A number of MFSA and MASS Committee officials discussed several topics at a cordial meeting held at the MFSA Offices in Mrieħel.
The first comment coming from MFSA was that there is a pressing need for more ‘financial literacy’ by retail investors. It emphasised that investors should read and understand the Prospectus issued by companies when issuing shares or bonds. Issuers are required by the Listing Rules to state the foreseable risks associated with the financial instrument and investors are to take careful note of them. Although investors might not read the entire document, investors are strongly advised to read the Summary Note which is present in each prospectus. In addition, retail investors should seek professional advice, before taking any decision.
The committee asked MFSA to define ‘execution only’, a term commonly used when buying a financial instrument. It is a term introduced by the financial services regulator to describe sales where a consumer has requested a specific investment – and has chosen not to receive advice at that time. ‘Execution only’ applies when:
- The Product is not cosidered as ‘complex’;
- Investment decision would come solely from the client (investor);
- No previous warnings on the product were announced;
- There is no conflict of interest by the financial advisor
MFSA confirmed that financial intermediaries are neither legally obliged to provide advice to clients in execution only cases, nor to alert investors when a financial product is not performing well.
MASS also asked the panel to define a complex product. MFSA admitted that it is not easy to define a complex product, but an example would be one whose value cannot be easily determined. Looking at it from one end of a scale, the most clear example of the ‘least complex’ investiment is a bank account. This would be followed by a ‘treasury bond’ issue, and others follow up the scale of complexity.
MFSA confirmed that financial intermediaries are legally required to carry out investor ‘tests’ in the following scenarios to determine the suitability of an investiment for a particular investor.
- An Appropriateness Test in the case of a complex product. In these circumstances the investor would require knowledge and experience.
- A Suitability Test is required when a financial product is communicated to prospective investors through an advertisement and the financial intermediary will be providing portfolio management.
On MASS’s comments about financial intermediaries’ ethics of conduct, MFSA said it has set up a new Conduct Supervisory Unit, to monitor their operations.
Another question put by MASS was about companies that issue bonds, whose value is much higher than their market capitalisation. MFSA considers such situations; however, it reiterated that the Regulator does not assess the risks associated with a bond issue: it merely ensures that risks are published in the prospectus.
MASS also asked why the Shareholder Register Information is no longer published in the Annual Report of companies. MFSA explained that this is no longer required by the updated Listing Rules.
Recent ‘Take-over bids’, were also refered to. These fall into two categories, namely ‘Voluntary’ and ‘Mandatory. In the case of a voluntary takeover, the bidder has to propose an offer to all shareholders with the same price. Mandatory takeover takes place when the bidder already owns the Major part of the organisation.
MASS asked whether the prospective bidder must commission an independent report regarding the valuation of the takeover. MFSA said the Listing Rules are not clear enough about this and are therefore liable to interpretation. The Rules are being amended to be more specific.