Category Archives: General

General Post

Non-Performing Loans – an EU perspective


The bread and butter of a traditional bank is the provision of loans. Although banks have reduced their dependency on this main source of income by branching out into other fields of the financial services world, the creation of loans is still a very important economic service. These loans are granted to households, business and to other banks, can be short or long term in nature, having a fixed, flexible or no interest rate and will be subject to different assurances such as collateral.

What is common between all loans is that they all carry a risk – the most basic of which is the risk that the loans become bad-debts or non-performing because the person or entity that took the loan can no longer service it. Non-performing loans will always be a problem for all banks since no model can ever cover all the risk involved and from time to time some borrowers will inevitably be faced with situations that were thought unlikely to happen.

From a regulatory point of view, a loan becomes a non-performing loan once more than 90 days elapse without the borrower paying the agreed instalments. Sometimes the banks can manage to agree new terms with such borrowers but at other times the bank would simply have to write off the loans and try to collect on the collateral and guarantees it would have secured before granting the loan. Banks also have the option of selling off the loans, but this will be at a discount and is dependent on finding someone to take on that debt.

What is the cost of non-performing loans?

It should be kept in mind that the cost of non-performing loans is a direct burden on the bank but an indirect burden on potential borrowers. As a bank is faced with more and more non-performing loans it would inevitably have to tighten credit and thus lend out less money. It must do this since its profits will start getting eaten away by the cost of managing the non-performing loans. Although loans are an asset for a bank they also come at a cost. The cost is not just the opportunity cost of using the same money for a different venture, but also the regulatory cost of keeping the loan on its books.

Therefore, as the number of non-performing loans rises the greater economy will suffer as loans become more expensive and less available. The expense could be in the form of higher interest rates, higher requirements for collateral and more stringent terms for the borrowers. As these factors come into play it would automatically become more difficult to obtain credit from a bank and thus some people and entities will be rejected for a loan. As credit becomes more difficult to obtain businesses will invest less and private individuals will take on less projects. So the effect on the whole economy is multiplied since less work is generated.

How do EU countries compare on Non-Performing Loans?

The below chart depicts the amount of non-performing loans as a percentage of total loans for the EU countries as at March 2016:

As expected the countries with the biggest economic problems have the highest percentage of non-performing loans. Countries like Cyprus which experienced a banking sector crises in 2012/13 and the so called PIIGS (Portugal, Ireland, Italy, Greece & Spain).

If we focus on the worst two countries (Greece and Cyprus) we can see that almost half the loans that have been issued are not being serviced. This of course is a very worrying situation for these two countries which is very difficult to get out of. These two countries are quite apart from the rest of the pack with the next worst country having a percentage of around 20%, which is still worrying. Ireland has started to improve as an economy but the percentage of non-performing loans is still quite high at around 15%. Having said that, the figure has gone down from the 20% registered in September 2015. Malta is sitting around mid-table, however it is worrying to see that over a period of 6 months the figure went up from 3.7% to 6.8%.

The below figure shows the same rates 6 months earlier as at September 2015:


The Bottom Line

Non-Performing loans are an indicator of economic health. The higher the percentage of such loans to total loans the more difficult and more expensive it is to obtain loans. This has a ripple effect on the economy as less investment and private consumption is registered. This is why the regulators place great emphasis on the measurement and management of these loans. Supervisors monitor the overall level of non-performing loans across euro area banks. They also check whether individual banks adequately manage the riskiness of their loans and if they have appropriate strategies, governance structures and processes in place. This is part of the common supervisory review and evaluation process (SREP) that is carried out for each significant bank every year. Furthermore, the European Central Bank regularly carries out coordinated exercises to review the asset quality of the banks it directly supervises.


Brexit – Making Britain Great Again



The more I read into the arguments put forward by the leave campaign who are rejoicing over the “win” that they have just accomplished the more I compare them to the businessman running for the US presidency. Trump’s motto “lets make America great again” seems to have been copied by the leave campaigners who have a motto “lets make Britain great again”. What a role model to choose!

They propose to do so by having more control over their laws and to decide better on how to spend their money. This sort of “centre of world” and “us versus them” mentality seems to be coming from the disillusion of the older generation of the Brits who still dream of the glory days of the British Empire. In actual fact no state is ever totally independent nowadays since they all depend on one another to one extent or another. The more trading partners a state has, the more its economy will grow and the more its people will prosper. Whether the UK admits it or not it needs to trade with Europe as much as Europe needs to trade with the UK.

