Investment Advice under Maltese Law
Investment advice is one type of investment service which may be furnished by an investment service provider licensed by the Malta Financial Services Authority (MFSA) under the Investment Services Act (ISA). With the exception of a category 4 licence holder, all other investment services licence holders may provide investment advice.[1]
Investment Advice is defined in the First Schedule to the ISA as
‘Giving, offering or agreeing to give, to persons in their capacity as investors or potential investors or as agent for an investor or potential investor, a personal recommendation in respect of one or more transactions relating to one or more instruments.’
One essential component of the definition[2] is a ‘personal recommendation’, which is in turn defined as a suggestion which is portrayed as suitable for the person to whom it is addressed, or which is based on a consideration of the circumstances of the recipient. There is an exception to the effect that a recommendation issued exclusively through distribution channels or to the public does not constitute a personal recommendation.
Investment Advice under MiFID
The Markets in Financial Instruments Directive (MiFID) (2004/39/EC) imposes several ongoing obligations to safeguard client welfare. Investment firms must carry out client profiling and classification in order to provide adequate investment advice which is suitable to the client’s profile. This has been complemented by the MiFID Implementing Directive (2006/73/EC). In October 2009, a consultation paper entitled ‘Understanding the definition of advice under MiFID’ was launched by the Committee of European Securities Regulators (CESR) to identify situations where firms will, or will not, be considered as providing investment advice. Subsequently, CESR issued a feedback statement regarding the consultation. CESR delineated five key tests which have to be satisfied for a service to qualify as investment advice under MiFID.
Test 1: Does the service being offered constitute a recommendation?
A personal recommendation is a recommendation made to an investor or potential investor, (or to an agent of such person), at the initiative of the investment firm or the investor. Whether or not an investor acts upon a recommendation is immaterial.
Advice must be distinguished from merely providing information. Whilst information involves statements of facts or figures, advice entails an element of opinion over and above the provision of information, such as comments or value judgments regarding the significance of the information in relation to decisions which an investor may take. The circumstances in which information is presented may render the information subjective, and would thus amount to a recommendation. A comparison of the benefits and risks of one investment as compared to another is objective information; however, if special emphasis is placed on the advantages of one product over others for a client in a way which is likely to influence the decision of the recipient, this would be tantamount to a personal recommendation. Moreover, a situation may occur where a communication with a client taken in isolation would appear as mere provision of information, however, if viewed in the context of a multiple step recommendation process it would amount to a recommendation.
Assisting clients to filter information about different financial instruments does not automatically mean that a recommendation is being given, provided that the ability of the clients to make their own choices is not curtailed. However, issues such as the type of questions asked and whether they infer the use of opinion or judgment by the firm may indicate that a recommendation is being given. Nevertheless, price comparison websites which collect data from clients about their circumstances and which generate a list of investment products that meet certain criteria, without providing a recommendation, would not constitute investment advice.
Test 2: Is the recommendation in relation to one or more transactions in financial instruments?
MIFID sets out the ‘transactions’ that a recommendation could be in relation to:
- buying, selling, subscribing for, exchanging, redeeming, holding or underwriting a particular financial instrument; or
- exercising or not exercising any right conferred by such an instrument to buy, sell, subscribe for, exchange or redeem a financial instrument.
It is immaterial whether or not the transaction actually materializes. Generic advice about a type of financial instrument, such as advice on investing in bonds rather than shares, would not be classified as investment advice. However, if the advice includes an indication of a particular instrument within that asset class this would be considered as investment advice. Similarly, a general recommendation about a transaction in a financial instrument intended for distribution channels or the public would not constitute investment advice in terms of the MiFID Directive. Contrarily, a recommendation consisting of the presentation of several financial instruments that are together recommended over other possible choices would be tantamount to investment advice.
Test 3: Is the recommendation:
- presented as suitable? or
- based on a consideration of the person’s circumstances?
The third test is made up of two tiers, and a recommendation would constitute investment advice if it fulfils at least one of the relative criteria. Thus a recommendation would be classified as investment advice if it is either presented as suitable or if it is based on a consideration of the person’s circumstances, or if it is both presented as suitable and is based on a consideration of the person’s circumstance. Consequently, an investment service provider who does not collect any information about an individual but strongly recommends a particular investment product as suitable for that person would still be providing investment advice.
Test 3a: Is the recommendation presented as suitable?
An investment services provider would be providing investment advice when presenting a financial instrument as suitable for the investor in either an explicit or implicit form. If the firm provides only selective information about the advantages for an investor of one specific product compared to others, seeking to influence the client’s choice, the firm would be making an implied personal recommendation, thus providing investment advice. It is not necessary for a firm to expressly state that a recommendation is being presented as suitable to the client. Moreover, presenting a financial instrument as appropriate for an investor would invariably amount to investment advice even if the firm knows that it is not suitable for that investor. Furthermore, an investment service provider could not avoid providing investment advice merely by using a disclaimer in its communications. Since clients do not have the same knowledge and understanding, a particular client’s perception as to whether or not s/he is receiving a personal recommendation will not be the sole criterion in determining whether investment advice is actually being given.
