Is the MFSA authorised to provide investment services?
No. The MFSA is prohibited from providing investment services to the public. The role of the MFSA is to license, regulate and supervise those entities providing investment services in or from Malta. That is why the MFSA is defined as the single regulator for financial services in Malta. The MFSA is therefore not in a position to provide you with any advice on investments.
How do I make sure that the firm is authorised by the MFSA and is reliable?
All entities authorised by MFSA undergo a rigorous and lengthy process before they are authorised to service your investment requirements. The MFSA must be satisfied that these firms are professional, knowledgeable and trained. Moreover, the MFSA goes into great lengths to ensure that such firms are of the highest integrity.
One can visit the MFSA website to check whether such entity is licensed or not and if licensed what activities it is licensed to carry out. In the licence there is indicated what services an entity is licensed to provide and in relation to which financial instruments it is authorised to provide the mentioned services.
Moreover, a firm is required to state that it is regulated by MFSA to conduct investment services on its letterheads, business cards, stationery and adverts.
You should know that not all investment firms licensed by the MFSA are the same or can provide the same investment services. An investment firm can be authorised under one of the different four ‘licence categories’ – from Category 1 to 4. Of these four categories, Category 4 would be of the least interest to you because firms licensed under this category provide services to collective investment schemes and not to retail investors.
We hope that the following notes help you understand better the type of services which the various categories of investment firms in Malta are able to offer you.
Category 1 Investment Services Licence Holder
Typically provides information, advice and executes instructions of the investor BUT would not be able to hold your money or your assets in his own name or otherwise. Therefore, if you avail yourself of the services of a Category 1 investment firm:
- You should be offered to choose from a range of products, although this may be limited. There can be instances where the firm is a representative of a particular product, such as a collective investment scheme;
- You cannot allow your firm to have discretion over your portfolio. Therefore, the firm has to consult you, and obtain your approval, before making a transaction on your own behalf;
- Contract notes of any purchase or sale should show that the investments are registered in your own name;
- Payments will have to be made to the company (such as the fund manager of a collective investment scheme) and not to the investment firm;
- The firm would not be able to accept cheques or other means of payment in its own name or in the name of officials working at the firm;
Category 2 Investment Services Licence Holder
Typically provides information, advice, gives recommendations, manages portfolios and executes instructions of the investor BUT would be able to hold your money or your assets in his own name or otherwise. Therefore, if you avail yourself of the services of a Category 2 investment firm:
- Investments can be registered either in your own name or, upon your request, in the name of the firm (if permitted to do so by MFSA – please ask the investment firm). If you opt for your investments to be registered in the name of your firm, the investment will still belong to you even though they will not be registered in your name. Your firm can explain more about this. In any event, you should be given a contract note to show how much you have invested;
- The firm may be authorised by MFSA to have discretion in the management of your portfolio. In which case and subject to your agreement, the firm will be entrusted to manage your investments without having to obtain your prior consent before effecting changes to your portfolio;
- Payments can be made directly to the firm. Cheques or other means of payment should be payable to the firm and not to its representative;
Category 3 Investment Services Licence Holder
This is very similar to a Category 2 investment firm except for one aspect. In this category, the firm would have a fairly large amount of securities from which to sell to individuals or institutions, and may also buy securities from investors, intermediaries or banks acting as a market maker
A category 3 Investment services licence holder can provide any type of investment service.
How do I choose an investment firm?
The best advice that we can give you about how to choose an investment firm is to ask questions. Do not hesitate to ask questions about how your firm proposes to invest your money. It does not matter if you are a beginner or have been investing for many years – it is never early or too late to start asking questions.
All firms will welcome your questions, no matter how basic. After all, investment firms would prefer you asking them questions before you invest rather than having to confront your uncertainties after your investment. So never feel intimidated or shy. Remember, it is your money!
