Recent Amendments to CBM Directive 19

Introduction

Directive No. 19 (the “Directive”), issued by the Central Bank of Malta (the “CBM” or the “Central Bank”) on the 7^th July 2021 officially came into effect on 1st January 2022, with amendments issued in September 2024. It applies to all paper-based instruments issued, processed, or encashed within Malta’s jurisdiction, as long as these instruments are denominated in euros. The Directive sets the framework for the safe and effective use of cheques and bank drafts (collectively referred to as “paper-based instruments”) where the payer, payee and the regulated institutions servicing the paper-based instruments are all located in Malta. It provides clear guidelines for payment service providers (PSPs), issuers (drawers), and recipients (payees) to promote transparency and compliance within the payment systems.

Objective and Scope

The Directive was issued pursuant to Article 34A (5) of the Central Bank of Malta Act, which empowers the Central Bank to issue regulations in respect of, inter alia, the provision and use of payment services. The Directive is designed to:

• enhance the safety and effectiveness of cheques and bank drafts;
• minimise legal and operational risks associated with paper-based payment instruments; and
• ensure compliance across all parties involved, including banks, financial institutions, and natural or legal persons using cheques in Malta.

Scope:

• Applies to credit institutions, financial institutions and their agents and branches, and post-office giro institutions that are licensed in Malta and passporting their services into Malta.
• Covers all natural or legal persons making use of paper-based instruments. Instruments in currencies other than euros are excluded from this Directive.

Key Provisions of the Directive:

1- Definition of Terms:

The Directive includes the following definitions:

• Cheque: A written or printed order from a drawer to a drawee institution to pay a specified sum of money to the named payee.
• Bank Draft: A type of cheque drawn by a financial institution on itself or another institution.
• Drawer: The person or entity issuing the cheque.
• Payee: The recipient of the payment indicated on the cheque.
• Drawee Institution: The bank or financial institution responsible for making the payment to the payee.
• Payment Service Provider (PSP): Includes banks, financial institutions, and post-office giro institutions involved in cheque processing.

2- Issuance and Content of Cheques:

To prevent misuse and fraud, the Directive sets strict requirements for paper-based instrument cheque issuance:

• Mandatory Information to be provided by the drawer:

Each paper-based instrument must specify:

• • The date of issue (must be current);
  • The payee’s name (the recipient);
  • The payable amount in both words and numbers (must match exactly); and
  • The drawer’s signature.
• Use of “Only”: A paper-based instrument marked with “Only” can only be cashed by the named payee, ensuring that the cheque is non-transferable. This adds a layer of security to prevent unauthorised third-party transfers.
• Discontinuation of “Or Order” Cheques: In terms of the Directive, credit or financial institutions shall discontinue the issue of “Or Order” paper-based instrument which were previously negotiable and could be transferred to third parties by endorsement. Existing “Or Order” instruments, shall only be negotiable by a payment service provider and may only be payable to the payee named by the drawer of the instrument.

3- Transaction Limits and Cash Payments

The Directive introduces important limits on paper-based instrument payments to reduce cash-based risks:

• Minimum Amount: A paper-based instrument cannot be issued for an amount below €20, ensuring that paper-based instruments are used for substantial payments only.
• Cash Limits for Natural Persons:
  • Paper-based instrument can be cashed if the amount is below €5,000.
  • If the amount exceeds €5,000, it must be deposited into the payee’s account. This limit helps reduce money laundering and large cash transactions.
• Payments to Legal Persons:
  • Paper-based instrument payable to legal entities (e.g., businesses) must be deposited in a bank account and cannot be paid in cash, further safeguarding against illegal cash transactions.

This set of restrictions is vital for both payees and PSPs, as it limits large cash flows and encourages transparency by channelling larger payments through bank deposits.

4- Handling and Authentication of Paper-based instruments

For both banks and financial institutions, the Directive places responsibility on ensuring proper processing:

• Authentication: Banks (drawee institutions) must verify the drawer’s instructions before processing the cheque. This includes confirming the drawer’s identity and the integrity of the paper-based instrument details.
• Endorsement for Cash Payments: Paper-based instrument payable to natural persons must be endorsed by the payee before cashing. PSPs are required to verify the payee’s identity by examining a valid ID, and they must document the details of this verification.
• Third-Party Deposits: Paper-based instrument can be deposited by a third party on behalf of the payee, provided the third party supplies the correct payee’s account number. This provision is useful in business scenarios but still requires accurate records of the transaction.

5- Validity of Cheques and Retention of Records

Paper-based instrument have a validity period of six calendar months from the date of issue, after which they cannot be processed. This limitation is significant for both issuers and recipients, as it sets clear expectations for when cheques must be presented and encashed.

PSPs are required to retain transaction records (either electronically or physically) for a minimum of five years. These records include the date of the transaction, payee details, verification steps, and other essential information.

The retention policy is crucial for both compliance and resolving potential disputes that may arise after the cheque is processed.

