Malta Investment Firms Client Classification and Categorisation

When providing investment services (other than investment advice or portfolio management services), a Licence Holder is required to ask its client or potential client to provide information relating to his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded. This process is intended to allow the Licence Holder to assess the appropriateness of the service being requested by the client. In so doing, the License Holder is required to determine whether that client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or investment service. A Licence Holder is within its rights to assume that a Professional Client has the necessary experience and knowledge in order to understand the risks involved in relation to the services being requested.

In the specific case of the provision of execution services and/or reception and transmission of client orders, the License Holder is exempt from the requirement to conduct an assessment of suitability and appropriateness, but only if:

• the services relate to shares admitted to trading on a regulated market or in an equivalent third country market, money market instruments, bonds or other forms of securitised debt (excluding those bonds or securitised debt that embed a derivative), UCITS and other non-complex instruments.;
• the service is provided at the initiative of the client or potential client;
• the client or potential client has been clearly informed that in the provision of this particular service the Licence Holder is not required to assess the suitability of the instrument or service provided or offered and that therefore, he does not benefit from the corresponding protection of the relevant rules,.

In general, in case of the service not being appropriate in relation to the client’s profile, a suitable warning needs to be given to the client in a standardized or in a personalized format. It seems that, having issued such a warning, the License Holder is then free to provide its services to that client, despite  the fact that the service requested is not suitable.

In the specific case of License Holders providing services relating to investment advice or portfolio management services, an enquiry also needs to be made by the License Holder into the client’s financial situation and his investment objectives. This shall in particular focus on the source and extent of a client’s regular income, his assets, and other regular financial commitments. Information should also be collected as to length of time for which the client wishes to hold the investment, his preferences regarding risk taking, his risk profile and the purposes of the investment.

In order to be able to construct a client profile, a License Holder is required to obtain from clients or potential clients, any information that is necessary for it to understand - in the context of the service to be provided - the essential facts about the client. At the end of the process, the License Holder must be in a position to have a reasonable basis for believing that the requested service satisfies the following criteria:

• it meets the investment objectives of the client in question;
• it is such that the client is able financially to bear any related investment risks consistent with his investment objectives;
• it is such that the client has the necessary experience and knowledge in order to understand the  risks involved in the transaction or in the management of his portfolio.

In the case of the client being a Professional Client, a License Holder is within its rights to assume that  the client has the necessary level of experience and knowledge, and that is financially able to bear any related investment risks consistent with the investment objectives of that client - and thus that the service to be offered is suitable.

In the specific case of the provision of investment advice and/or portfolio management services, where a License Holder does not obtain the information required, then it must refrain from providing its services to that client or potential client.

In assessing the suitability and appropriateness of a client, a License Holder must – depending on the circumstances - take into account:

• the types of service, transaction and instrument with which the client is familiar;
• the nature, volume, frequency of the client’s transactions in instruments and the period over which they have been carried out;
• the level of education, profession or relevant former profession of the client or potential client.

A Licence Holder is entitled to rely on the information provided by its clients. This unless it ought to be aware that the information is inaccurate or incomplete. In the case where a License Holder receives an instruction to perform investment or ancillary services on behalf of a client through the medium of another investment firm, the former may rely on the information provided by the latter as well as on the suitability and appropriateness determination prepared by that entity. The investment firm which mediates the instructions will remain responsible for the completeness and accuracy of the information transmitted.

he following qualify to be treated as eligible counterparties:

1. investment firms;
2. credit institutions;
3. insurance companies;
4. UCITS or UCITS management companies;
5. pension funds or a pension fund management company;
6. other financial institutions authorized or regulated under EU Law or the national law of an EU Member State;
7. undertakings which are exempt from the requirements of the MIFID in terms of Article 2 (1) (k) and (l) thereof;
8. national governments and their corresponding offices including public bodies that deal with public debt;
9. central banks and supranational organizations.

hese would typically be clients possessing the necessary experience, knowledge and expertise to make their own investment decisions and to properly assess the risks that they incur. The following are all regarded as professionals with respect to all investment services and activities and with respect to all the financial instruments mentioned in Schedule 2 to the Investment Services Act, 1994:

1. Entities which are required to be authorised or regulated to operate in the financial markets. The list below should be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned, entities authorised by a Member State under a Directive, entities authorised or regulated by a Member State without reference to a Directive, and entities authorised or regulated by a non-Member State:

1. Credit Institutions;
2. Investment Firms;
3. Other authorised or regulated financial institutions;
4. Insurance Companies;
5. Collective investment schemes and management companies of such schemes;
6. Pension funds and management companies of such funds;
7. Commodity and commodity derivatives dealers;
8. Locals;
9. Other institutional investors.

1. Large undertakings meeting two of the following size requirements on a company basis:

1. − balance sheet total: EUR20,000,000
2. − net turnover: EUR40,000,000
3. − own funds: EUR2,000,000

1. National and regional governments, public bodies that manage public debt, Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.

1. Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

hese are clients who are not categorised as eligible counterparties or professional clients. This is therefore a residual category which comprises all those clients that do not fall to be categorized otherwise..

Prior to commencing with the provision of investment services, a Licence Holder is required to classify its potential client as a Professional Client, Retail Client or an Eligible Counterparty. This obligation subsists not only at the beginning of the relationship with the client. In fact, there is a notification obligation in the case that there has been a revision of the categorisation. In furtherance to this obligation, a Licence Holder is required to implement written internal policies and procedures which are to be followed.

In order to assist License Holders in abiding by their obligations, Professional Clients are duty bound to keep the Licence Holder informed of changes which could affect their categorisation. This however is not a derogation from the obligations of the License Holder – in fact if the latter becomes aware that the client no longer fulfils the conditions to be regarded as a Professional client, then appropriate actions needs to be taken.

Once a client is assigned to a particular category the Licence Holder is required to inform him in a durable medium about his right to request a different categorization. This must be accompanied by a formal warning with respect to any limitations to the level of client protection that this different categorisation would entail.

A Licence Holder may, either on its own initiative or at the request of the client concerned:

• treat as a Professional or Retail Client, a client that might otherwise be classified as an Eligible Counterparty;
• treat as a Retail Client, a client that is considered as a Professional Client. In such a case the Licence Holder is allowed to consider whether to provide a higher level of protection to the particular client or otherwise. In case of an affirmative outcome, the client and the License Holder have to enter into a written agreement specifying whether this treatment will apply to one or more particular services or transactions, or to one or more types of products or transactions.

Having said this, a person who would otherwise fall to be treated as a Retail Client may, by giving clear instructions to the License Holder, elect not to be so treated - meaning that the client would have chosen to waive some of the rights and other protection afforded by the law. Such instructions can either be general or else can refer to a particular investment service or even a transaction or type of transaction or product. Upon receipt of such a request, a License Holder is required to issue the client with a clear written warning of the protections and investor compensation rights that will be lost. This is then to be followed up by a document from the client stating that it is aware of the consequences of losing such protection.

Despite the procedure as outlined above, the effect of requesting different treatment is not automatic, and in fact, a Licence Holder can only accept such a request provided that:

• clients should not be presumed to possess the market knowledge and experience normally expected of a Professional Client;
• an adequate assessment of the expertise, experience and knowledge of the client, provides reasonable assurance that the client is capable of making his own investment decisions and of understanding the risks involved. This assessment is conducted in relation to the specific investment services and products to be provided;

The above two criteria are normally satisfied through ensuring that:

• the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter of the previous four quarters;
• the size of the client’s Instrument portfolio, defined as including cash deposits and Instruments exceeds EUR 500 000;
• The client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.