Curmi & Partners

Learning the new norm

by David Curmi

Gone are the days when opening an account at a bank or buying an investment were straightforward tasks that took no more than a small effort to fill a single form with your name, address, ID and you’re done.  Today the task requires that you hand over reams of data about yourself, your assets, liabilities, income, expenditure, reasons why you want to invest, your objectives, expectations, source of wealth, source of funds... the list goes on and on. 

The objective for collecting this data is twofold. Firstly it is to allow the service provider to conduct an assessment that both the reasons for your actions and the funds you will be utilising to help achieve your objectives are indeed genuine. Failure to establish this basic yet fundamental fact could land the service provider in very hot water.

The second is then to interpret the data in order to provide you with advice and a course of action that helps you achieve your objectives in a manner that is in line with your willingness and ability to take on risk. The latter part of this is captured in what is called the Suitability Assessment.  It all may sound a little overcomplicated and perhaps convoluted. In some ways it is but the reasons for requiring this level of detail are derived from the Mifid II regulation that was introduced in January 2018. And the need for such regulation is both obvious and practical. 

This is because without much of the information required it is not possible to provide the right advice, and in the right context. Unfortunately, there have been a number of cases both locally and internationally of what is termed mis-selling of investments. A situation where service providers give the wrong service or product to the client. 

In some ways it is similar in process to the prescription of medicine by your doctor.  Before prescribing such medicine a diagnosis of the problem is undertaken through the asking of questions, the answers to which provide the doctor with the information required to match the symptoms to a certain drug that will hopefully cure the problem. 

Similarly investment services providers must ask the right questions to be able to provide solutions, not to a problem, but to help find an appropriate strategy to achieve the desired outcome.  In many cases the results of the strategy are only visible in the medium to long term, meaning that if you get it wrong, the costs could be quite severe.  One of the key objectives therefore of Mifid II is to provide investor protection to help minimise these risks.

This regulation puts a significant responsibility on the service provider. In truth, to the serious investment provider, though it only converts to a set of rules, the principles and ethos that the serious service provider would already aspire to achieve. On the other hand, investors should also realise the importance that should be placed when seeking such advice. The need to disclose all the information necessary and to invest in time and effort to find the right provider are critical factors in minimising risks of unfavourable outcomes. 

There is a detailed and significant process that needs to be undertaken. Not just in the onboarding of a client from an anti money laundering perspective but in getting to know the investment objectives and the risk tolerances of each client, in a detailed fashion.  To get inside the mind of an investor, to really understand how he/she thinks so that the advice given is tailored for that person, not just initially but on an ongoing basis too.

Done properly and on an ongoing basis requires the right IT systems, quality human resources and ongoing interaction with the client, all of which come at a significant cost.  Sadly the sheer weight of regulation has brought service providers to bear significant costs. This brings to the surface the brutal commercial reality of needing to turn a profit while providing the service. 

More often it is the smaller investor who bears the brunt of this commercial reality as the minimum cost of servicing such clients has increased exponentially.  And in the current hostile environment of using the services of the financial arbiter for almost any negative investment outcome as a way to recoup losses, adds an extra layer of risk.

A rethink of the impact of this new regulation is not going to happen but perhaps a practical view on its implementation may be necessary. Meanwhile investors ought to be prepared to either be shepherded into a lower level of service or be asked to pay a higher price.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.