Category Archives: Legal

Financial Regulation related Post

Legal, Other

MLRO: Friend or Foe?

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Money Laundering

A Money Laundering Reporting Officer (MLRO) is responsible to ensure that the company they work for is compliant on aspects of Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT). Having just attended a 2 day seminar on AML, which for a change was not a total waste of time, I was inspired to write a post on the position of an MLRO. A person occupying this role can be considered as both a great friend and a great enemy by their colleagues.

Friend

The friend part comes from the point of view that a good MLRO will ensure that the business is abiding by the AML laws and regulations. Besides meaning that the entity would be compliant, it also means that the business is not taking on any unnecessary business risks. An effective MLRO would have in place robust systems and procedures to ensure the entity they are working with is covered from all angles. This involves detailed written procedures that everyone in the organisation is made well aware of. It is useless to have the best system possible for your particular business but then the people who have client contact are not made aware of the system. Thus, regular and effective internal training is necessary in order for the MLRO to explain to the people working in the organisation about their duties and responsibilities from an AML point of view.

In order to have an effective system the MLRO has to be approachable and people have to be made aware of who the MLRO actually is. Although the MLRO must be a senior officer within the company, they cannot be just sitting in a head office with nobody on the ground floor knowing who they are. Also, simply sending an email with the company’s AML manual or giving an employee a copy of such manual is not enough. Most people would simply ignore it or read it once and just dismiss it. So the MLRO must find a way to get people interested in the work they do and get them to understand its importance.

An easy way to do this is to simply explain how an AML breach could be detrimental to the person’s job and the whole organisation’s existence. The fine that the entity might receive if it is in breach of AML rules and regulations is just one aspect – the reputational risk of the entity could perhaps be the largest risk factor. So if colleagues see their MLRO as the one who helps them stay in check and avoid costly risks they will see them as a friend.

Foe

Of course, like with anything to do with compliance it is much more common to look at the MLRO as the enemy. From the point of view of directors and shareholders the MLRO, like the Compliance Officer could easily be regarded as being an extra expense that causes more expenses and disruption of potential business. While senior management might want to take on a risky client and try to justify the risk-reward trade off of doing so, the MLRO would be the person to highlight the risk part and perhaps seen as exaggerating this aspect.

From the point of view of the people who are actually in contact with clients the MLRO could be the one that would bar them from pursuing certain potentially lucrative client accounts. They could also look at the MLRO as the person who is forcing them to get a stack of useless paperwork on a client that they have known for years that could cause the business to lose such a client.

To be fair certain MLROs do not make it easy on themselves and tend to be too strict and annoying in their pursuit of carrying out their duties. Just because an MLRO needs to be sure that absolutely everyone is covering all aspects of the AML rules it does not mean that they should be policing their colleagues in an antagonising and perverse manner. If people see their MLRO as the enemy the system will not work effectively and mistakes and oversights would be inevitable.

Furthermore, if an MLRO is over-reaching and going over and above the requirements then they would definitely be seen as the enemy. Over stepping and being extra safe is also bad for business. No profits can be made without certain risks and if an MLRO is holding back business due to over-reaching and trying to be holier than the Pope, then it will ultimately back fire through loss of good business. I am a great opponent of over-regulation, which can be either brought upon by regulators or by the people who are in charge of enforcing the regulation within organisations.

Finding a Balance

The key is to finding a balance. Unfortunately being seen as an enemy and a necessary evil that comes with the job. The MLRO must recognise that it is not his/her responsibility to decide what degree of risk a company would like to take. That decision remains always at the discretion of the directors who are responsible for the overall direction of the business. However it is the MLROs job to notify top management about the risks involved from an AML perspective and to work with them to develop the best working environment.

