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.
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.”
