Deposit accounts, payment accounts, electronic money and certain categories of lending are amongst the in-scope Retail Products 

On the 19 February 2024, the MFSA issued a consultation on a proposed “Conduct of Business Rulebook for Credit Institutions” (the “Conduct Rulebook”) consolidating the prevailing requirements for good conduct of business by credit institutions manufacturing and/or distributing retail products in Malta and introducing certain other requirements, where no conduct of business requirements exist to-date, mainly in the context of marketing communications.

The MFSA also informed the industry that the intention is for the MFSA to assume the supervisory remit for the following directives: (a) the Mortgage Credit Directive (the “MCD”)[1], in its entirety and (b) the Consumer Credit Directive (the “CCD”)[2], only in so far as its requirements apply to entities authorised under the Banking Act, Cap. 371 (the “Banking Act”) or the Financial Institutions Act, Cap 376 (the “Financial Institutions Act”).

It is pertinent to note that the three sets of regulations transposing locally the MCD, the CCD and the Payment Accounts Directive[3][4] have been consolidated in the Conduct Rulebook.  Additionally, the sources of the rules in the proposed Conduct Rulebook are attributable to relevant provisions of various Guidelines and Opinions issued by the European Banking Authority (the ‘EBA’).[5]

The proposed 284-page Conduct Rulebook includes definitions of various relevant terms such as “Client”, “Retail Product” and “Deposit Account”.  The Conduct Rulebook is addressed to banks and the definition of “Regulated Person” is also limited to entities licensed under the Banking Act. However, it is observed that the definition of “Retail Products” to which the Conduct Rulebook applies is a broad one and apart from deposit accounts and certain types of lending, includes payment accounts, payment services and electronic money (and which may be offered by entities licensed under the Financial Institutions Act).

The five Chapters of the Conduct Rulebook address the following matters:

Disclosures

The first Chapter of the Conduct Rulebook addresses disclosures applicable across board independently of the product being offered (including disclosures on websites, through electronic communications or at branches), as well as product specific disclosures. The latter include disclosures with which the industry is already familiar under the Consumer Credit Regulations[6], the Residential Immovable Property Regulations[7] and the Payment Account Regulations[8] (the “Regulations”) as well as new disclosures for instance in relation to the offering of Deposit Accounts.

Marketing Rules

Similarly, the Chapter is split into two: those rules which apply to the advertising of all Retail Products and cover areas such as the issuance and internal approval process for the advertisement within the entity, warning statements, advertisements implying cost reduction and guidance for any advertisements on social media and those rules which apply to the advertising of specific products falling within the Regulations as well as the advertising of Deposit Accounts.

Product Oversight Requirements

This part of the Conduct Rulebook deals with Product Oversight Requirements and incorporates the EBA Guidelines on Product Oversight and Governance Arrangements for Retail Products[9]. The rules distinguish between the obligations of manufacturers and distributors of products and deal with a wide array of matters such governance and oversight aspects, product testing and monitoring, remedial action when a fault is identified, staff training and product distribution including distribution channels and distribution agreements.  A notable obligation is the impact assessment which the manufacturer is obliged to carry out for every retail product and service with respect to: (a) the impact of fees and charges of the retail product or service; and (b) on any good outcomes envisaged from the sale of that retail product or service with respect to the interests, objectives and characteristics of clients belonging to the identified target market during the product lifecycle. This impact assessment shall be carried out both when a retail product or service is being designed to be brought into the market and when significant changes are made to an existing retail product or service. The impact assessment is to be provided to the MFSA together with a notification of the intended launch and commencement of the application of the fees and charges in relation to the product or service. Manufacturers are also subject to an obligation to identify the category of clients for whose needs, characteristics, nature and objectives each specific retail product is compatible in order to avoid consumer detriment.

Conflicts of Interest

The fourth Chapter deals with situations which may impact the Regulated Entity’s ability to perform objectively and fairly with its clients. Consequently, Regulated Persons are required to have in place adequate measures in identifying, managing and, as a means of last resort, reporting instances of conflicts of interest. The elements of remuneration and remuneration policy rules are also covered in this Chapter in so far as it may give rise to conflicts between the Regulated Person’s commercial interest and its duties to act in the best interest of its clients. It also includes an annex with examples of detrimental cross-selling practices and an annex with examples of situations of conflicts of interest which are detrimental to clients.

Bank-Client Relationships

The final chapter of the Rulebook considers a wide range of matters, some of which are of general application to Retail Products whilst others apply specifically to lending under the Residential Immovable Property Regulations, Consumer Credit Regulations and Payment Accounts. These matters range from Record Keeping Requirements, to Visits, Calls and Other Communications (including also Debt Collection Visits and/or Communications), Knowledge and Competence of Staff, Creditworthiness Assessments, Credit Risk Management and Internal Control Frameworks, Pre-contractual Information, Obligations on Property Valuation, Variation of Terms and Conditions, Measures related to Arrears, Forbearance and Foreclosure pursuant to Credit Agreements relating to Residential Immovable Property including Procedures and Non Performing Exposure Strategy, Tying and Bundling Practices and Complaints Handling Mechanisms. Various annexes are also included with this Chapter including Lending to Clients in the form of Micro-Enterprises, Metrics for Credit Granting and Monitoring and Possible Forbearance Measures.

The purpose of the consultation is for the MFSA to obtain the industry’s views on the draft chapters of the Conduct Rulebook by the 16 April 2024.

Author: Catherine Formosa

Footnotes

[1] Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 Text with EEA relevance

[2] Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC

[3] S.L. 378.10, S.L. 378.12 and S.L. 371.19

[4] It is made clear that in the context of payment services obligations emanating from Central Bank directive No 1 on the provision of payment services continue to apply in their entirety and will continue to be administered and monitored by the Central Bank of Malta.

[5] Examples of such instances include conduct-related elements sourced from EBA’s Guidelines on product oversight and governance arrangements for retail banking products; Guidelines on internal governance under the Capital Requirements Directive, Guidelines on loan origination and monitoring and Guidelines on management of non-performing and forborne exposures as well as the EBA Opinion on good practices for mortgage creditworthiness assessments and arrears and foreclosure, including expected mortgage payment difficulties and the EBA Opinion on disclosure to consumers of banking services through digital means.

[6] S.L. 378.12

[7] S.L. 378.10

[8] S.L. 371.19

[9] EBA/GL/2015/18