A very interesting exercise that was undertaken during the seminar I recently attended was to divide participants into groups and work on a case study. The case study involved coming up with a scheme on how to launder €150Mln for a multi-national consortium. The beauty of the exercise was that it put people who are responsible for counteracting money laundering on the other side of the situation. The game helps one appreciate the level of complexity that is needed and the mind frame that launderers would be in. It ultimately will help in finding loopholes in the system of the company that each participant works in. So the exercise helps people learn by putting themselves in their counterparty’s situation. I believe this is an interesting and effective method that an MLRO could use in getting the AML message across to people.

Does the Regulator play a Role?

The Malta Financial Services Authority (MFSA) and the Financial Intelligence Analysis Unit (FIAU) are the regulators that authorise and monitor the work of MLROs. Do they have a role to play in the effectiveness of the work of the MLRO? The simple answer is yes, but one must not end up “depending” on the regulator to do something. Although there is a requirement for the MLRO to present an annual report to the FIAU which also includes training received and conducted there is no specification of what is actually required. So in November and December it is a common practice to see many AML “training” programs which would suffice for the purposes of filling in the MLRO training requirements.

Of course one can argue that from year to year they would still remember the laws and regulations and if there are new ones they can easily read up on them on their own. With this I agree 100% and find the “training” courses that simply go through the legislation as utterly boring and useless. In my view, it would make much more sense if the training required involved something more. Something with practical examples, case studies and something that is more interesting than watching paint dry on a humid day! It would make sense to use practical examples that have actually happened locally and training has to be targeted depending on the type of business. An MLRO of a bank has a totally different situation compared to an MLRO of an investment service company or and MLRO of a real estate agency. So having group training sessions is definitely not the ideal setting.

The Bottom Line

Whether we like them or not the MLROs do play an important role in the organisation. There is no secret formula that works for every organisation, but each MLRO has to adopt a risk-based approach to cover the issues that affect their organisation. Undoubtedly the MLRO needs to understand their organisation very well and they need to identify the weaknesses that exist from an AML perspective. However this is not enough, any system and procedures they develop are only as good as far as how they are implemented. Thus, MLROs need to find a way to monitor and incentivise the people with client dealings and transaction processing so that they actually implement the AML measures.

KD

 

 

 

 

Legal, Other

Arbiter for Financial Services Act – A Review

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 arbitrate

Currently the Arbiter for Financial Services Act is being finalised following a series of discussions between representatives of the government and the opposition. The Act, which will be coming into force in the coming months, will have an effect on any company that offers financial services from Malta. This act generally gives the authority to one person to settle a dispute between two or more parties which have an issue which is connected to financial services. The idea is to have a faster and more focused court-like setting where the Arbiter has the “power to mediate, investigate, and adjudicate complaints filed by a customer against a financial services provider.”  So this act is going to give quite a bit of power to just one person and the Board of Management which would be managed by such person.

The idea looks nice on paper, but how will this all work in practice?

Here I have 3 main reservations

1.      Independence of Arbiter

One of the first issues I am finding with this setup is that it is going to be quite difficult to find someone who has the competence required and at the same time is independent. The requirements to be appointed as an Arbiter are that the person should “possesses the necessary expertise in consumer related issues in respect of financial services, including a general understanding of law.” The draft Act also mentions some instances where a person cannot be considered as an Arbiter which again all look nice to have on paper.

So we are saying here that it has to be someone who has acquired an amount of knowledge and expertise in the financial services industry, specifically in consumer related issues. In my view this is not going to be an easy task since the issue of independence is going to be a problem for many potential candidates. Let us consider appointing someone who has been working with the regulator for an amount of years. Such a candidate would have been involved directly with consumer issues in the financial services industry which qualifies him/her for the post. However, if this person has never worked with a financial service provider or has not done so in a very long time, then that person would lack the knowledge and expertise of how things work in the field. 10, 15, 20 years of always hearing one side would not really allow that person to be independent.

What if we consider appointing a current or an-ex judge/magistrate who would possess the legal acumen to actually give a legal ruling – the problem here is finding one with expertise in financial services. Ok, let us consider finding a lawyer who is specialised in financial services. This may well be the best option however the issue of independence is going to come up more than once. Given the small size of the local industry, Malta’s financial services practitioners tend to use the services of a handful of legal firms which have expertise in this industry. So if an employee from such an entity was to be appointed as the arbiter it could well be the case that many a time such person would have a conflict of interest through his/her previous dealings with the financial services practitioner.

