Safeguarding client funds has always been a cornerstone obligation for payment institutions and electronic money institutions, which typically is undertaken either by placing funds at an EU credit institution or by investing clients’ funds in secure liquid low-risk assets.
The Malta Financial Services Authority (MFSA) has recently published a Circular to Payment Institutions (PIs) and Electronic Money Institutions (EMIs) to provide guidance for those institutions which opt to safeguard clients’ funds by investing clients’ funds in secure liquid low-risk assets. This marks a meaningful evolution how the obligation can be met by institutions.
The Circular sets out two distinct routes through which institutions may invest client funds. The first involves direct investment in assets that meet specific 'secure low-risk' and 'liquid' criteria as defined under the Capital Requirements Regulation (CRR). The second allows institutions to invest in units of a UCITS Money Market Fund (MMF) - provided that fund meets precise conditions around credit quality, portfolio composition, and redemption mechanics.
With respect to direct asset investments, the assets must fall within the categories set out in Table 1 of Article 336(1) of the CRR, with a specific risk capital charge not exceeding 1.6%. For liquidity purposes, assets must meet Level 1 or Level 2 criteria under the EU Liquidity Coverage Ratio (LCR) framework.
Institutions that opt for UCITS MMFs, the fund's investment objective must be focused on ‘high credit quality money market instruments’, and redemption proceeds must be receivable by the end of the following business day.
In this respect, PIs and EMIs must demonstrate, document, and justify their choices against precise regulatory benchmarks. A semi-annual assessment of portfolio holdings is required, and the MFSA reserves the right to request those assessments at any time. Furthermore, governance arrangements have been enhanced, with the MFSA will requiring a board resolution approving the revised safeguarding policy, a responsible person designated to oversee invest in the UCITS MMF, daily monitoring of fund assets, and key indicators.
The MFSA also stated that the annual audit of safeguarding arrangements will now explicitly include an assessment of compliance with the circular's conditions which means that governance gaps will surface. For many institutions, this will require a meaningful review of existing safeguarding frameworks. Policies will need updating, governance structures will need to reflect the new requirements, and custodian due diligence will need to be thoroughly documented.
The MFSA's Circular is clear on what institutions wishing to invest client funds in UCITS MMFs must submit. They are required to provide offering documents for the intended fund, a maximum allocation percentage and its justification, an updated safeguarding policy, a board resolution approving that policy, and their own detailed assessment of the fund's underlying assets against CRR criteria. Additionally, institutions must evidence that custodian or depositary arrangements properly insulate client assets, and demonstrate the due diligence undertaken in selecting them. Importantly, this list is explicitly non-exhaustive meaning that the MFSA reserves the right to request further documentation on a case-by-case basis. Firms should treat this not as a one-time submission exercise, but as an ongoing compliance commitment.
Malta's payment and e-money sector is evolving, and the MFSA's changing supervisory expectations highlight this growth. At PwC Malta, we have the experience to help you manage these requirements, from reviewing policies and governance frameworks to handling MFSA submissions and providing ongoing compliance support. If you're evaluating your current safeguarding measures or seeking guidance on the MFSA's latest expectations, let's start a conversation.
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