Types of Investment Services

“Investment services” is a general term used to describe a whole range of activities related to investments in financial instruments. Typically, the most common forms of investment services are the following:

  • The provision of investment advice whereby investors are provided with personal recommendations on the investments products that would be suitable for them (also known as an advisory service);The purchase or sale of financial products on an execution only basis (therefore without receiving investment advice); or
  • The provision of portfolio management services (collective or discretionary).

The below links provide an explanation of the different types of investment services which may be provided by licensed entities. It also explains some of the requirements these entities need to be in line with in terms of the revised Markets in Financial Instruments Directive known as MiFID II.

One should always check that such entity is in fact licensed to provide investment services before entering into an agreement with such entity. This information is provided in the Financial Services Register. Investment services should only be sought from licensed entities.

What is an Investment Advice?

An investment advice is deemed to be the act of providing personal recommendations to a client or potential client on one or more transactions relating to financial instruments.

When providing investment advice, firms are required to recommend to the client (or potential client) the financial instruments that are suitable for him/her and, in particular, are in accordance with the client`s risk tolerance and ability to bear losses.

The term ‘advice’ means a ‘recommendation of what you should do’. For example, a recommendation to buy or sell a particular investment. The recommendation is personal to the client and based on his/her specific circumstances and financial objectives.

Investment advice is different from guidance that includes information about different types of investments or general principles without recommending a specific course of action or giving a personal recommendation.

What is an Independent Advice?

Before providing advice, an investment firm must inform a client whether this advice is being provided on an independent or a non-independent basis.

Firms that provide investment advice on an independent basis are not permitted to retain any monetary or non-monetary benefit (inducements) paid by a third party – or if they accept such a benefit, they must transfer it to their client – and are required to include a sufficiently wide and diverse range of financial instruments offered by various providers in the independent advice. Independent advice may not be limited to financial instruments that are issued or provided by the investment firm itself or related entities. If the advice does not satisfy these requirements, then the advice is not independent.

What is a Non-Advisory Service?

As we have described, when a firm is giving you investment advice or is managing your investments, it must ensure that the product is suitable for you.

When you are not receiving investment advice from a firm, or not relying on a firm to manage your investments, you will generally be expected to take a greater degree of responsibility for your decisions. When you want a firm simply to buy or sell an investment without providing you with investment advice or portfolio management services, different requirements apply. In such case, the licensed entity must assess whether the client has the knowledge and experience to invest in such product and the test to be carried out is known as the Appropriateness test.

The test aims to protect those who may not understand or be aware of the implications and level of risk involved in a transaction, particularly where the products are 'complex' or where you have not taken the initiative to carry out the transaction.

Examples of 'complex' financial products include:

  • Options, futures, swaps, and other derivatives

  • Financial contracts for differences

  • Convertible bonds

  • Warrants

  • Binary options.

These products are categorised as being complex given that the characteristics of such product would not be understood by the average investor and therefore one needs to have a certain degree of knowledge and experience in the investments field in order to understand the risks of such products.

Examples of 'non-complex' financial products include:

  • Shares, bonds or other forms of securitised debt admitted to trading on a regulated market

  • Money market instruments

  • Units in certain investment funds

The above are the ‘traditional’ financial instruments the average investor would typically invest in.

These examples are by no means exhaustive and merely indicative.

As part of the Appropriateness test, you are likely to be asked questions about your investment knowledge and experience.

If the firm concludes that you have the necessary knowledge and experience to understand the risks involved, then the firm may simply go ahead with the transaction.

If the firm concludes that you do not have the necessary knowledge and experience, or you have not supplied enough information to enable it to reach a conclusion, then you will receive a warning from the firm saying that either the firm does not regard the proposed transaction as appropriate or that the information is not enough to enable it to determine whether the financial instrument is appropriate or not.  If you insist on going ahead with the transaction, you must accept the risk and be provided with a risk warning.

Trading in Products without Investment Advice

The Appropriateness test does not apply in the case of some kinds of ‘non-advisory’ transactions. This service can be described as Execution-only. The circumstances where the test does not apply are as follows:

  • the product involved does not have to be a ‘complex’ product;
  • You have chosen to contact the firm to carry out your transaction (i.e. at your own initiative). This means that you are not responding to a personalised approach to you from the firm which was intended to influence you in respect of a specific product or transaction (for example in certain situations when you are buying shares on line).

You will be warned that the firm is not exercising any judgement on your behalf.

In such cases, you do not have to answer any questions about your investment knowledge and experience, financial situation or investment objectives. The firm may of course ask you questions for other purposes, particularly if you are a new customer.

Frequently Asked Questions

This section gives you easy access to commonly-asked questions about investments aspects.

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The Role of the MFSA

Question: 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.

Question: 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.

Licensing Type

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.

Choosing the Investment Services Provider

Question: 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!

Question: 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.

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