What about appointing someone who has been working in the industry in a senior position for many years and thus has the knowledge and expertise of dealing with clients, keeps up to date with financial services regulations and would have a deep knowledge of different financial services instruments. Two main problems here: i) Why would such a person leave his/her current position which is likely to be more financial rewarding and flexible? ii) How can such a person be independent when most financial practitioners know each other and may have done business together?

2.      Excessive Powers of the Arbiter

Another very troubling issue is the excessive powers being granted to this one person (or office) which may be beyond the competence of such person and quite possibly anti-constitutional. Here I am referring to the fact that the Arbiter will have the authority (according to this Act):

“to consider complaints which are being dealt with or which have already been dealt with by the Malta Financial Services Authority, and its recommendations, rulings, directives or decisions shall not be considered as a res judicata of the complainant’s case and the consideration of such a complaint by the Arbiter shall not be construed as going against the principles of natural justice”

This is by far the most dangerous clause that exists in this act. It is being said that even when a complainant and a financial service provider have come to a contractual agreement on a settlement, the Arbiter has the authority to supersede such agreement. This creates a very dangerous precedent whereby the legal stance of previously settled cases which have been contractually agreed to by both parties is put into question!

According to the lawyers present during the discussions, up until now it has always been the case that any dispute about the validity of a contract would have to be scrutinised in the Civil Courts. Thus this clause is giving a dangerous and unprecedented authority to one person who is only required to have “a general understanding of law”. So we went from a formal well established procedure in the civil courts to being judged by a person who generally knows the law!

This very dangerous clause, coupled with the fact that the Arbiter can decide on cases going back to 2004 (and not anything earlier than that date) makes one wonder the exact reasoning behind inserting such clauses. It begs the question:

Is this law being enacted in light of the La Valette Multi-Manager Property Fund incident?

One cannot help but wonder about the above question and at the same time keep in mind that at the end of the day the Government (which is pushing for the enactment of this law) is the largest shareholder in Bank of Valletta (BOV) with its 25.23% shareholding. Furthermore, BOV is a publicly listed company with its shares trading on the Malta Stock Exchange. So wouldn’t it be only logical to consider whether one should sell his shareholding in BOV if this Act is passed through parliament as it currently stands?

What does this mean for the Insurance industry? Companies within this sector are involved in many settlements on a regular basis – such is the nature of their business. So if an insurance company can no longer bank on the legal validity of the claims it has settled – how does it provision for this in the policies it issues? Again, Mapfre Middlesea Plc, GlobalCapital Plc and all the publicly listed banks are involved in the insurance industry to one degree or another – so should one also sell all his holdings in such companies if this Act remains unchanged?

In a nut shell, saying that this dangerous clause would open up a Pandora’s Box would be an understatement.

3.      Who really benefits?

At the end of the day, no matter what ruling the Arbiter gives in his hastily 90 day target time the right of appeal from that sentence cannot be removed. Thus the end result would most likely be that both claimants and service providers would end up worse off and the people that have most to gain from all this are the lawyers and consultants appointed by both parties. Interestingly enough, it had been proposed in the discussions about this Act that there should be a cap established on the fees that a person representing a complainant can charge. The proposal was to have a cap amounting to the higher of €500 or 0.5% of the net proceeds won on behalf of the complainant. This would serve to protect the complainant from ending up paying exorbitant legal and consulting fees. To date I am not aware that the Government has introduced this clause as it was stated that it needed to be studied further.

