The MFSA has on the 12th July 2018 issued a consultation paper on the Virtual Financial Assets rules for VFA agents. The closing date for submission was 31st July 2018 and now the MFSA is expected to issue the official chapter after taking into account the submissions which it has received as well as other consultations with relevant stake holders which it has carried out.
This paper is intended to form part of a rule book which will be entitled the ‘Virtual Financial Assets Rulebook’ and which will be divided into three chapters. This chapter applies to VFA agents appointed in terms of the VFA Act and to applicants seeking registration in terms of the said Act.
The first title of this chapter outlines the high-level principles which should guide VFA agents in the provision of their VFA activity in or from within Malta, while title 2 outlines the registration requirements and the registration process for VFA agents. Title 3 outlines the ongoing obligations which VFA agents must adhere to, while title 4 provides for enforcement and sanctions in the event of misconduct by VFA agents.
This article will continue discussing title 3 of Chapter 1 of the rule book, i.e. the on-going obligations for VFA agents.
On-boarding of clients
Prior to providing services to a client, the VFA agent must ensure that the person is fit and proper, of sufficient good standing and repute, has sufficient financial resources and that its board has sufficient knowledge, experience and expertise in the fields of information technology, DLT and DLT assets at all times.
The VFA agent must immediately upon appointment, submit to the MFSA a written declaration that the above requirements are satisfied. If the VFA agent considers a client or a prospective client as not being fit and proper, then it must immediately inform the MFSA accordingly. The VFA agent must inform the client of the VFA agent’s obligations in this respect and obtain his consent to disclose the conclusions of any properness and fitness assessment. A copy of the assessment is to be held at all times at the registered office of the VFA agent and made available to the MFSA upon request.
The appointment of more than one VFA agent
Where a client appoints more than one VFA agent, the client shall establish how the responsibility is to be allocated and inform the MFSA accordingly. The appointment of more than one VFA agent does not relieve any of them from any responsibilities and obligations under the rules, however each VFA agent will be responsible only for the duties allocated to him.
Conduct of business obligations
- General conduct of business obligations
The VFA agent must establish and maintain an organizational and organizational arrangement, depending on the size and organization of the VFA agent as well as its nature, scale and complexity of its business to prevent conflicts of interest. The circumstances should cover cases where there is conflict of interests between the interest of the VFA agent and the duty which the VFA agent owes to the client; or between the different interests of two or more of its clients to whom the VFA agent owes in each case a duty. The VFA agent must keep a conflict of interest policy set out in writing. Records of cases in which conflicts of interest have arisen must be kept by the VFA agent.
- Operation independence rules
The VFA agent shall take all reasonable steps to prevent or manage conflicts of interest between themselves, including their employees or between the interests of one client or another.
- Conflicts of interest policy
The written policy shall include:
- The identification of the circumstances which constitute or may give rise to conflicts of interest
- Procedures to be followed and measures to be adopted in order to manage such conflicts and to prevent such conflicts from the damaging the interests of clients.
The VFA agent must assess and review on an annual basis his conflicts of interest policy to address any deficiencies.
- Remuneration policy rules
A VFA agent shall define a remuneration policy which will ensure that:
- Clients are treated fairly and their interests are not impaired
- Remuneration policy does not create a conflict of interest or an incentive that may lead relevant persons to favour their own interest or that of the VFA agent to the potential detriment of clients.
- Rules on personal transactions
The VFA agent must ensure that relevant persons do not enter into personal transactions which meets one of the following criteria
- That the person is prohibited from entering into it in terms of Chapter V of the Act
- It involves the misuse or improper disclosure of confidential information
- It conflicts or is likely to conflict with any obligations of the VFA agent
Supplementary conditions for VFA agents appointed in terms of Article 7 of the Act
The VFA agent shall on an going basis ensure that an issuer is a fit and proper person. The VFA agent shall ensure that the DLT assets in relation to which an application for registration of a white paper is being made, qualify as a Virtual Financial Asset. The MFSA will be relying on the determinations made by the issuer and its VFA agent. In the event of disagreement between the VFA agent and the issuer, the matter shall be resolved by both parties prior to the submission of the white paper to the MFSA. The VFA agent shall also satisfy itself that a systems auditor has prepared a report which covers all aspects of an issuer’s technology arrangements including cyber security.
The VFA agent shall ensure that the issuer has provided investors with a roadmap which clearly establishes and sets out milestones and ensure that the issuer is meeting the said milestones. If the milestones are not being met, the VFA agent has the duty to inform the MFSA accordingly.
The VFA agent must satisfy itself that the board of administration of the issuer:
- Can be relied upon to prepare and publish all information that investors and their advisors would reasonably require for the purpose of making an informed decision; and that
- They have understood the nature of the responsibilities and obligations which they will be undertaking as members of the board of administration of the issuer.
The VFA agent shall be required to prepare and submit to the MFSA, on an annual basis a compliance certificate in relation to the issuer, which would include any breaches of the Act which would have been committed.
The certificate should include a confirmation that:
- All local AML/CFT requirements have been satisfied, which confirmation should be obtained from the issuer’s MLRO; and
- The issuer’s Innovative Technology Arrangement complies with any qualitative standards set and guidelines issued by the Malta Digital Innovation Authority (irrespective of whether or not the said arrangement holds a certification issued by the said authority in terms of the Innovative Technology Arrangements and Services Act), which confirmation should be obtained from the issuer’s system auditor.
A copy of the compliance certificate must be held at the registered address of the VFA agent in Malta and made available to the MFSA upon request.