MFSA Publishes New Corporate Governance Code

On 5 August 2022, the MFSA published its New Corporate Governance Code (the “Code”) along with a Feedback Statement. The Code was the culmination of a two-year period in which the MFSA engaged in a dialogue with the industry on corporate governance and issued a draft corporate governance code for stakeholder views, comments and suggestions. This brief article will set out the rationale behind the Code, its applicability and its structure.

Rationale of the Code

According to the MFSA, good corporate governance has several important outcomes. First, it engenders mutual trust between stakeholders including customers, employees and the general public. Second, good corporate governance leads to enhanced stakeholder value, ensures the financial soundness of regulated entities and protects investors as well as the integrity of the market. Third, good corporate governance should improve the compliance culture and performance of regulated entities. Owing to these crucial outcomes and as highlighted in the MFSA’s Strategic Update 2021 and the MFSA’s Supervisory Priorities 2022, the Authority has placed a tremendous amount of emphasis on ensuring that the boards of regulated entities adopt, maintain and enhance good corporate governance. In light of the above, the MFSA published the Code to:

1. set out best practice in corporate governance for entities falling within the MFSA’s regulatory remit;
2. enhance governance structures, improve relations, and strengthen trust with stakeholders;
3. ensure effective operation of boards and management;
4. assist 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;
5. ensure that regulated entities have adequate and effective internal controls and procedures to discharge their responsibilities and monitor outcomes;
6. enhance stakeholder and public confidence in the financial services sector in general; and
7. assist entities to put in place improved governance standards to achieve enhanced resilience and sustainable operations going forward, as well as ensuring ethical behaviour.

Applicability of the Code

The Code applies to all persons (corporate and unincorporate) authorised by the MFSA to provide “financial services” in or from within Malta. The Code cross refers to the MFSA Act which defines “financial services” as:

“the business of credit and financial institutions, the business of insurance and the activities of insurance intermediaries, the provision of investment services and collective investment schemes, pensions and retirement funds, regulated markets, central securities depositories and such other areas of activity or services as may be placed under the supervisory and regulatory competence of the MFSA by the Minister or by any other law”.

Therefore, the Code applies to inter alia, credit and financial institutions, insurance undertakings, insurance intermediaries, investment service providers, collective investment schemes, pensions and retirement funds, trusts and corporate service providers.

The Code does not apply to:

1. authorised persons who are natural persons – for example, the Code does not apply to CSPs who are individuals;
2. listed entities falling within the scope of the Capital Market Rules; and
3. authorised entities which are also listed entities falling within the scope of the Capital Markets Rules.

While the MFSA expects all authorised entities under the remit of the Code to comply with the Code on a “best-efforts basis”, compliance with the Code should be based on the principle of proportionality by taking into the account the nature, size and complexity of the entity. The Code does not replace any other laws, rules and regulations which authorised entities are bound to observe. If a conflict arises between the Code and other laws, rules and regulations, the latter will prevail.

Structure of the Code

The Code is divided into two main parts:

1. Title 1 entitled Scope and High-Level Principles – this part contains three sections setting out: (i) the entities to which the Code applies to; (ii) the main principles underpinning the Code; and (iii) the definitions used in the Code.
2. Title 2 entitled Principles of Good Corporate Governance – this part contains four main sections: (i) the effective board; (ii) internal controls; (iii) stakeholder engagement; and (iv) corporate culture, corporate social responsibility and environmental, social and governance. Each section contains several core principles which are buttressed by supporting provisions. The MFSA considers that this approach ensures efficacy and proportionality in the Code’s application and is consistent with corporate governance policies and approaches promoted by international organisations such as the European Commission and the OECD.

The Code raised a number of questions which are tackled in the MFSA’s Feedback Statement.

The principles found in the Code seek to bolster enhance the legal, institutional and regulatory framework for good corporate governance in Malta’s financial services sector and therefore complements the provisions already in force in the legal and regulatory framework. The MFSA expects entities (under the remit of the Code) to adopt these principles on a best effort basis to foster trust, transparency, and accountability required for long-term investment, financial stability and business integrity.