knowledgepower

The Bottom Line

Like I have said many times before, the best way to help consumers and protect them is to educate them. If consumers are better equipped to assess the products and proposals that service providers propose or recommend to them we will have a much better result. Increasing regulation ends up marginalising the small investors since they become uneconomical to service. The risk involved and the time involved to service the small investor would not make it viable to service them. So as a result they would end up only being offered the same few products and thus creating a concentration risk in those few products. This concept of educating investors has to flow both ways however, the industry and quite possibly to a certain degree the government should come up with ways of organising educational clinics, seminars, conferences, courses and other incentives about the subject to the investors. But from the other hand, the investors have to be make an effort to look for such learning opportunities and not simply play the fool that wants to shift all the responsibility to the service provider. In the words of many before me: “Knowledge is Power” and thus through more knowledge investors would possess the power (ability) to better decide on their financial matters with guidance from the financial practitioners.

 

 

 

 

 

 

Legal, Other

Regulating the Financial Services Industry – Finding a balance

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balance

Why Regulate?

I recently watched the movie “The Big Short” which is about a few traders who actually predicted that the US housing bubble was going to burst and that the collapse of the sub-prime mortgage market was inevitable. These traders used financial instruments (mainly credit default swaps) to bet against the market and the major banks – which as we all know now, was a very profitable thing to do in the end.

The reason I opened with a reference to this movie is not to get into the merits of how they profited from the situation but to highlight a point that struck me the most while watching it. In the move the actor Steve Carell plays hedge fund manager Mark Baum who appears to be on vendetta against the big Wall Street banks who he describes are nothing but crooks. At first the character thinks that the big banks do not have a clue what they are doing and that they are being naïve by not recognising the problem and continuing to deal in sub-prime mortgages which are literally worthless. But at the end he finally comes to the realisation – which now with the benefit of hindsight is quite obvious to see – that the big banks knew exactly what they were doing and what’s more, they knew that they would have to be bailed out since they were too big to fail. So they deliberately made as much profits as possible until they would reach the point of no return and have the tax payer bail them out.

This notion that the banks know that they are too valuable to the financial system and that bank failures would be devastating on any economy puts them in a particularly advantageous position. In more technical jargon we would say that it creates a moral hazard situation. This is the main reason why the financial sector is so highly regulated. Thus, many would agree, especially many small investors who do not trust the big banks and believe they need to be protected from them, that regulating the banks and other financial services practitioners is very important. The more regulated they are, the better they would argue.

But…

Could too much regulation actually leave investors worse off?

More specifically, could the small retail investors that the politicians and policy makers so heroically swear to protect against these big bad financial practitioners, end up worse off?

Let us start with reviewing a bit the EU investment services rules since in Malta we are subject to the same/similar regulations & directives. So in 2007 we saw the introduction of the Market in Financial Instruments Directive (MiFID) which introduced much more pro-consumer rules and put much more onus on the service providers. What this means is that investment service providers had to start recording much more data in order to ensure that they were abiding by the many more procedures and regulations that had been introduced. This in turn lead to much more forms to be filled in and checks to be put in place to ensure that the sales staff were actually adhering to the rules and not putting the company they work for at risk of breaching any of them.

On the whole this is obviously a good thing since it ensures further that the investment service providers are acting fair and responsible in carrying out their business. At the same time, this increased regulation comes at a cost in the form of time and money that investment services firms have to spend per transaction. Furthermore, such firms also have to assess the risk and reward of entering into transactions with clients. Are the various risks of selling this product to this client worth the compensation that the company is earning?

In most cases the highest risk is when dealing with the smaller less knowledgeable investor, who is also the same investor that will generate the lease return for the service provider. So it is quite common for investment firms to exclude certain investors from certain products based primarily on the higher risk such investors pose. This in turn will leave these investors with lesser choice and higher concentration risk since they will only be offered a small choice of investments. So regulations that had the aim of protecting investors could actually be leaving them worse off by excluding them unnecessarily from certain investments. What is even worse is that such investors, who are the ones who would need investment advice the most, could be shun away altogether from investment advice due to the higher risk of offering investment advice to them.