So ultimately the British will need to negotiate trade agreements that will most likely be as similar as possible to the current agreements in place. The main difference will be that it will cost the UK a lot of money to renegotiate everything. It seems like all of the world understood this concept except the older generation of the Brits who are still disillusioned by the British Empire mentality. Time will tell if it was a good move or not, what is clear is that the students and young generation who will have to deal with it all definitely did not agree that it would be better to be out.

The Financial Sector and Passporting Rights

The financial sector would definitely be one of the hardest hit sectors as a result of the Brexit. We saw this clearly with prices of the banking stocks around the world taking such a big hit on Friday 24th, the day the results were announced. London is a very important financial hub that is a gateway for many non-EU countries. A big advantage that the EU offers in the financial services sector is the right to passport a license. What this means is that an entity that is regulated in the UK can very easily acquire Passporting rights to operate in the other EU jurisdictions without needing to acquire full licensing in each member state. So for example, if Morgan Stanley has a fund licensed in the UK it can easily and cheaply get permission to promote and sell it in the other jurisdictions with the blessing of each jurisdictions’ regulator.

Since the UK has just voted to leave the EU the passporting right no longer applies to UK regulated entities and products. Thus sticking to our example, Morgan Stanley would have to go to another member state and get its product fully licensed there and then can passport it to the other states. What this means – London just became much less attractive to use as a hub and other jurisdictions will benefit from this.

The people who voted to leave the EU, who were mainly the older generation and people from the North might be thinking, we don’t care about the bankers and high earners working in London. Serves them right to lose their jobs after all we have done to bail them out in the crisis. This of course is the one of the most idiotic arguments one can make and again we see a likeness of the mentality of the leave campaign to Donald Trump. In simple terms: banking sector does bad = whole economy does bad = fall in purchasing power. Who will pay for this all? The tax payer as usual. So the hard working Brits (who either voted to leave the EU or who applied a little logic and voted to stay in) will pay the price for it all.

Who will gain most from Brexit?

First we have the politicians who have used the Brexit to their advantage. People like Nigel Farage and Boris Johnson who I am sure made a bucket load of money from all this and have gained more support that will see them advance in their political career. Then we have the consultancy firms who will be in high demand by both the private sector and the government entities themselves to see how the Brexit will actually affect them. Finally we have China. With a weaker union and a smaller EU block China gains in the long term by attracting more trade towards its jurisdiction and away from Europe. So congratulations to the Brits who voted to exit Europe – you have just made the politicians, lawyers, accountants, other consultants and the Chinese very happy indeed.

The Bottom Line

Ultimately billions of pounds will be spent in relation to the transition to the free “independent” UK. So most of the gains that the Brits thought they would save by not being an EU member would still be spent on new negotiations and added costs of trading. Animosity is clearly present within “great” Britain with speculation that Northern Ireland and Scotland might seek independence in order to remain in the EU. We even have petitioning for London to be declared a separate state and also remind in the EU. I will close the post on a light note however. In one of the interviews with Nigel Farage after the Brexit result in which he admitted that he had twisted words about NHS funding he also stated that Britain should consider more trade with the Commonwealth. Please check out this humorous clip in relation to the notion of the Commonwealth and “great” Britain:

Retirement Planning – a Portfolio Approach


Retirement Planning – a Portfolio Approach

I would like to start this post by pointing out a very important fact: Planning for retirement does not mean buying an investment called “Pension Fund” or “Retirement Fund”. Many seem to think that in order to plan for their retirement they need to buy an investment that somehow has “retirement plan” of “pension plan” in its name. This is definitely not the case. In order to plan for one’s retirement one must think of all their assets as forming part of one overall portfolio.

The principal aim of retirement planning is to have a decent income once one retires from their employment and for estate planning. It is no secret that the state aid will not be enough for many people to earn an income in retirement that is compatible with the standard of living that they would have become accustomed to during their working life. Thus, it is important to plan in order to earn supplementary income. Does this mean that everyone should start buying income paying products from a young age – NO!

The best way to plan for retirement planning is for one to structure his/her assets in an overall portfolio structure. As with any portfolio investment one needs to plan according to one’s:

  • investment objective,
  • risk tolerance
  • financial affordability
  • knowledge and experience.

