According to a report of a survey by Diligex CSP Survey Report the introduction of Malta’s newly reformed Corporate Services Provider (CSP) regime will likely lead to a material consolidation in the number of providers as standards rise to match international requirements for the prevention of Money Laundering and Financing of Terrorism.
This regulatory journey began in October 2019 when the MFSA published its consultation titled ‘Raising the Bar for CSPs’, and reaches a significant waypoint on 16 May when the previously exempt warranted professionals (Accountants, Auditors, Lawyers and Notaries) and ‘de minimis’ providers must either have applied for authorisation with the MFSA or cease such services.
A survey conducted by Diligex, which studied possible reactions to the new CSP regime found that a material number of warranted professionals and smaller registered CSPs were thinking of exiting the business because they would find it difficult to meet the new regulatory requirements.
In the weeks leading to the 16 March enactment of Legal Notice 96/2021, and the publication of the final rules by the MFSA, Diligex conducted a survey of sixty-four CSPs active in Malta as part of a campaign to raise awareness of the reforms. Sixty-four CSPs represents nearly 11% of the known CSP universe according to Malta’s 2019 Moneyval report, though the exact number remains uncertain.
The known universe of CSPs is uncertain because of the previous exemption that was available to warranted professionals who did not have to register with the MFSA, but only had to inform the FIAU that they were conducting CSP activity. Collectively warranted professionals represented fifty-seven percent of the number of known CSPs, under the Moneyval measure, though as is apparent this percentage could have been higher. Hence, the material consideration is that the majority of providers, who were previously exempt from registration, will now need to seek authorisation and conform with all the obligations that go with it, or cease business on Sunday.
The survey established that many CSPs were concerned by the increased costs associated with complying with the revised regulatory regime. These concerns were particularly expressed by warranted professionals and smaller registered CSPs. A leading concern was the cost and availability of Professional Indemnity Insurance (PII) which is now mandatory for Class B and Class C holders.
In response to the regulatory changes CSPs were considering three options: avoid, merge, or exit. The avoid option was open to CSPs who were also registered under the Trusts and Trustees Law. Although still required to observe stringent compliance requirements; providers licenced under this Law retained their exemption, upon notification. Indeed, several respondents licenced under the Trusts and Trustee Law, were considering surrendering their CSP licence – if they had one.
The merge group were looking to reduce their marginal costs by acquiring, or entering into partnership with others. This may not be a smooth process, as the survey identified a minority of CSPs who did not trust the quality of their competitors’ clients with respect to anti-money laundering due-diligence.
A third group, nine percent, were seriously considering exiting the business. Others, seventeen percent, expressed a low level of confidence that they would continue, even though they would apply for authorisation, and some who were currently registered indicated that they would leave the business.
Diligex’s report of the survey ran three possible scenarios (low, central, and high) on the immediate impact of the new regime on providers. These scenarios respectively identified that 9%, 14%, or 18% of CSPs respectively could leave the business. The high case scenario considers the distribution of CSPs and the number of clients that they have. Forty-one percent of the Diligex sample were CSPs with 50 clients or less, which respondents considered as highly likely to leave the business because they were too small to absorb the increased requirements and higher costs of the new regime.
As Malta begins its journey under its new regulatory regime, a vision of its future CSP landscape comes from Jersey (a leading offshore financial centre) which embarked on a similar reform in 2001. On the introduction of its new regime approximately 1/5 of the providers promptly left the business. Today the number of providers has dwindled to around one-third of its original number. While this statistic may appear stark as Malta begins its journey, of the remaining Jersey providers many are now deemed to be global leaders in this business.
Moreover, the MFSA has encouraged previously exempted CSPs to become authorised through application of the principle of proportionality, and six-month transitionary period that follows 16 May’s application deadline. The six-month grace period allows CSPs to refine their policies and procedures through active dialogue with the MFSA and affords time to build up their compliance and risk functions in line with the nature and size of their business. Hence, the development of Malta’s CSP’s post reform could be more gradual given the benevolent smoothing afforded in the process.