You may think that I am exaggerating a bit here – which firm would reject business just because a product is classified as complex and presents more risk to the investment service provider? Let us look at real examples of how this is actually happening. Any HSBC Bank Malta Plc (HSBC) customer had been informed that a few years ago the bank decided that it would only be offering execution only transactions and would absolutely not be offering investment advice. Furthermore, the same bank has recently informed its customers that it would no longer be allowing its customers to hold investments on their nominee accounts. That is to say that HSBC would no longer be holding the custody of clients’ investments and has actually written to clients to transfer their holding to other providers (which are competitors of the same bank).

Some may argue that this is a one off case and that it is a direct result of directives by HSBC’s parent company to reduce risk as much as possible across the many subsidiaries, especially in the smaller jurisdiction such as Malta. So let us look at another example – the subordinated bond issued by Bank of Valletta Plc (BOV) late last year which is basically a Contingent Convertible Bond (Coco). Due to the nature of the bond it was rightly so rated as a complex instrument by our regulator. Under MiFID rules such instruments must be accompanied by more paperwork to ensure that it would be appropriate for an investor based on such investor’s knowledge and experience.

What happened in practice? A bond which from a scale of 1 to 10 in its complexity would be rated at less than 1 in my view, was made subject to more scrutinising procedures by the listing authority. It had to be sold in two tranches – tranche 1 imposed a minimum of €5,000 which had to also be accompanied by investment advice, thus putting the highest level of onus on service providers, while tranche 2 imposed a minimum of €25,000 and had to be accompanied by an appropriateness test. Our regulator argued that due to the vast network of retail clients that such a bond would have appealed to, such clients needed to be protected even further than MiFID suggests. The result – many investment services providers including other banks simply did not bother with the issue. The bond was sold by a smaller amount of firms which got back logged in the paperwork and the issue had to be prolonged until all the work by the investment firms had been carried out. Looking at the trading of the same bond on the secondary market – virtually non-existent. I went into much more detail in a previous post which focused specifically on the bond issue. Here I simply wish to highlight the negative aspect of too much regulation.

Compliance

So how do you strike a balance?

I started the post by pointing out why regulation of this industry is such an important aspect. We then saw a few examples of how regulation could leave investors worse off by marginalising the smaller less knowledgeable ones. So how can regulators and policy makers stick a balance between these two opposing forces? In my view, the answer lies in being more pragmatic in the imposition of the rules and regulation governing investment services. The one size fits all approach of putting all complex instruments into the same basket is redundant and disruptive. While firms that are found guilty of negligence and misconduct should be properly dealt with, regulations should not be acting as an impediment to business.

Another very disruptive and damaging practice is having an ultra pro-investor approach when regulating investment services firms. As I have just stated, when found guilty of purposeful negligence and unethical behaviour the regulator should be given as much ammunition as possible to deal with such perpetrators. However, feeding the idea that if someone loses money when investing in a financial instrument they have a good chance of getting compensation creates a misconception that investment firms are guaranteeing every instrument that they sell. This is a very dangerous situation which will only lead to a negative situation for both the investors and the firms selling the investments.

Could there perhaps be a solution whereby staff that work with the regulator must spend a certain amount of time working with an investment service provider? Thus they would attain hand-on experience and would ultimately be able to implement the directives more effectively and efficiently. Moreover, this would have to be an ongoing exercise and not a one time thing. Just because someone worked in the industry 10 years ago and has been working for the regulator ever since does not qualify as still being in touch with reality.

On the other hand, should compliance officers and Money Laundering Reporting Officers (MLROs) be given training by the regulator on a regular basis for example? This would help to get the perspectives of both the regulator and the practitioners more in line. Here I am not talking about the usual boring courses that just present what is in the regulations. Anyone can read the regulations on their own and no presentation is needed for that. What I am speaking about here is offering real life examples of what the regulator is dealing with in order to create a more understanding environment between the regulator and the practitioners.

