Deposit Protection in Malta

Financial institutions all around the world implement sound risk management systems, maintain internal controls, focus on market discipline, and retain minimal capital cushions and mandatory capital to absorb shocks and avoid bank panic. The financial system in Malta is safe, well-regulated, and subject to periodic and ongoing supervisory controls. The local financial system may nevertheless be jeopardized by financial institutions experiencing temporary distress or engaging in severe misconduct intentionally or unintentionally. In these matters, deposit protection in Malta provides a rescue fund for bank account holders of supervised credit institutions that fail or are likely to fail.

The Malta Financial Services Authority (MFSA) regulates the domestic financial services sector. It acts as the resolution authority for supervised credit and payment institutions in times of distress and covers about 2.300 licensed entities. Following its objectives, the MFSA aims to protect the integrity of the financial markets to ensure financial stability and eventually safeguard consumer interest. As a result, the MFSA collaborates with the Resolution Unit to determine and assess whether a supervised institution is failing or likely to fail. An institution in this status is unable to meet its obligations towards bank account holders or has suspended payments to its creditors. This is a prerequisite to activate the Deposit Compensation Scheme.

Deposit Insurance and the Depositor Compensation Scheme

Deposit insurance aims to increase the stability of the banking and payment system by protecting bank account holders. Essentially, a deposit insurance protects eligible bank account holders from the effects of the insolvency of a financial institution. Deposit guarantee schemes should be able to provide that protection in multiple ways where such schemes should primarily be used as a paybox function to repay account holders in line with European directives. The Maltese Depositor Compensation Scheme was initially based on European Directive 94/19/EC with minimum harmonization throughout the EU member states. A stricter and more uniform level of protection was laid down in a recast directive on deposit guarantee schemes (2014/49/EU). The result is a broad and clear scope of coverage, quick repayment periods for eligible creditors, evident information provisioning, and robust funding requirements.

Eligibility for Deposit Protection in Malta

The objective of a deposit guarantee scheme is threefold. It seeks to avoid the disruption of the local economy by protecting the payment system and as a result maintain public confidence. However, the core principles of a free market economy are the freedom of choice and the prerogative of supply and demand. These fundamental understandings assume that consumers penalize suppliers for poor performance and misbehavior. In the real economy this does not always apply and bank deposit protection therefore places an additional layer of maximized protection on retail depositors. As a result, deposit protection in Malta protects aggregated deposits in locally supervised credit institutions. The maximum compensation payable is set at 100.000 Euro, with exceptions for bank accounts with a temporary high balance and a capped maximum repayment for eligible claimants of 500.000 Euro.

Deposit insurance eligibility and disqualification of claim submissions have proven realistic over time. A false sense of security may be given to uninformed account holders. Therefore, the Maltese subsidiary legislation on depositor compensation scheme regulations (371.09) requires supervised credit institutions to deliver potential customers an information leaflet explaining the applicability of the deposit guarantee scheme and its exclusions. After the prospect becomes a client a confirmation of eligibility must be provided to account holders on their account statements.

Following the objectives of the scheme, eligibility for deposit protection in Malta is furthered by domestic regulation 371.09 subject to definitions in several European regulation and directives. The most common, yet often misunderstood corporate exclusions for deposit protection include:

  • Deposits held by financial institutions as defined on point 26 of article 4.1 of Regulation (EU) No 575/2013.
  • Deposits held by investment firms as defined in point 1 of article 4.1 of Directives 2004/39/EC.
  • Deposits of which the holder has never been identified pursuant to article 9.1 of Directive 2005/60/EC when they have become unavailable.

A deeper investigation into the underlying principles of these articles is required to fully comprehend the implications of these definitions for claim eligibility. The best indicator is often the business name of the account holder, followed by its activities. These statements of fact reveal often necessary information to determine the substance of a company. Deposit insurance is not intended to provide regulatory arbitrage for account holders by hedging excessive risk taking against this type of deposit protection. In this light, the articles exclude creditors who are able to insure themselves against the risk of their core activities. For example, private account holders who trade on the financial markets and hold their balance on a bank account are often covered by the scheme, where corporate account holders with the same objective are excluded from this very coverage.

Claim Filing Procedures

Resolution procedures for financial institutions aim to reduce risk for the financial institution, its creditors and society. Therefore, it is imperative to minimize the costs associated with the resolution and to avoid destruction of value of the institution. As a result the conditions for repayment of account balances via a deposit protection scheme follows a strict protocol. Submission, verification and timing of claims are equally important and even crucial for approval of repayment and settlement.

Automatic reimbursement happens for identified and eligible domestic creditors. Their data can be verified on a local level. Verification is more complicated for international creditors, foreign companies, inactive accounts and accounts with a temporary high balance. Some firm facts apply to every claim filing procedure. These include the time limit for claim submission of two years after the activation of the scheme, and the administrative necessities to verify and confirm claim eligibility. This often includes evidence of deposit ownership, a verification of the identify of the claimant, and for corporate accounts the company documents that reveal the ownership structure and active status of the company. Depending on the requirements of the Depositor Compensation Scheme, claims can be submitted in person or by apostilled affidavit to ensure accuracy.

Recovery of Unsecured Deposits

Account balances above the insured limits, unsecured liabilities and those accounts excluded from depositor compensation are bailed in. This means that the recovery and resolution costs fall on the creditor, and a write-down of the remaining balance is likely. Consequently, creditors must closely monitor the different possibilities for repayment.

Early intervention in stressful situations is intended to ensure the continuity of critical functions, avoid detrimental effects on the financial system, protect public funds and creditor interests. The resolution committee is responsible for the administration procedures. Upon the appointment of a statutory administrator a moratorium with a suspension of payments to unsecured creditors and account holders can be imposed. Restrictions on individual accounts may be temporarily lifted and limited access to account facilities are possible. Recovery options are available during all three resolution stages: statutory administration, depositor compensation and bank liquidation. Collective civil action remains possible for every creditor.

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This website is an initiative of Legal Floris LLC. Fore more than a decade, we help international creditors reclaim their money when their bank fails or investment disappears. Our vast experience in dozens of bank failures in different countries allows us to maximize repayment and minimize risk for our clients. For more information, contact us right now and find out how we can help you get your money back:

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