The Malta Financial Services Authority (MFSA) has published a consultation paper (the "Paper") concerning proposals for a so-called business conduct rulebook. The document provides an in-depth look at the main structure and content of such a proposed rulebook, including sections relating to complex products, structured deposits, disclosures, financial product governance and conflicts of interest.
The purpose behind this article
The main purpose of the draft for comments is to solicit industry opinions on the first three draft chapters of the Business Conduct Rulebook, which mainly deal with issues such as customer disclosure requirements, product governance and oversight, and conflicts of interest. In addition, the document seeks industry input on the MFSA's proposed supervisory approach in certain specific areas: the sale of complex products, the application of the rulebook to structured deposits, documentation for clients in Malta, and English, among others.
Advice is primarily directed to persons licensed under the Investment Services Act (excluding custodians), persons regulated under the Insurance Business Act or the Insurance Intermediaries Act and individuals working with or advising such entities , and persons licensed as credit institutions under the Investment Services Act, who sell or advise clients on structured deposits.
The main purpose behind the proposal is to create a single business conduct rulebook applicable to investment firms, UCITS management companies, and insurance companies and intermediaries, which are referred to as "regulated persons" in the proposed rulebook. In addition, the Rulebook will set out matters applicable to credit institutions selling or advising on structured deposits to clients.
With such a rulebook, the MFSA will translate requirements in many EU directives, namely MiFID II, the current Insurance Mediation Directive (IMD I) and the proposed new IMD (IMD II), as well as various related regulations Solvency II and UCITS IV and V.
MFSA also refers to numerous opinions and guidance issued by European regulators (ESMA, EIOPA and EBA). The MFSA has taken an approach whereby certain provisions in the draft IMD II and certain other opinions and guidance issued by EIOPA which the MFSA believes may apply to persons licensed under the Investment Services Act have been extended to Applies to such persons, in areas not covered by MiFID II. On the other hand, certain provisions in MiFID II and opinions and guidance issued by ESMA and certain provisions which the MFSA considers applicable to persons regulated by the Insurance Business Act or the Insurance Intermediaries Act also apply to the rulebook The latter category of regulated persons.
Applicability of the rulebook
Persons referred to as "supervised persons" shall include:
- A person who holds an investment services license within the meaning of the Investment Services Act, excluding an alternative investment fund manager or a person licensed to act as a trustee for a collective investment scheme, which includes, under the Act, a European investment company under the European Investment Company Passport Rights Regulations" for setting up a branch in Malta and the European Management Company Regulation for setting up a branch in Malta under the Investment Services Act (UCITS Management Company Passport), as long as it provides MiFID services under Article 6(3) of the UCITS IV Directive, or if It sells its UCITS in Malta;
- persons registered under the Investment Services Act (Bundling Agents) Regulations;
- Persons authorized to carry on insurance business under the Insurance Business Act, including European insurance companies establishing a branch in Malta to exercise their European rights under the European Insurance and Reinsurance Business Passport Rights Regulation;
- Persons registered under the Insurance Intermediaries Act as insurance brokers, insurance agents, insurance managers or related insurance intermediaries, including European insurance intermediaries establishing a branch in Malta to exercise European rights under the European Passport Rights Insurance Intermediaries Ordinance; and
- Individuals who are licensed as credit institutions under the Banking Act to sell or advise clients on structured deposits.
This rule distinguishes between two main types of clients, retail clients and professional clients. "Professional Client" means a Client who meets the specified criteria set out in Part I of the Second Annex to MIFID II and the First Annex to the draft IMD II mentioned above.
Regulated persons are bound by a number of rules contained in the Investment Services Provider Investment Services Rulebook or various rules issued under the Insurance Business Act or the Insurance Intermediaries Act. The rules cover both prudential requirements and requirements for conducting business. Currently, the compliance of regulated persons is regulated by the Securities and Markets and Supervision Unit in the case of investment service providers and by the Insurance and Pensions Supervision Unit in the case of insurance companies and insurance intermediaries.
Rulebook: Structure and Layout
The rulebook will be divided into seven main chapters, namely Customer Disclosure and Reporting, Product Governance, Conflicts of Interest, Sales Process and Practices, Contractual Agreements with Retail Customers, Execution of Customer Orders and Governance of Regulated Personnel.
MFSA intends to introduce regulations on the sale of complex products to retail customers in an efficient manner. Although MiFID allows the sale of such products on an advisory and non-advisory basis, under the proposed option it would not be possible to sell complex products to retail clients based solely on the suitability test. Therefore, the MFSA proposes to require all sales of complex products to retail clients It's all done on a consultative basis, so after suitability testing for retail clients by regulated personnel.
The MFSA has decided to take a similar approach to MiFID II structured deposits, which fall within the scope of its investor protection and business conduct rules
Obligation to disclose information to customers
Regulated persons should disclose information to clients in an understandable form and in such a manner that clients can reasonably understand the nature and risks of the services provided and the types of products offered. Advertisements by regulated persons should be fair, clear and not misleading. In addition, there are a number of disclosures that should be made in a timely manner before services are rendered or contracts resulting in the purchase of financial products are entered into. Certain disclosures will be made in a durable medium, that is, by providing information clearly and accurately on paper, free of charge, in English and/or Maltese. In addition to paper documents, the information must be provided in a medium appropriate to the context in which business is conducted between the regulated person and the client, and the person to whom the information will be disclosed, when a choice between paper information is provided in In other media, the information is specifically chosen to be presented in that particular other media.
Duty to Avoid Conflicts of Interest
Regulated personnel should identify and manage conflicts of interest and develop measures specifically for such situations. If such measures are insufficient to manage conflicts of interest, they should be disclosed to clients. The Rulebook translates the relevant requirements of the MiFID II and UCITS IV Directives, as well as the corresponding implementing Directives, concerning the establishment of appropriate organizational and administrative arrangements to prevent any conflict of interest from adversely affecting the interests of clients. In addition, the regulated person will also need to establish, implement and maintain an effective conflict of interest policy, taking into account the size and organization of the regulated person and the nature, size and complexity of its business.