Test 3b: Is the recommendation based on a consideration of the person’s circumstances?
Information about a person’s circumstances include both factual information, such as income, as well as subjective information about that person’s desires and necessities, such as overall risk appetite. The nature of the information which a firm collects, and the way it presents its questions, are crucial in ascertaining whether a recommendation is based on a consideration of a person’s circumstances. A firm which has collected information about a person’s circumstances will still be considered as providing a personal recommendation, irrespective of whether it uses the information it has accumulated or not.
Test 4: Is the recommendation issued otherwise than exclusively through distribution channels or to the public?
Newspapers, magazines or other publications addressed to the public and to which a large number of persons have access, including a public webpage on the Internet as well as television and radio programmes, are considered as distribution channels. A recommendation concerning financial instruments made exclusively through such distribution channels or to the public is not a personal recommendation. Publication of a list of ‘best products’ or ‘funds of the month’ addressed to the public in general, rather than to an individual client, would not in itself be regarded as investment advice. The Internet does not always qualify as a distribution channel. If a webpage or e-mail correspondence is used to provide personalized information to a particular client rather to the general public, this would amount to investment advice.
Moreover, a message sent to several clients or potential clients could still be considered as investment advice, irrespective of the medium used, i.e. whether oral, correspondence, email etc. The target audience, the content of the message and the language used, are different elements to consider in assessing whether a message sent to several clients amounts to investment advice.
- Target audience – A message could qualify as investment advice depending on the way in which the clients to whom the message is sent are selected.
- Content – A message containing a solicitation, recommendation or opinion about the suitability of a product could amount to investment advice.
Language – The tone of the message could be such that it is reasonably perceived by the client as suggesting a particular instrument, thus amounting to amounting to investment advice.
Test 5: Is the recommendation made to a person in his capacity as one of the following:
- an investor or potential investor?
- an agent for an investor or potential investor?
A recommendation would be tantamount to investment advice if it is either made to a person in his capacity as an investor or potential investor, or else it is made to a person in his capacity as an agent for an investor or potential investor.
Test 5a: Is the recommendation made to a person in his capacity as an investor or potential investor?
Under MiFID, a recommendation to a person acting in his capacity as an investor or potential investor, or to a person acting in his capacity as an agent for an investor or potential investor constitutes a personal recommendation. Consequently, a recommendation provided to a person acting in another capacity would not amount to investment advice. It is irrelevant whether a client is specifically paying for such advice or if advice is given in the context of a wider package of investment services.
Corporate finance advice to undertakings on capital structures, industrial strategy and related issues is an ancillary service which does not constitute investment advice. Such advice is neither provided to investors, potential investors or their agents, nor does it involve investment in financial instruments. However, the distinction between investment advice and corporate finance advice often depends on the particular case at issue, since both forms of advice can overlap to a significant extent. CESR is aware that firms may face uncertainty in deciding whether they are giving advice when providing corporate financial services. CESR recommends that such firms consider whether the general targets of investor protection that MiFID seeks to achieve are relevant on a case-by-case basis.
Test 5b: Is the recommendation made to a person in his capacity as an agent for an investor or potential investor?
In most cases it will be clear that a person is acting as agent for an investor or potential investor, for example where a person holds a power of attorney to act in the name of his spouse. However, there may be situations where it is ambiguous whether an agency relationship within the meaning of the MiFID Implementation Directive exists. A firm, such as a portfolio manager, may commission advice for a client from a third party specialist adviser, acting as agent for the client. The firm must clearly state that the portfolio manager is acting as agent for a particular client or clients, and the investment service provider must ensure that the investment firm commissioned possesses all the required information about the clients involved.
Firms that do not wish to provide investment advice
Investment services which do not satisfy the five key tests do not amount to investment advice. To avoid the risk of providing investment advice inadvertently, a firm which does not intend to provide investment advice must regularly ensure that its internal controls and the information given to clients tallies with the nature of the service it is providing. Staff training, in particular of customer-facing personnel, is crucial to ensure that employees refrain from giving their own views or recommendations about the suitability for the client of any particular financial instrument. Merely describing a service as ‘non-advised’ will not, on its own, mean that the services rendered do not amount to advice.
[1] Subsidiary Legislation 370.03, Investment Services Act (Licence and other Fees) Regulations, Rule 4
[2] Investment Services Act, chapter 370 of the Laws of Malta, First Schedule