It must also be kept in mind that all the above points will evolve over time and are not static. Thus your retirement portfolio must also evolve to reflect these changes.

Investment Objective

For someone who is in their initial years of their working life their investment object is going to be quite different than for one who is close to the final years of their working life. Furthermore, it is not only an age thing, but other factors also have an effect on the investment objective. An initial objective of any investor would be protection. So a wise choice would be to acquire some form of life insurance and if affordable some form of disability insurance.

Let us assume we have an investor who has purchased their first home, has some form of insurance in place and a decent cash balance for regular expense items. Such a person would have a long term investment horizon and their investment objective would normally be to increase their overall capital. Thus, such an investor would be better off investing in products that focus on capital growth rather than income. The growth in capital possible through equity investing rather than investing in bonds is exponential. Therefore, it would not be wise to invest totally into income paying bonds when one has 30 odd years left until retirement.

On the other hand, someone who is nearing their retirement age should start shifting their portfolio more towards income paying investments. For such a person it would be more important to have something extra coming in rather than possibly doubling their capital in 10 years’ time. So the investment objective is going to have an effect on what investments one should have in their overall portfolio. Moreover, although income is important and normally is the main concern of many investors, if one would also like to leave something extra for their heirs then they should also consider this in their overall portfolio.

Risk Tolerance

This is something very specific to the investor. As a general rule most people are risk averse, meaning that they would rather avoid rather than increase risk. However there is the risk reward trade-off to consider which basically means that the lower the risk the lower the potential return. In general, one who is still a number of years away from retirement would tend to be more able to take on risk for the potential of higher returns compared to someone who is closer to retirement. Even psychologically, investors would be more willing to take on risk when they are younger than when they are older. However, every investor is different in the degree of risk that they are comfortable in taking on. This will affect the type of individual investments that one would put into their overall portfolio. So although a younger person might want to invest in equities to increase their capital in the long term they can buy conservative equities/equity like investments such as an ETF that tracks the overall market, or they could buy a more speculative product that for example moves 3 times the price of oil.

Financial Affordability

Like with anything else in life we should only buy investments that we can afford. The affordability factor should be considered in two main ways. The first is that certain products have a high initial cost. So for example, certain bonds trade in multiples of €100,000 meaning that one needs to buy a minimum of €100,000 in order to buy the bond. The second factor connected to affordability is the percentage of the overall portfolio that the investment will make up. What I am referring to here is the fact that although the investor might afford to buy the asset, he/she would be left too exposed to the one asset if they do in fact invest in it.

An easy way to see how this second factor could be detrimental to a portfolio is to consider investing into property. With interest rates very low and the local rental market doing well we are seeing many people investing into property with a buy-to-let setup. Let us take a hypothetical situation where we have an investor who owns their main residence which is worth around €250,000 at current market rates, has a portfolio of €50,000 in investments, has €10,000 in the bank and is now considering buying an apartment costing say €100,000 in order to rent it out. Without going into the debt factor that this will have, let us assume that the €10,000 will remain on his bank account to cater for unforeseen expenses and act as a buffer. The €50,000 will all be used to purchase the property and the balance will be borrowed from the bank. If this is the case, the assets that make up this persons’ overall portfolio would be €350,000 in property and €10,000 in cash. This would mean that over 97% of this person’s portfolio would be invested into two properties, less than 3% would be in liquid, easily accessible cash and no other investments. Through such an example it is easy to see the concentration risk of going down such a route.

Knowledge & Experience

Another important factor to consider when deciding on which assets to put into one’s overall portfolio is to invest in assets which they are familiar with. This does not mean that one should invest only in things which they have already invested into and not consider anything else. However, one should research investments which they are considering investing into before they actually financially commit themselves. There are many good investment advisors around that can help here, but supplementary research is always a plus. By searching a bit online one will find many avenues where good information can be attained on the assets they are considering investing into. So just like one would consult websites such as and trip advisor when booking a hotel, investors should also do some supplementary reading before investing their money.

