The Consultation Document
The Malta Financial Services Authority (MFSA) issued a Consultation Document (hereinafter referred to as “the Document”) concerning the proposition for a so-called Conduct of Business Rulebook. The Document delves into the main structure and content of such proposed Rulebook, including sections relating to complex products, structured deposits, disclosures, financial product governance and conflicts of interest.
Purpose behind the Paper
The main purpose behind the Consultation Paper is to acquire the industry’s views on the first three draft chapters in the Conduct of Business Rulebook, which inter alia address issues such as client disclosure requirements, product governance and oversight, and conflicts of interest. Furthermore, the Document aims to obtain the industry’s views also concerning regulatory approaches which the MFSA proposed to adopt in relation to certain specific areas: selling of complex products, the application of the Rulebook to structured deposits, documents to be provided to clients in Maltese and English, amongst others.
The consultation is principally of interest to persons licensed under the Investment Services Act (excluding custodians), persons regulated under the Insurance Business Act or the Insurance Intermediaries Act and individuals who work with or advise such entities, as well as persons licensed as credit institutions under the Banking Act, who sell or advice clients in relation to structured deposits.
The main purposes behind the proposal is to have a single Conduct of Business Rulebook applicable to investment firms, UCITS management companies and insurance companies and intermediaries, which shall be referred to as the ‘regulated persons’ in the proposed Rulebook. Moreover, the Rulebook will also provide for matters applying to credit institutions who sell or advise clients in relation to structured deposits.
By virtue of such a Rulebook, the MFSA would be transposing the requirements found in a number of EU Directives, namely, MiFID II, the present Insurance Mediation Directive (IMD I) and the proposed new IMD (IMD II), and various provisions relating to Solvency II and UCITS IV and V.
The MFSA also made reference to numerous opinions and guidelines issued by the European Supervisory Authorities (ESMA, EIOPA and the EBA). The MFSA has adopted an approach whereby certain provisions that are found in the draft IMD II and certain other opinions and guidelines issued by EIOPA which the MFSA believes can be applied to persons licensed under the Investment Services Act, have been extended to apply to such persons, in areas which are not covered by MiFID II. On the other hand, certain provisions which are found in MiFID II as well as opinions and Guidance issued by ESMA and which in the opinion of the MFSA could apply to persons regulated under the Insurance Business Act or the Insurance Intermediaries Act are also so applied to the latter category of regulated persons in the Rule Book.
Applicability of the Rulebook
Those referred to as the ‘regulated persons’ shall comprise:
- persons holding an investment services license within the meaning of the Investment Services Act, other than Alternative Investment Fund managers or person licensed to act as custodians in relation to a collective investment scheme, in terms of the said Act, including a European investment firm which has established a branch in Malta in exercise of a European right in terms of the ‘European Passport rights for Investment Firms Regulations’ and a European management company which has established a branch in Malta in terms of the ‘Investment Services Act (UCITS Management Company Passport) Regulations, in so far as it provides MiFID services in terms of Article 6(3) of the UCITS IV Directive or if it markets its UCITS in Malta;
- persons registered under the Investment Services Act (Tied Agents) Regulations;
- persons authorised to carry on the business of insurance under the Insurance Business Act, including a European insurance undertaking which has established a branch in Malta in exercise of a European right in terms of the ‘European Passport Rights for Insurance and Reinsurance Undertakings Regulations’;
- persons enrolled under the Insurance Intermediaries Act to act as insurance brokers, insurance agents, insurance managers or tied insurance intermediaries, including a European insurance intermediary which has established a branch in Malta in exercise of a European right in terms of the ‘European Passport Rights for Insurance Intermediaries Regulations’; and
- persons licensed as credit institutions under the Banking Act who sell or advise clients in relation to structured deposits.
Types of Clients
The Rules distinguish between two main types of clients, namely, Retail Clients and Professional Clients. ‘Professional Clients’ refers to clients which meet certain determined criteria laid down in the first section of the second Annex to the MIFID II and the first Annex to the draft IMD II referred to above.
The regulated persons are subject to a number of Rules contained either in the Investment Services Rulebook for Investment Services Providers or in the various Rules issued under the Insurance Business Act or the Insurance Intermediaries Act. The Rules cover both prudential requirements as well as the conduct of business requirements. Compliance therewith by regulated persons is currently supervised by the Securities and Markets and Supervision Unit in the case of investment services providers, and by the Insurance and Pensions Supervision Unit in the case of insurance undertakings and insurance intermediaries.
Rulebook: Structure and Layout
The Rulebook will be divided into seven main chapters, that is, Client Disclosures and Reporting, Product Governance, Conflicts of Interest, Selling Process and Practices, Contractual Agreement with Retail Clients, Execution of clients’ orders and Governance of Regulated persons.
The MFSA intends to introduce regulations concerning the sale of complex products to retail clients in an effective manner. Despite the fact that MiFID allows the sale of such products both on an advisory basis as well as on a non-advisory basis, under an option being proposed, it will not be possible to sell complex products to retail clients solely based on an appropriateness test. The MFSA is therefore proposing to require all sales of complex products to retail clients to be effected on an advisory basis and hence after a suitability test is carried out by the Regulated person vis-à-vis the retail client.
The MFSA came to a decision to take a similar approach to the treatment of structured deposits by MiFID II, which were brought within the scope of its investor protection and conduct of business rules
Obligation to Disclose Information to Clients
The regulated persons are to disclose information to clients in a comprehensible form and in a manner that the client is reasonably able to understand the nature and risks of the service to be provided and of the type of product that is being offered. Advertising by regulated persons should be fair, clear and non-misleading. Moreover, a number of disclosures are to be made in good time prior to the provision of the service or conclusion of the contract leading to the purchase of the financial product. Certain disclosures are to be effected in a durable medium, that is, information is provided on paper, clearly and accurately, in the English and, or Maltese language and free of charge. Other than on paper, information must be provided in the appropriate medium to the context in which the business between the regulated person and the client is carried on and the person to whom the information is to be disclosed, when offered the choice between information on paper of in the other medium, specifically chooses the provision of information in that particular other medium.
The Duty to avoid Conflicts of Interest
A regulated person is expected to identify and manage conflicts of interest and have in place measures which cater specifically for such situations. If such measures are not sufficient to manage the conflicts of interest, such should be disclosed to clients. The Rulebook transposes the relative requirements emanating from MiFID II and UCITS IV directives, as well as the corresponding implementing directives, relating to the establishment of appropriate organisational and administrative arrangements to prevent any conflicts of interest from adversely affecting the interests of the client. Regulated persons are furthermore required to establish, implement and maintain an effective conflicts of interest policy taking into account the size and organisation of the regulated person as well as the nature, scale and complexity of its business.