6- Suspension of Cheque Issuance Services

The Directive provides PSPs with the authority to suspend cheque issuance services for non-compliant drawers:

• If a drawer issues six cheques in a 12-month period that cannot be honoured (due to insufficient funds or non-compliance with cheque requirements), their cheque-issuing services will be suspended for 24 months.
• The drawee institution may discontinue providing cheque issuance services to drawers for these instruments if, during the preceding twelve (12) calendar months, six (6) cheques presented to it for settlement could not be paid out. Where suspension of cheque issuance services is applied, this shall remain effective for a period of not more than six (6) months from the date when it becomes effective.
• The drawee institution must issue a warning after the fourth failed cheque, providing drawers the opportunity to correct their practices before suspension. Cheques issued by the drawer prior to the time of suspension, if valid, should be
• honoured.

7- Penalties for Non-Compliance

Both payment service providers and users face penalties for failing to comply with the Directive:

• PSPs: Non-compliance, such as failure to verify identity or improper record-keeping, can result in penalties, imposed by the Central Bank of Malta, under the Central Bank of Malta Act.
• Users: A fine of up to €200 can be imposed for each instance of non-compliance, such as improperly issued cheques or those presented outside the scope of the Directive.

Penalties serve as a deterrent, ensuring compliance and accountability for both service providers and cheque users.

8- Complaints and Dispute Resolution

PSPs must establish effective complaint resolution mechanisms to address disputes between cheque issuers, recipients, and the institutions themselves. Users can escalate unresolved complaints to the Central Bank of Malta or to the Office of the Arbiter for Financial Services if a payment service provider is deemed to have breached the Directive.

The complaints process is outlined as follows:

1. Internal Complaints Mechanism: Payment service providers must implement efficient and transparent procedures to resolve disputes with users.
2. Escalation to the Central Bank: If the internal process does not resolve the issue, users can escalate the complaint to the Central Bank of Malta, which has the authority to investigate alleged violations of the Directive.
3. Dispute Resolution via the Arbiter: Users can also file complaints with the Office of the Arbiter for Financial Services, an independent body responsible for resolving disputes in Malta’s financial sector. The Central Bank will assist the Arbiter in resolving such disputes.

This comprehensive dispute resolution mechanism ensures that users and providers have multiple avenues and escalation options intended to resolve issues, increasing trust in the system.

All of the above is reflected and summed up in the following implications.

Implications for Key Stakeholders:

For Banks and Payment Service Providers (PSPs):

• Enhanced Record-Keeping Requirements: Institutions must maintain detailed records of cheque transactions for at least five years. This includes identification of the payee, date of the transaction, and details of cash payments or deposits.
• Obligations on Identity Verification: PSPs are required to authenticate the identity of the payee before cashing cheques, ensuring that only authorised individuals receive payment. This protects against fraud and unauthorised transactions.
• Suspension Powers: PSPs are empowered to suspend the cheque-issuing abilities of non-compliant drawers, particularly those whose cheques frequently bounce due to insufficient funds or other violations. This offers banks a tool to mitigate risk and encourage responsible financial behaviour from their clients.
• Penalties for Non-Compliance: Banks and other financial institutions must comply with the provisions of the Directive or face administrative penalties, ensuring that institutions uphold their duties diligently.

For Cheque Issuers (Drawers):

• Stringent Issuance Requirements: Issuers must ensure that every cheque meets the Directive’s detailed requirements, including accurate dates, payee names, amounts in both words and numbers, and proper signatures. Non-compliance or repeated bounced cheques may result in a suspension of cheque-issuing services for up to 24 months.
• Limitations on Cash Payments: Drawers should be aware of the limitations on cash payments, particularly for amounts exceeding €5,000, which must be deposited into a payee’s account. For businesses and legal entities, cheques must be deposited rather than cashed, adding an additional layer of security.

For Cheque Recipients (Payees):

• Restrictions on Cashing Cheques: Individuals receiving cheques must ensure they are within the €5,000 limit for cash payments. Anything above that must be deposited. Legal entities will not be able to cash cheques at all and must deposit payments directly into their accounts.
• Third-Party Deposits: Payees can use third parties to deposit cheques into their accounts, but they must ensure that the correct account information is provided.
• Endorsement and Identity Verification: Payees must endorse the cheque when cashing it and provide valid identification to the PSP to receive payment, ensuring that only authorised parties access the funds.

Conclusion:

Directive No. 19 is a comprehensive Directive designed to safeguard the use of cheques and bank drafts in the Maltese financial system. It imposes stringent requirements on all parties involved—payment service providers, issuers, and recipients—ensuring that transactions are processed securely and efficiently.

The Directive’s provisions on authentication, cash limits, record-keeping, and penalties aim to minimise operational risks, reduce the potential for fraud, and increase transparency. Both banks and cheque users must familiarise themselves with these rules to ensure compliance, avoid penalties, and facilitate smooth, secure cheque-based transactions in Malta.

For businesses, banks, and individuals engaged in cheque transactions, adhering to this Directive will help promote a more secure and reliable payment environment.