Piggybank and calculator. Isolated on white background
Attaining a Decent Income after Retirement

For many the main goal when it comes to their retirement planning is to secure a decent return after they stop or reduce their main work activity. In my view this is best attained by slowly building a portfolio of diversified assets over the years. The accumulation of income paying products should evolve over time and one is not expected to invest all their money in capital growth products and switch all their money into income paying products on the day they retire. The ideal situation would be to have income coming from different sources so if one of the sources is negatively affected in some way one would have alternatives that they could depend on. So by having some income coming from rental income, some coming from direct bonds and bond funds and some coming from income paying equities one would have different streams of income which are affected by different things.

As one is building their portfolio over the years they should not forget to think of alternative investments to the regular bonds, shares and property mix. Such alternatives would include investing into commodities such as precious metals and oil, investing into art and collectables and also investing into private businesses. A good source where one could attain a good capital appreciation and even income through dividends is by investing into private companies. Many start-ups end up needing additional finance while many other well established businesses also would need extra financing for new projects or to get through a rough patch. It is true that the risk could be lager here than investing into regulated and quoted companies, but if one does their research well and finds a good opportunity they can attain an equity stake in a good company at a decent price which would pay-off in the future. Such an investment could offer good income opportunities and a good asset for the heirs of the person who would eventually take over these shares.

The Bottom Line

The main message I would like to convey through this post is that there is no fixed formula to use when it comes to retirement planning. Everyone has to assess their own characteristics and find the best mix of products that suits them. So called retirement plans are a good start but they are not an end in themselves. Some of these retirement plans do give you a tax break if you use them, but the amount of tax saved per year on them is ridiculously low to have any significant weight.


Our Financial Services Industry and More


In my writings I intentionally try to avoid any references to political issues since for many years it seems that both parties had been working in tandem towards the improvement of our financial services industry. They have more or less always agreed on the major issues and both use the industry as an example to boast how successful they were at aiding and developing it. I have also avoided the issue since the main aim of this blog is to provide insights and educational notes based on facts while trying to avoid simply expressing opinions without basing them on facts. I respect everyone’s beliefs and opinions and I try to use my writing to better one’s understanding of investments and the industry in general.

However, the continued saga that has taken over the local media outlets this year has directly affected the industry I operate in and I cannot avoid pointing out a few facts that everyone should be keeping in mind. It has become even more apparent to me how little politicians know about how this industry works and how competitive it is. Through irresponsible and sometime immature antics, many a time presented through social media (of course), it is shocking to see how short sighted both parties are acting when it comes to this very important industry.

Proper use of Social Media

I understand that we are all human and we all make mistakes. No one is an expert in every field and sometimes people are ill advised and they unconsciously take the bad advice and think that they are doing the right thing. But then I also believe that people who are ministers, have a doctorate and/or are part of respected professions have common sense. For example, if you have an issue with the person who is the head of the regulatory body that supervises and regulates all entities involved in the financial services sector in Malta – I do not think you should express such issues through a social media post. Do not get me wrong, it is important to scrutinise everyone and to make it clear that everyone will be held accountable for their actions. However, when every foreign investor who is involved in any type of investment services business has to deal with the entity which that person oversees – it is not the best idea to attack him personally and so publically.

When I said that the financial services industry is a very competitive one I was mainly referring to the international competition that exists between the many jurisdictions which try to attract business to themselves. Publicly questioning the integrity of the head of the regulatory authority in this sector on social media is very irresponsible and petty. There are many other better avenues to address any concerns one may have that do not put our whole jurisdiction into a negative light.

Stop blaming others for your mistakes/short sightedness

Every member of parliament (MP) knows that they have to declare their assets publically. This in itself is a good thing that ensures that such MPs should think twice when it comes to their financial dealings since they know that they have to make their financial dealings public on a regular basis. If someone does not agree with this point or would rather not make their financial affairs public, then why would they become an MP at all I would ask? Everyone’s privacy should be respected and everyone is free to decide for themselves if they want to join the public domain and enter politics. However, you cannot try and play both sides. So if one had taken the decision to become an MP such person should have more common sense when it comes to their financial affairs. Blaming other people or entities for bad advice is not an excuse for taking bad decisions which one should have known would look dubious once they became public – even if they were doing nothing wrong.