The Bottom Line

At the end of it all, it is always going to be a difficult task to find the ideal level of regulation. What is important is that both regulators and practitioners work towards the common goal and try to understand each other’s perspective. Both can learn from each other and both need each other whether they would like to admit it or not. Regulating by empowering is far more effective then regulating by imposing. Thus, I truly believe that more effort and resources need to be channelled towards the education of the investing public. After all education = power since by educating people you will empower them to be able to regulate the financial practitioners themselves.

General, Legal

Have I received Investment Advice?

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investment-advice2

In this week’s post I would like to discuss the concept of Investment Advice. Unfortunately there is a big misconception on what a financial advisor’s role is in modern financial markets. Some investors have the incorrect idea that a financial advisor is there to tell you exactly what to do with your money and that every time they speak to an advisor it means that they have received advice.

In reality most investors do not even receive advice from their advisor but information. From a legal point of view there is a specific definition for what financial advice is and just because your broker told you that he/she has been selling the bond of XYZ limited lately it does not mean that he/she gave you advice to buy that financial product. Just because the features and characteristics of the product are explained to a client it does not mean that such client received advice to buy that product.

To go a step further, even if the advisor carries out an appropriateness test on a client whereby the advisor asks the client certain question to establish the knowledge and experience of the client in relation to a particular product, it still does not qualify as giving financial advice.

Financial services providers in Malta and across the EU are subject to the Market in Financial Instruments Directive or MiFID in short. This directive defines investment advice as follows:

“‘Investment advice’ means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments”

Thus, the directive is quite specific in what actually amounts to investment advice as opposed to other things such as promotion and sell or simply the provision of information. In order to clarify the concept further, the CESR (Committee of European Securities Regulators) in October of 2009 had published a consultation paper entitled “Understanding the definition of advice under MiFID” (Ref. CESR/09-665). In this paper it was established that for a service to amount to investment advice ALL of the following 5 tests had to be met:

  1. Does the service being offered constitute a recommendation?
  2. Is the recommendation in relation to one or more transactions in financial instruments?
  3. Is the recommendation at least one of the following: a) presented as suitable?; b) based on a consideration of the person’s circumstances?
  4. Is the recommendation issued otherwise than exclusively through distribution channels or to the public?
  5. Is the recommendation made to a person in his capacity as one of the following: a) an investor or potential investor?; b) an agent for an investor or potential investor?

In the rest of the post I will be going through the above 5 tests to elaborate more on what is being meant in more detail.

MiFID

Test 1: Does the service being offered constitute a recommendation?

In specifying that a service will only amount to investment advice if it constitutes a recommendation, the Directive draws a distinction between providing advice and simply providing information. Advice requires an element of opinion, in contrast to the provision of information that does not make any comment or value judgement on its relevance to decisions which an investor may make.

Hence, when an advisor simply provides facts about a product such as the interest being promised, the maturity date, who the issuer is and what its business is, there is no element of advice yet. Even if an advisor explains to a client that the current interest rate scenario is one where investing into a long dated bond makes the investment more risky than investing into a short dated bond, this is still an element of fact and not an opinion.

In theory a recommendation not to buy a particular financial instrument could also amount to investment advice. However, all of the 5 tests mentioned also have to be met. Moreover, the recommendation not to buy a product has to be based on an opinion and not simply facts. Case in point, the recent Bank of Valletta Notes that are being issued at a rate of 3.50% fixed for 15 years. As I explained in a previous post (see link here), the fact that the bond is likely to be illiquid, and is long dated with a low fixed interest rate means that based on facts, and not simply an opinion, the bond presents a big liquidity and interest rate risk.

Test 2: Is the recommendation in relation to one or more transactions in financial instruments?

Both generic advice and general recommendations are not investment advice under the Directive. In the case of generic advice, the consultation paper explained that this is owing to the fact that they do not relate to a particular financial instrument. So as an example, if a financial advisors tells a client that based on what the client has explained to the advisor such client should invest in bonds – no financial advice has been given. The terms bonds, shares, commodities are too generic in nature and can relate to many different instruments at once. For example, buying a bond issued by the government of Venezuela and a bond issued by the Republic of Germany are both transactions in bonds, but it is easy to understand that they are quite different in terms of risk.

