Corporate Governance Expectations for Trustees: A Legal Perspective

Introduction

Corporate governance serves as the backbone of any well-functioning fiduciary structure. In Malta, trustees, governed under the Trusts and Trustees Act, are expected to adhere to rigorous governance standards established by the Malta Financial Services Authority (MFSA). Through thematic reviews and its Corporate Governance Code, the MFSA outlines expectations to ensure transparency, integrity, and efficiency in the operations of trustees. This article explores the MFSA’s corporate governance expectations for trustees, particularly in light of the findings from thematic reviews and the principles encapsulated in the Corporate Governance Code.

The Role of Trustees in Corporate Governance

Trustees, by their nature, hold a fiduciary duty to manage assets responsibly for the benefit of beneficiaries. As custodians of trust, trustees must embody accountability, transparency, and diligence. The MFSA’s governance expectations emphasize the necessity of a robust internal governance framework that balances the interests of all stakeholders, including beneficiaries, clients, and regulatory bodies. Trustees are not only required to comply with statutory and regulatory mandates but also to align with best practices in governance as articulated by the MFSA.

Governance Expectations from Thematic Reviews

The MFSA’s thematic reviews highlight specific areas of concern and improvement within the trustee sector. These reviews focus on governance structures, compliance culture, and risk management frameworks. Notably, trustees have often been found lacking in formalizing Board discussions, maintaining adequate compliance documentation, and addressing conflicts of interest.

Board Effectiveness and Decision-Making

The thematic reviews underline the importance of effective Board structures. Trustees are expected to document discussions and decisions comprehensively to ensure that regulatory bodies can assess their governance efficacy. Informal decision-making practices, as observed in some entities, fail to meet the MFSA’s standards of transparency and accountability. Trustees must ensure that Board minutes are sufficiently detailed, reflecting key strategic decisions, especially those impacting client onboarding, compliance, and risk management.

Compliance Culture

A strong compliance culture is non-negotiable for trustees. The MFSA’s findings reveal instances where compliance officers lacked independence, and compliance monitoring plans (CMPs) were inadequately implemented. Trustees are expected to appoint compliance officers with clear reporting lines and adequate resources, ensuring independence from operational functions. Regular assessments and updates to compliance frameworks are mandated to align with evolving regulatory expectations.

MFSA Corporate Governance Code

The MFSA’s Corporate Governance Code provides a comprehensive framework for trustees to enhance governance standards. While the Code operates on a “best effort” basis, it sets high-level principles and supporting provisions to guide trustees in achieving governance excellence.

The Effective Board

The Corporate Governance Code places significant emphasis on the effectiveness of Boards. Trustees are required to:

• Ensure the Board collectively assumes responsibility for the entity’s sustainable success.
• Clearly delineate the roles and responsibilities of Directors and Senior Management.
• Regularly review strategies, risks, and performance metrics to align with regulatory and ethical standards.

The Code further underscores the necessity for diversity within Boards to foster independent judgment and avoid dominance by a single individual. Trustees must implement policies to prevent conflicts of interest and establish a culture of compliance throughout their governance structures.

Internal Controls and Risk Management

Internal controls form the bedrock of robust governance. Trustees must establish and maintain comprehensive risk management frameworks to identify, manage, and mitigate operational, financial, and compliance risks. The MFSA mandates adherence to the “Three Lines Model” to ensure clarity in roles and responsibilities across governance, risk management, and operational levels. Furthermore, trustees are required to align their ICT and security risk strategies with the entity’s overall business objectives, safeguarding against technological vulnerabilities.

Stakeholder Engagement and Corporate Culture

Trustees are expected to foster transparent and constructive relationships with stakeholders, including beneficiaries, regulatory bodies, and employees. The Corporate Governance Code emphasizes the role of trustees in cultivating a corporate culture that prioritizes ethics, transparency, and sustainability.

Addressing Gaps Identified in Thematic Reviews

The MFSA’s thematic reviews and Corporate Governance Code are complementary tools to enhance governance standards. However, gaps remain in the implementation of these frameworks. For instance, some trustees fail to adequately document outsourcing arrangements or maintain detailed risk registers.

Trustees must align their practices with regulatory expectations by formalizing agreements, regularly updating policies, and ensuring comprehensive record-keeping. Additionally, the proportionality principle allows smaller trustees to tailor governance structures to their scale and complexity while adhering to core principles.

Proportionality and Practical Implementation

The MFSA’s principle of proportionality acknowledges the varying sizes and complexities of trustees. Smaller trustees are encouraged to adopt governance frameworks proportionate to their operations. However, this does not exempt them from fulfilling core governance obligations. Practical measures include:

• Conducting regular Board evaluations to ensure accountability and effectiveness.
• Establishing clear succession plans to address key person risks.
• Providing continuous professional development for Directors and key officers to remain aligned with evolving regulatory requirements.

Conclusion

The MFSA’s governance expectations, articulated through thematic reviews and the Corporate Governance Code, underscore the pivotal role trustees play in upholding Malta’s financial integrity. Trustees must embrace a culture of compliance, accountability, and transparency, ensuring their governance frameworks align with both statutory requirements and best practices.

By addressing gaps identified in thematic reviews and adhering to the principles of the Corporate Governance Code, trustees can enhance stakeholder trust and contribute to the resilience of Malta’s financial services sector. The road ahead demands vigilance, adaptability, and a commitment to ethical governance as trustees navigate an increasingly complex regulatory landscape.

Against this backdrop, Aspida’s role becomes even more crucial. By staying ahead of these key issues, Boards can better navigate the challenges of 2025 and drive long-term success for their companies.

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