Before you make an investment, you must decide which firm to use. We have prepared some notes which may assist you in the course of making your decision:
Think about your investment objectives. For example, you could ask yourself: – Do I need my investment to provide me with periodic income or do I wish my capital to grow over a period of years? What financial commitments do I already have or plan to have? What is my appetite for risk – should I go for risky or less risky products? These are some basic questions which a potential investment firm may ask you – usually at the beginning of your meeting. Have your answers prepared in your mind or, better still, written down. It does not matter if there are some aspects which are not clear – you can always discuss them later with your potential firm.
Do not hesitate to talk to two or more different firms. It would be useful for you to enquire about their investment experience and professional background. If possible, meet them face to face at their offices. Ask them as to what they are allowed to do under their licence. If you can, do shop around for products available. It is in your interest to learn about the number of products available on the market.
Not all investment firms offer or charge the same for the investment services they provide. Understand how the investment firm is paid by asking for a copy of its tariff schedule. Ask what “fee” or “charges” you will be required to pay when buying or selling a security; when opening, and/or closing an investment account; ongoing account related fees (if any); advisory related fees (when provided with an advisory service); safekeeping fees (if applicable). More information about fees and charges is found under the “Compare charges and more” section of this website.
Make sure that your investment firm meets your requirements and is in a position to provide you with the investment service that you want. You might also want to check whether it is able to sell financial products from a range of different companies. Some of these investment firms are also representatives of one or more products, such as collective investment schemes.
Some investment firms may only sell the products of the companies they represent. In this case, the choice of products can be rather limited. In any case, investment firms must ensure that the products they suggest really suit your interests and needs.
What does the term ‘nominee’ means?
Certain investment firms are authorised to hold your money and investment on your behalf in their own name – that is providing ‘nominee services’. An individual would not usually require to have his monies and investments held in the name of the investment firm. You may however find it convenient to have your investments held in this way. After you determine whether you need the services of an investment firm providing ‘nominee services’, make sure that the benefits and pitfalls of having your investments held by the firm in its own name are explained clearly at the outset.
Ask how your investments could be affected, if at all, if the firm ceases to trade.
I noticed that my entity charges me a “custody fee”. Why is this? What does “custody” mean?
What we have discussed so far applies to both local and foreign investments acquired through a local investment firm offering nominee services.
When you acquire foreign investments, your investment entity would usually have a nominee account with a foreign entity which registers such investments in the name of the local financial entity. The foreign entity would not normally know who the beneficial owners of the investments are (i.e. the local entity would not provide details of the names of who owns the investments – although it could be asked to do so by the foreign entity).
However, there is still an important aspect which you need to keep in mind. Although physically, investments are no longer available in paper format (the printed certificates referred to above), there would still be the need to keep a proper and up-to-date register of all holdings. When it comes to foreign investments, this register is usually maintained by a “custodian”, typically a division of a major global bank. Obviously, the investments held in custody by one of these banks are segregated from those which it owns. The “Custody Fee” is the fee which is payable to such bank for keeping a proper register of the foreign investment.
Normally, and depending on the type of investment, custody banks operate in reputable jurisdictions that give top protection to clients’ holdings. If you are unsure about the level of protection in other jurisdictions, ask your financial entity for more information.
Why have nominee accounts become so popular?
While the certificated form was the traditional way of holding investments, pooled nominee accounts are now by far the most common. Nominee accounts allow investors to own investments (such as shares, bonds, or funds) without becoming involved in any of the associated administration or paperwork. The benefit to customers is that the process to trade (buy and sell) investments is faster, simpler and most often cheaper.
Nevertheless, the fact that the investments are recorded in the name of the financial entity means you will have to get its authorisation to trade your securities. In other words, you cannot sell an investment which you purchased from entity A through entity B without having obtained authorisation from entity A. Most of the times, if you are unhappy with the services received from a particular entity and wish to transfer out of its nominee account to another firm, without selling your existing investments, you will usually be charged for this.
How do nominee accounts work in practice?
When you accept to use nominee services offered by your investment firm, your investments would be legally owned by your financial entity.
While the entity would become the legal owner of the investments, you would still remain the beneficial owner, meaning that you have rights over them. Your entity will keep records of which client is the beneficial owner of all the investments held under nominee.