Moreover, and what is most important to our industry, one must weigh the cost of their actions on the country they have decided to serve. If you are a public figure all your actions will have an effect on the public you are serving. So someone occupying such a position should always keep in mind the bigger picture and what is really at stake. Some people may well be surprised to know that certain foreign investors still think of Malta as an offshore centre with dubious setups. Anyone of these foreigners who has actually tried opening a company locally in the financial services sector would quickly realise that this is not the case. Sadly, however we are still battling this misconception. So having politicians publicly attack each other for one or the other’s mismanagement of their financial affairs is simply harming our reputation an increasing the misconception that some investors have.

Beware of the Power of the News

We live in a world where social media and the internet at large have made information available in seconds. If one had to search for Malta in the news online I am sure they would not be finding a very attractive jurisdiction to invest in at the moment. It is truly a shame that such an important industry that contributes so much to our local economy is being dragged into the political pettiness by both parties.

While it is important to hold people accountable, by organising public demonstrations and coming out with headlines aimed at scaring people into turning against one political party or another does nothing to help our industry. It may be surprising to some, but believe it or not we do not operate in a vacuum, Malta is not the centre of the world and we are in competition with much larger countries who might also have a better reputation. So having the two main political parties mud-sling each other is only benefitting their individual political aspirations and not our economy.

The Bottom Line

At the end of the day we are all trying to be better off on a personal level and an element of greed will always exist. I do believe that to a certain extent greed is a good thing since it motivates people to become better at what they do. However, one also has to keep in mind the bigger picture and not give into the temptation of short term benefits. If the industry does well there is a much better chance that you will do well, even if you are not directly employed in the financial services industry. All industries are to some extent or another interconnected to the financial services industry which encompasses many branches of finance including, but not limited to banking, insurance, investments and accounting.


Malta’s Financial Services Industry – Too big to Fail?


At a seminar that I have recently attended one of the speakers referred to Malta’s financial services industry as having reached the point of becoming too big to fail. This should be viewed from the perspective that if the financial services industry in Malta had to suffer the ripple effects throughout the economy could be devastating.

Foreign vs Local Firms

To fully understand the importance of the financial services industry in Malta one has to look beyond the firms that cater to the local market and recognise that there are many firms registered and operating from Malta that cater mainly to foreign firms and customers. Taking a quick look at the quarterly statistics published by the MFSA one can easily appreciate how many operative entities in the financial services sector exist. For example, when considering the banking industry, although we all know of the big two and a handful of other smaller banks that service the local market, in actual fact as at 30th September 2015 there were 28 credit institutions and 39 financial institutions licensed in Malta.

In the insurance sector for example, as at the end of September 2015 there were 62 licensed entities in the Non-Life, Life, Composite and Reinsurance categories. In the third quarter of 2015 there were 147 licensed Investment services firms in Malta, of which 108 had a Category 2 license. As at the same date, in the funds industry we had 26 recognised fund administrators. To add some EUR figures now, as at September 2015 the Net Asset Value (NAV) of the locally-based Collective Investment Schemes (including Professional Investment Funds and Alternative Investment Funds) was €9.69 Billion with a B! This figure is made up of the NAVs of 524 funds (including sub-funds). To put this figure in perspective, Malta’s GDP as at 2013 at market prices was €7.51 billion.

So it is not that difficult to see that there is a very large proportion of the local financial services industry which is made up of foreign entities that have registered in Malta. This is of course a positive thing and a good result of the efforts made by various entities such as Finance Malta which for years have been working to attract foreign companies to Malta. It also highlights the fact that we must ensure that we remain attractive for the existing companies to remain in Malta and for new ones to continue to come to Malta. Before going on to list our strengths and what we can do to safeguard/improve them I would like to point out some indirect positives of the financial services industry.

The Indirect Positives

One must keep in mind that besides the direct effect that the financial services industry has on the Maltese economy there is also a significant indirect effect. Some of the indirect effects connected to this industry are:

  • The taxes paid by these companies locally

Here we are not only speaking about the corporate tax effect that the business pay but also the income tax effects of the people who work for these companies and are resident in Malta. Moreover these companies pay indirect taxes both on services they purchase in Malta and many times on the services they purchase in the EU.

  • The effect on the property market

Promoters and top management of these foreign companies who relocate or decide to open shop in Malta are normally among the top income earners who would afford the top rents and top purchase prices of some of the highest valued property on the island.

  • The spreading of knowledge

When locals work with these companies they are exposed to a much greater network of professional people within this sector and beyond. The knowledge base of such workers will grow and such knowledge can then be shared with other people and firms within the industry.

