Corporate Governance Code
In August 2022, the Malta Financial Services Authority (the ‘Authority’) issued a new Corporate Governance Code (the ‘Code’) addressed to all MFSA licensed entities other than those failing within the scope of Capital Gains Rules.
The preambles to the Code refer to the Code as ‘soft law’[1], and state that entities should endeavour to adopt its principles. There is however an expectation that entities will comply on a best efforts basis in a manner commensurate with the nature, size and complexity of the entity concerned.
The Authority has for the time being opted for middle ground. Whilst the Code is not strictly binding on entities, it is understood that an entity will need to take action to try as much as possible to adhere on the basis of proportionality.
It is up to the board of directors to determine governance arrangements. Given the above, it is expected, as a minimum, that the board takes responsibility to assess on the basis of proportionality what is or is not relevant to the governance of the company it manages. It is advisable that a record of any such assessment is kept by a company.
The Authority has set out criteria that are to be considered by an entity in assessing which principles are to apply to it on the basis of proportionality – such include size, nature of services provided, to whom and the complexity of the product offered, geographical presence and its risk profile.
Whilst the Authority has allowed flexibility in allowing an entity to determine its own application of the principles, there is no guidance for the time being to assist entities in their self-assessment. Until such time, entities should be guided by the three tests embodied in the principle of proportionality[2], namely suitability[3], necessity[4] and proportionality[5].
The Authority has indicated that it will further supplement the Code by rules and guidance notes. If cross sectoral harmonisation is to be encouraged, if competition distortions or different standards between entities similar in size, risks pursued and products sold as a result of self assessing in different ways or incorrectly is to be discouraged, or if riskier behaviour by entities adopting the simplest of rules on the basis of misguided self-assessments is to be avoided, the Authority’s further intervention is a must.
Until such time, it remains unclear how the Authority will uphold the principles, whether it will itself be involved or whether it will allow company law to apply, and thus allow their application through shareholder intervention. In the absence of clear enforceable rules, in both cases, the matter is not without difficulty.
It may thus be a while before the Code reaps any particular results. This will all depend on how the Authority will police and correct an entity’s self-assessment, and on how fast it can harmonise the different sectors and bring licensed entities in line.