When you receive the contract note, which is a document issued by your investment firm indicating the price at which the investment has been purchased and any charges incurred, you are most likely to notice – along with your name and address – a reference such as “[name of the financial entity] nominee Account (or a/c)”. That means that your holdings are held under nominee. Nevertheless, the investment firm cannot trade the investments without your prior written consent (or as agreed in the terms and conditions by yourself and the entity).
Let’s assume that this is the first time that you will be buying an investment through an investment firm which offers nominee services..
Before buying or selling an investment, the entity would normally require your confirmation in writing. This can be done by e-mail (if an e-mail indemnity is in force) or through other means acceptable by the financial entity.
When you pay for the transaction, the investment firm will deposit the amount in a Clients’ Account. This is a bank account which the firm uses to channel all funds relating to investments belonging to investors. It is normally a pooled account – that is, all investors’ monies would be placed in such an account. However, the investment firm will also have an investment account in your name and at least once yearly, the firm is obliged to give you a breakdown of any incoming or outgoing funds specifically related to your transactions as the beneficial owner of the investments.
Any income from investments will be sent to the investment firm, which will then be distributed to the beneficial owners by cheque, credited to an account or reinvested, depending on the beneficial owner’s instructions.
Nominee accounts are designed to facilitate trading of investments as entities can conduct transactions electronically. This means that investments held in nominee accounts can be processed much more efficiently.
Many Investment firms now provide their clients with an online trading system which gives the beneficial owner the opportunity to trade outside the opening hours of their entity in the comfort of their own home.
How do I know if a financial entity offers nominee services or not?
You may ask the financial entity for such information directly.
If you want to verify such information, you should check the investment service licence of the entity and check whether under services the Nominee Service is listed on its licence.
If the financial entity is authorised to provide nominee services, it would have either a Category 2 or Category 3 licence. Category 2 – Licence Holders authorised to provide any Investment Service, and to hold or control Clients’ Money or Customers’ Assets, but not to deal for their own account or underwrite.
Category 3 – Licence Holders authorised to provide any Investment Service, to hold and control Clients’ Money or Customers’ Assets, and to deal for their own account or underwrite.
How safe are Nominee accounts?
Many investors don’t understand exactly know how their investments are held and what the risks to their account are if the worst happens. Unless you have been informed otherwise, your account is almost certainly a pooled nominee one. This means that the legal owner of the shares is your entity and your investments are aggregated with those of other investors dealing with the entity.
Put like that, it may sound quite alarming but you should not worry too much because there are legal systems in place to safeguard your holdings and money.
The MFSA’s Conduct of Business rules clearly stipulate that your investments should be held separate from those of your investment firm. Nominee accounts are “ring-fenced” (that is, they are held separately) from the entity’s business accounts – so you should not worry that your investments are being combined with those belonging to the entity.
The separation between clients’ investments (and monies) and the entity’s investments (and monies) is crucial to how this arrangement operates. This is however not the only requirement, the rules also require the entity to keep proper records of each customer’s investments such that they are easily identifiable from the investments of other clients, also held under nominee.
Furthermore, the law stipulates that in the case of liquidation of a financial entity (the process which ensues after a company is declared insolvent), the creditors of that entity shall be unable to claim or demand any right of action on or against the investments held under the control of such entity for and on behalf of and in the interest of any of its customers. In the event of any such insolvency or bankruptcy, the entity shall – on request of the customer or the Authority – immediately transfer the control, possession and title to all assets held by or in the name of an investor to another entity or to such other person as may be instructed by the customer or the Authority.
What information will you receive before investing?
All information provided to you throughout your business relationship with an investment entity should be ‘fair, clear and not misleading’. This principle refers both to the content of the information and to the way it is presented to you.
Your firm should provide you with the relevant information in good time before you invest so that you can make an informed decisions. Types of information you will receive before investing include:
- Marketing communication
Marketing communications: Whether or not you are a client of a firm, you may receive advertisements and other marketing communications issued by an investment entity.. All advertisements and marketing communications have to be presented in such a way that you can identify them as being of a promotional nature.