  • The effect on tourism

When foreigners come to live/work in Malta they would spread the word with their families and friends about the Island which in turn will result in increased tourism for the Island. Even if they do not move to Malta, by setting up their companies here they necessarily need to travel to the Island on a regular basis.

  • The effect on other local businesses

Such foreign companies will inevitably need to employ other local businesses in various sectors from lawyers, accountants, and other consultants. They will also contribute to the hospitality industry through hotel stays and business meetings over a meal for example.


An Analysis of our Strengths

Many website of companies that operate in the financial services industry have a “Why Malta” section which list the various pros available to companies who setup shop in Malta. In this section I would like to analyse these strengths to see how much of a strength they really are and what can be done to improve or safeguard them.


Our location is many a time listed as a strength of doing business in Malta. However, when one considers that a lot of foreign promoters that setup in Malta are from mainland Europe it would still be more convenient for them to setup in a place like Luxembourg. We do however have very good connections to mainland Europe so there is still a strength in being in our current geographical location. So short travel times would be a more appropriate strength.

Thus it is important to ensure that such good connections are maintained and improved. We know of the ailing national carrier which is supposedly going to be partially taken over by a larger counter party. The introduction of the low cost airlines which have helped in connecting Malta to other locations have also been a good help. The introduction of new carriers and new lines by existing carriers such as Ryanair’s inclusion of destination in Germany are all welcomed efforts as well.

Excellent ICT Connections

The website of Finance Malta for example states that “Satellite technology and high capacity fibre-optic submarine cables link Malta with Europe”. GO Plc boast about having “The only 4G network 100% fibre connected” while Vodafone Malta tells us “99% Network Coverage”. So yes coverage is very good in Malta, but what about the reliability of that coverage. Any customer of GO has experienced the lower than expected data speeds or being temporarily cut-off for a second or two which makes working through a remote location more difficult.

We also have to analyse the connectivity for foreigners when visiting Malta on a business trip. Are hotel wi-fi zones conveniently set-up or are they restricted just to public areas? Do they offer business facilities where one could operate a remote office? What about ICT maintenance, do we have enough qualified personnel to offer support services on the go and in the hotels?

EU Member State

This is definitely one of our strengths when compared to places like islands in the Caribbean, Mauritius and other known off-shore localities. When being licensed in Malta the companies can use the EU passport to use their license in other jurisdictions. How this is done will depend on the level of activities that they wish to perform in the foreign jurisdiction. But to simply promote their products (without operating an actual office abroad) all the license holder needs to do is to apply the simpler version of this passporting facility which involves our regulator informing the foreign regulator.

I would say that as a threat here we could list the fact that we cannot afford to passport licenses of entities that are not that reputable and honest. We cannot afford to make a bad name for our jurisdiction since in the end the foreign regulators can always refuse to accept Maltese licensed entities that are trying to passport their license. This would definitely create problems for the local industry. From first-hand experience I can say that our regulator is quite stringent in its authorisation process and local banks are also very strict on who they offer their banking facilities to. Although this can be a negative thing at times, it does in fact help us in the long term to maintain a reputable jurisdiction.

Small and Nimble

This advantage is also prominently argued when convincing entities to come to Malta. Since we are a small country where networks with people in influential places are easier to make and maintain it should theoretically be easier to do business in Malta. Of course there is the other side of this argument that since Malta is so small it cannot afford any major scandals. Hence the process to get a license and to open a bank account for foreigners is still not the quickest of processes by any measure.

So one has to be careful not to make it appear that since Malta is a small place that it easy to get any business setup. Also, we must ensure that we promote a reputable jurisdiction and change some people’s attitude that any business is good business. Financial practitioners have to realise that it does not pay to take on any business and that they have to be selective in their choices of whom they chose to endorse.

Knowledgeable Workforce

Another reason why companies come to Malta is the fact that all employees have a decent level of English and in most cases will also know another language. Our courses at University level when it comes to financial services are of quite a high level, especially in the honours courses. So overall we produce a workforce with a good knowledge level that foreign companies wishing to setup in Malta can employ. But is the amount of employees enough and is the level as good as it could be?

