As reported yesterday by International Adviser Malta is reforming its pension regulations following complaints about unregulated advisers and risky investments.
The new rules will bring Malta into line with international norms and the internal guidelines of some pension operators already on the island.
The regulations, which are set to ban the sale of “risky and illiquid” structured notes by unregulated advisers, should not affect the way every Malta pensions trustee does business.
Following an industry survey, IA understands the practice of investing in structured notes has been driven by adviser commissions and a low return environment.
"Some investors and advisers will not always possess the depth of knowledge required to fully understand the risks and rewards associated with investing in structured products."
While structured notes might not necessarily be high risk, some firms have allowed up to 100% of pension savings to be invested in these riskier products.
Commission on these structured notes also ranges from 2% to 5%, paid to the adviser.
In some instances, the end client will not even be aware money has been put into a structured note.
Not all firms’ internal guidelines allow these kinds of investments, IA understands.
Adviser limits
The other issue the Malta authorities want to tackle is the role of the adviser in the investment process. When the new rules come into effect on 2 July, advisers will either have to become Mifid regulated or have a regulated discretionary fund manager make investment selections.
In some instances, the client will have been advised to invest in a range of funds and this decision will need to be revisited under the new rules.
Under the new arrangement, where the adviser acts as the discretionary manager, this will become problematic when it involves structured notes. However, this shouldn’t effect most European financial advisers regulated under the Insurance Distribution Directive, but the details have yet to be confirmed.
Appropriate measures
Peter Kenny, managing director, Old Mutual International, said: “The Malta Financial Services Authority’s proposed new regulations are sensible, appropriate measures to be taking.
“Specifically, we welcome greater restrictions on structured notes. Old Mutual International is encouraging all market participants to help rid the industry of inappropriate structured products which are having a damaging impact on investor confidence and outcomes.
“Over the years, Old Mutual International has taken action to tighten its criteria, introduced a maximum fee level, and in some cases banned certain types of structured products from certain institutions.”
In April, OMI announced it was taking legal action over adviser commissions linked to structured products.
Kenny continued: “Not all structured products are bad, and they can be useful for clients who want a degree of capital protection whilst also providing exposure to investment markets or a fixed return. However, many structured products are often very complex in design.
“Regrettably, some investors and advisers will not always possess the depth of knowledge required to fully understand the risks and rewards associated with investing in such structured products.”
Bethell Codrington says:
I ask again, where in the Insurance Distribution Directive does it give permission to advise on Investments?
PLEASE will someone show me.
Will Grahame-Clarke says:
Dear Beth,
Insurance Based Investment Products (IBIPS) – and any advice or distribution activities pertaining to them – come under the scope of the IDD. On page 12 of the Directive it refers in clause 17 to the fact that “insurance-based investment product’ means an insurance product which offers a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations…”
This is reinforced in Chapter VI: “Additional requirements in relation to insurance-based investment products” (page 27)
There is probably no mention of investment advice (or “investment advisers”) because that is not the terminology that the EU uses. In the EU’s vernacular, “investment advisers” work under MiFID and advise on non-insurance related investments whilst “insurance intermediaries” or advisers are those that advise on insurance, even if that insurance is investment-based.
So, in simple terms, if the “investment” is insurance-based it categorically comes under the IDD (as does any activity pertaining to it, such as advice and/or intermediation and/or distribution) – if it isn’t insurance-based, then it comes under MiFID II.
Credit to Paul Stanfield
Best
Will GC
Bethell Codrington says:
FCA confirms on its website – The types of firms affected by IDD (replacement of IMD) will be:
•insurance brokers
•reinsurance brokers
•managing general agents
•insurers
•reinsurers
•professional firms involved in insurance business (both authorised and exempt)
•appointed representatives who conduct insurance business
•ancillary insurance intermediaries (including those excluded from regulation through the connected contracts exclusion)
I don’t see a lot about Investment Advice. Would be delighted if someone can prove I am wrong ….