In contrast, general recommendations are not investment advice because, being addressed to the public in general, they are not by definition presented as suitable for, or based on an evaluation of the personal circumstances of, a particular investor. So if a client sees a billboard on the side of the road that is promoting the sale of a particular financial product this cannot be construed as being advice.

Test 3a: Is the recommendation presented as suitable?

If the presentation of the information seeks to influence the client’s choice then the firm might be making an implied personal recommendation. If a disclaimer does not change the nature of a communication, meaning that the communication would still create a reasonable expectation by the client that he/she is being advised, the firm may be viewed as providing investment advice. Thus, disclaimers cannot be relied upon, on their own, to ensure that a service does not involve presenting a recommendation as suitable.

If a person places special emphasis on the advantages of one product over others for a client, in a way that would tend to influence the decision of the recipient to select that particular product over others presented, this could well amount to investment advice. Again, it must be stressed that all the other 4 test must also be satisfied for the service to be deemed as being classified as investment advice. So if an elderly client who is retired and is reasonably assumed to be interested in fixed income products is presented with a product that offers a fixed income, this alone does not mean that investment advice has been given.

Test 3b: Is the recommendation based on a consideration of the person’s circumstances?

If a firm has information about a client’s circumstances, including information on areas like his investment objectives or financial situation (i.e. investment advice or the service of discretionary portfolio management had previously been given to the client), it might reasonably be expected that the information is being used to create a picture of the client’s needs and wants to form the basis of a recommendation.

In some cases, it would not be reasonable to expect that a firm will access and use all of the information that it may happen to hold about a client’s circumstances. However, if information on a client was collected recently, or indeed over time as part of an established relationship, a client returning to the firm for follow-on advice can reasonably expect his previous information to be taken into account.

A related issue is that some marketing activities could be inappropriately classified as investment advice, if they are distributed to existing clients on whom the firm holds information. In situations where those activities either involve the presentation of a financial instrument as suitable for an investor or where the firm is making a recommendation based on the consideration of a person’s circumstances, investment advice would have been provided.

It has to be stressed here that the recommendation must relate to something specific. So if for example all the clients of a firm who have previously invested in bonds are sent a mailshot about a new bond that is coming to the market, this alone does not necessarily classify as investment advice. If a letter is sent specifically to a client there would for sure have been a solicitation of the product by the investment service provider to the client. Thus an appropriateness test would need to be filled in since the service would not have been at the initiative of the client. However, this does not necessarily mean that investment advice was given.

investement-advisor

Test 4: Is the recommendation issued otherwise than exclusively through distribution channels or to the public?

Not all messages to multiple clients would automatically constitute advice, but there are circumstances in which they could. Three elements that should be taken into account:

  1. the target audience (if the personal circumstances that led the individual to be contacted are highlighted);
  2. the content of the message (e.g. if it contains a solicitation or judgement regarding the advisability of the transaction); and
  3. the language used (e.g. the tone and the way it could be understood by the client).

Test 5: Is the recommendation made to a person in his capacity as an investor or potential investor?

Where the client’s primary purpose for seeking advice is in order to generate a financial return or hedge a risk, the client’s objective is patrimonial in nature and if advice is provided such advice would be deemed investment advice. Conversely, where the client’s primary purpose for requesting the advice is for an industrial, strategic or entrepreneurial purpose, the objective of the client is industrial, entrepreneurial and strategic in nature and the advice provided would be corporate finance advice and not investment advice.

The Bottom Line

The aim of this post is to clarify what is understood as investment advice from the perspective of MiFID. There is a big misconception about this topic in the local market and I hope this post helped to clarify issues that might not have been known to investors. As always please refer to my general disclaimer and note that this post was neither investment, legal or any other form of advice. Anyone interested in further discussions about this or any other topic covered in my posts can contact me on kd@financebykd.com.

KD