- Client agreement:If you are a new retail client that a firm has taken on for the provision of investment services, you will be provided with a copy of the client agreement which will contain your and the firm’s essential rights and obligations. In this document there will be included:
- Information about the firm: A firm must give you general information about itself, including who regulates it and the services it offers to clients, to help you understand the nature of the services on offer and the risks involved.
- Information on investment management: Where you have asked a firm to manage investments on your behalf, you should expect to receive information including a description of the management objectives and the related level of risk, what types of products or transactions may be involved in your portfolio and information about the valuation method and the frequency of valuations of your investments.
- Information about financial products: You will receive information explaining the nature, risks and costs of financial products. Such information includes, for example, a description of the products’ risks and whether prices/values may fluctuate. The amount of information will depend on the type of product, its complexity and risk profile.
- Information about costs and charges: You will receive information about the direct and indirect costs and charges of a service or product, including any commission charged or paid. This should clearly show you the total costs to be incurred. Sometimes, however, the precise amount of the total costs is not available at the time when the information is communicated to you. In such cases, you should instead receive sufficient information to see how the costs are going to be calculated, so that you can verify the total price once it is available.
Will I be kept updated about the performance of my investment portfolio?
The MFSA’s rules state that at least on a quarterly basis, an investment firm that holds instruments or money on behalf of investors is required to send, to each of its clients (the beneficial owners of investments), a statement of those investments and money. This statement would usually be sent by post or electronically via email. The entity may also provide beneficial owners with periodic statements but that’s up to you to request such additional service and you have to check whether additional fees will be charged by the entity for such additional reporting. Many entities nowadays provide their clients with electronic access to their accounts as well so they can see how their portfolio is performing online.
What does the term inducements mean?
Inducements are payments or non-monetary benefits which a firm receives or pays out as a result of advising on or arranging investments for its customers. The firm is required to disclose to you, as its customer, the essential terms of any arrangements relating to such fees, commissions or non-monetary benefits in summary form. It may, on your request, provide you with more information. The aim of this requirement is to enable you to understand and be informed of any incentives which may reward the firm for promoting a particular product or service.
Before investing, it would be sensible for you to make sure that you know what the arrangements are if you need to make a complaint about the firm or seek redress, and which investor compensation scheme covers the firm. The firm should give you this information.
What is a conflict of interest?
Firms should act in accordance with your best interests; to this end they should have in place effective arrangements to prevent conflicts from adversely affecting your interests. Your investment entity should avoid unduly putting other clients’ interests or the firm’s interests ahead of yours when providing you with a service.
Examples of conflicts of interest are when the firm is likely to make a financial gain or avoid loss at your expense; or when it has an incentive to favour another client’s interests over yours.
Your firm will also inform you of the key steps it follows to identify and manage conflicts of interests.
When your firm’s arrangements are not sufficient to manage a conflict of interest, then it should disclose to you in a clear manner the nature and sources of this conflict of interest, before it does business with you.
What happens if the beneficial owner of an investment passes away?
Transfer of assets to the rightful heirs in case of death of the beneficial owner should not be a complicated process and should be similar to the process followed had the investment been held directly in the name of the investor.
Obviously, how and in what manner the process may evolve for the surviving spouse or the universal heirs also depends on whether the beneficial owner has provided for a legal will or dies intestate.
In the case where an investment is held in countries where probate applies, if the investment is held in the name of the investment firm under nominee, then the heirs will not go through the process of probate. It is highly recommended that in such cases, heirs seek the advice of a professional person, such as their notary, who can guide them accordingly. ‘Probate’ is the term commonly used when talking about applying for the right to deal with a deceased person’s affairs or administering the estate of a deceased person.
Probate has and still causes many heirs to investments a major headache as it is an expensive process and usually takes time – therefore holding foreign investments with a local financial intermediary might be advantageous to local investors.
There might also be tax matters which one needs to consider in such circumstances and therefore it is recommended that one seeks professional advice from a competent person to deal with any issues that may arise in this area