earned by the individual in the last three financial years. In this step, the individual’s income is obtained and depending on the range of income a corresponding percentage is obtained. That percentage is then applied to the base amount derived in step one and the result obtained is deducted from the base amount. Third, an additional percentage is applied to the result obtained in step two on the basis of the shareholding value. In this final step, the individual’s shareholding value is determined on the basis of the information contained in the last financial statements of the entity and depending on the range of shareholding value a corresponding percentage is obtained. That percentage is then applied to the resulted obtained in step two and that figure is then added to the result obtained in step two.

In the case of individuals who only hold a position in the relevant entity which requires the MFSA’s prior approval, a two-step process is employed to determine the amount of the administrative fine. This two-step process is exactly the same as the first two stages used to calculate the fine for individuals who are both shareholders and approved persons.

In the case of individuals who are only shareholders in the relevant entity, a two-step process is also used to determine the quantum of the administrative fine. This two-step process employs the first stage used to calculate the fine for individuals who are both shareholders and approved persons. In the second step, shareholding value is determined on the basis of the information contained in the last financial statements of the entity and depending on the range of shareholding value a corresponding percentage is obtained. That percentage is then applied to the base amount derived in step one and the result obtained is deducted from the base amount, unless the result obtained is equal to the maximum penalty the MFSA may impose.

It should be noted that the quantum of the administrative penalty can be revised following representations made by the entity or individual or can be increased if the MFSA deems that the fine does not have a deterrent effect. Finally, the MFSA cautions that the information contained the Guidance Note is not binding, but merely serves as guidance to the MFSA to ensure that the quantum of administrative fine is proportionate, effective and has a deterrent effect.

For any further information or assistance on regulatory matters, kindly contact ARQ Advisory Director Dr Denia Ellul 

[1] All natural and legal persons authorised by the MFSA to provide financial services or otherwise falling under the regulator and supervisory functions of the MFSA.