James Caldwell says:
I understand any investment that has volatility and can decrease in value is excluded under IDD…….structured deposits which have derivatives (most structured botes ) are specifically a MiFID regulated transferable security
James Caldwell says:
@Bethell Codrington. I am not sure you will get many takers on your challenge. However, I do understand some protected insurance funds will still qualify under IDD…however,
Christopher Lean says:
The comments in the article seem to contradict what I have been forwarded by a large QROPS provider in Malta. The update I was sent said-
”A restriction on those permitted to give advice in relation to investment selection to advisers authorised to give investment advice via MIFID or and equivalent regime. For clarity and from discussions with the regulator, we understand that a licence to advise on Insurance products will not be considered an equivalent regime.”
How does IDD fit in with this statement?
Angela Brooks says:
Malta and Gibraltar regulators both need some clarity on this – they could do with one hymn sheet (ditto trustees and advisers). But most of all, the poor old consumers need to know where they stand – because right now they must be awfully confused.
John Batty says:
The draft regs state the following, and specifically mention Insurance-based investments
1.3.11 The Investment Advisor of a Scheme may either be:
(a) an entity licensed to provide investment advice to Professional Clients under the
Investment Services Act, (Cap.370); or
(b) an investment advisor established in another Member State or EEA State and
duly authorised for this activity in accordance with Directive 2014/65/EU or
Directive 2016/97 (in the case of insurance-based investment products), as
amended from time to time, and carrying out its activities pursuant to the
respective Directives, as applicable;
Bethell Codrington says:
The Devil is always in the detail. If, MFSA allow this (and I doubt it) a Trustee Compliance department might want to read the following, assuming they wish to deal with such firms:
Article 16
Non-complex insurance-based investment products
An insurance-based investment product shall be considered as non-complex for the purposes of Article 30(3)(a)(ii) of Directive (EU) 2016/97 where it satisfies all of the following criteria:
(a) it includes a contractually guaranteed minimum maturity value which is at least the amount paid by the customer after deduction of legitimate costs; Not sure I see many of these on OMI’s valuations
(b) it does not incorporate a clause, condition or trigger that allows the insurance undertaking to materially alter the nature, risk, or pay-out profile of the insurance based investment product;
(c) it provides options to surrender or otherwise realise the insurance-based investment product at a value that is available to the customer;
(d) it does not include any explicit or implicit charges which have the effect that, even though there are technically options to surrender or otherwise realise the insurance based investment product, doing so may cause unreasonable detriment to the customer because the charges are disproportionate to the cost to the insurance undertaking;
(e) it does not in any other way incorporate a structure which makes it difficult for the customer to understand the risks involved.
For definitions on complex and non-complex products it is here: https://www.esma.europa.eu/sites/default/files/library/2015/11/09_295.pdf
And this is a great article on Complex products: http://www.compoundgrowth.co.uk/esma-guidelines-complex-products-finalised-mifid-ii.html
James Caldwell says:
@John Batty. Since when is a structured note an insurance based product? This article is about Malta regulators and their right to lay down stipulations, not what EU regulations state, or what insurance intermediaries want.
@Will Grahame-Clarke. You should rely on your research and stick to the subject matter of Malta and structured notes. Your reply is irrelevant to your article and demonstrates no understanding of individual regulators powers. It also entirely trivialises the vast different requirements of being an investment adviser and an insurance intermediary, the qualifications, risk to client, exposure to loss, etc. although at least we now have clarification that anyone operating under IDD is an insurance intermediary or insurance adviser? Perhaps the Malta regulator with their many highly qualified individuals focus more on client outcomes than worrying about insurance intermediary future business?
John Batty says:
Apologies for the misunderstanding there @James Caldwell, I posted that in response to the statement by Christopher that he had been told that those licensed for Insurance Products would not be allowed to advise. My comment wasn’t meant to be in relation to structured products in any way.
Angela Brooks says:
I have a very simple mind – and I try to think like the victims who have lost a life-time’s retirement savings. I am sorry if I am a bit dim, but isn’t it kind of bleeding obvious that if an adviser is going to advise on investments, he needs an investment license? If I want to go fishing, I get a fishing license; if I want to go driving I get a driving license; if I want to commit matrimony I get a marriage license. QED. Simples.