When you consider that all our graduates have been studying English from the age of 3 when they entered primary school – is our overall level of English as good as it should be? Here I am referring to people who graduate with a university degree who have spent 20 something years studying the language and/or studying other subjects using English. Should we introduce English proficiency tests across the board for all courses? Keep in mind that to enrol for the bachelor of commerce at the University of Malta your only requirement is an intermediate level pass in Mathematics. Another problem I see with our workforce, is the attitude problem that develops when the students know that they will definitely find a basic level job since there is so much demand for employees with their qualifications. If you take the accounting graduates and the banking and finance graduates – thanks to the progress made in the financial services industry these students know that they have a good chance of finding a job easily. So is this creating the situation where the student does not need to do his utmost? If so, could this not lower the over level and backfire on us?

What about availability? Are we in fact producing enough graduates in the financial services sector? In order to get the full picture here we need to think beyond the directly related jobs such as accountants and consider other such as software developers. If anyone has ever tried to hire a Java developer for example you would quickly find out that the demand for such jobs is far beyond the supply. Like with any asset, since the demand is above the supply the price for such an asset will be high. This is why a developer with little experience can command a high wage compared to other employees in a different department. This of course is good news for developers but in the overall perspective it is reducing our competitiveness.

Our Tax System

I purposely left this last point till the end. Undoubtedly one of the major reason that companies setup shop in Malta is the beneficial tax system we employ. Our system allows companies to legally avoid taxes in higher taxed jurisdictions by moving their business to our Islands. As many know, we have the 5/6ths rule whereby non-residents can claim back 5/6ths of the tax they would have paid on dividends at source. In Malta the corporate tax rate is 35% which means that dividends are paid out after 35% would have been deducted at source. Since non-residents can claim back 5/6ths of this they would effectively be paying 5%.

The problem of focusing too much on this factor is twofold in my eyes. One is the negative image we could portray whereby we could be attracting the wrong type of investors looking to avoid tax at all costs. The other is the fact that there have been a lot of talks at EU level to introduce measures of fiscal integration across the Union. This would effectively mean that the government would lose its ability to determine its own tax rates and a more harmonised approach would be introduced. This would practically eliminate our tax advantage. Both government and opposition are in agreement that they will fight this at all costs, however only time will tell how this will all fold out.

My input here would be not to focus too much on the tax issue. All the above points I mentioned in this section of strengths are all independent of the tax issue. So we have much more to offer foreign investors than the tax incentive. This is the message I believe that Malta has to portray in attracting more business to the financial services sector. When I say that Malta has to do this I do not mean just the government and the entities setup to attract foreign investors, but also the financial practitioners who ultimately end up working with these investors. So the consultants, lawyers, accountants, directors – they all must work together to present a better picture of Malta. The tax issue is a very nice perk of doing business here, but it not the only one. We have far more to offer and this is how I believe our approach should be.

The Bottom Line

We are all aware of the importance of the financial services sector to our economy. I hope this post has highlighted some of the aspects that were not so apparent. I also hope it gets people thinking on the points I raise and how we can all contribute to a better sector altogether.






Have I received Investment Advice?


In this week’s post I would like to discuss the concept of Investment Advice. Unfortunately there is a big misconception on what a financial advisor’s role is in modern financial markets. Some investors have the incorrect idea that a financial advisor is there to tell you exactly what to do with your money and that every time they speak to an advisor it means that they have received advice.

In reality most investors do not even receive advice from their advisor but information. From a legal point of view there is a specific definition for what financial advice is and just because your broker told you that he/she has been selling the bond of XYZ limited lately it does not mean that he/she gave you advice to buy that financial product. Just because the features and characteristics of the product are explained to a client it does not mean that such client received advice to buy that product.

To go a step further, even if the advisor carries out an appropriateness test on a client whereby the advisor asks the client certain question to establish the knowledge and experience of the client in relation to a particular product, it still does not qualify as giving financial advice.

Financial services providers in Malta and across the EU are subject to the Market in Financial Instruments Directive or MiFID in short. This directive defines investment advice as follows:

“‘Investment advice’ means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments

Thus, the directive is quite specific in what actually amounts to investment advice as opposed to other things such as promotion and sell or simply the provision of information. In order to clarify the concept further, the CESR (Committee of European Securities Regulators) in October of 2009 had published a consultation paper entitled “Understanding the definition of advice under MiFID” (Ref. CESR/09-665). In this paper it was established that for a service to amount to investment advice ALL of the following 5 tests had to be met:

  1. Does the service being offered constitute a recommendation?
  2. Is the recommendation in relation to one or more transactions in financial instruments?
  3. Is the recommendation at least one of the following: a) presented as suitable?; b) based on a consideration of the person’s circumstances?
  4. Is the recommendation issued otherwise than exclusively through distribution channels or to the public?
  5. Is the recommendation made to a person in his capacity as one of the following: a) an investor or potential investor?; b) an agent for an investor or potential investor?

In the rest of the post I will be going through the above 5 tests to elaborate more on what is being meant in more detail.


Test 1: Does the service being offered constitute a recommendation?

In specifying that a service will only amount to investment advice if it constitutes a recommendation, the Directive draws a distinction between providing advice and simply providing information. Advice requires an element of opinion, in contrast to the provision of information that does not make any comment or value judgement on its relevance to decisions which an investor may make.

Hence, when an advisor simply provides facts about a product such as the interest being promised, the maturity date, who the issuer is and what its business is, there is no element of advice yet. Even if an advisor explains to a client that the current interest rate scenario is one where investing into a long dated bond makes the investment more risky than investing into a short dated bond, this is still an element of fact and not an opinion.

In theory a recommendation not to buy a particular financial instrument could also amount to investment advice. However, all of the 5 tests mentioned also have to be met. Moreover, the recommendation not to buy a product has to be based on an opinion and not simply facts. Case in point, the recent Bank of Valletta Notes that are being issued at a rate of 3.50% fixed for 15 years. As I explained in a previous post (see link here), the fact that the bond is likely to be illiquid, and is long dated with a low fixed interest rate means that based on facts, and not simply an opinion, the bond presents a big liquidity and interest rate risk.

Test 2: Is the recommendation in relation to one or more transactions in financial instruments?

Both generic advice and general recommendations are not investment advice under the Directive. In the case of generic advice, the consultation paper explained that this is owing to the fact that they do not relate to a particular financial instrument. So as an example, if a financial advisors tells a client that based on what the client has explained to the advisor such client should invest in bonds – no financial advice has been given. The terms bonds, shares, commodities are too generic in nature and can relate to many different instruments at once. For example, buying a bond issued by the government of Venezuela and a bond issued by the Republic of Germany are both transactions in bonds, but it is easy to understand that they are quite different in terms of risk.

In contrast, general recommendations are not investment advice because, being addressed to the public in general, they are not by definition presented as suitable for, or based on an evaluation of the personal circumstances of, a particular investor. So if a client sees a billboard on the side of the road that is promoting the sale of a particular financial product this cannot be construed as being advice.

Test 3a: Is the recommendation presented as suitable?

If the presentation of the information seeks to influence the client’s choice then the firm might be making an implied personal recommendation. If a disclaimer does not change the nature of a communication, meaning that the communication would still create a reasonable expectation by the client that he/she is being advised, the firm may be viewed as providing investment advice. Thus, disclaimers cannot be relied upon, on their own, to ensure that a service does not involve presenting a recommendation as suitable.

If a person places special emphasis on the advantages of one product over others for a client, in a way that would tend to influence the decision of the recipient to select that particular product over others presented, this could well amount to investment advice. Again, it must be stressed that all the other 4 test must also be satisfied for the service to be deemed as being classified as investment advice. So if an elderly client who is retired and is reasonably assumed to be interested in fixed income products is presented with a product that offers a fixed income, this alone does not mean that investment advice has been given.

Test 3b: Is the recommendation based on a consideration of the person’s circumstances?

If a firm has information about a client’s circumstances, including information on areas like his investment objectives or financial situation (i.e. investment advice or the service of discretionary portfolio management had previously been given to the client), it might reasonably be expected that the information is being used to create a picture of the client’s needs and wants to form the basis of a recommendation.

In some cases, it would not be reasonable to expect that a firm will access and use all of the information that it may happen to hold about a client’s circumstances. However, if information on a client was collected recently, or indeed over time as part of an established relationship, a client returning to the firm for follow-on advice can reasonably expect his previous information to be taken into account.

A related issue is that some marketing activities could be inappropriately classified as investment advice, if they are distributed to existing clients on whom the firm holds information. In situations where those activities either involve the presentation of a financial instrument as suitable for an investor or where the firm is making a recommendation based on the consideration of a person’s circumstances, investment advice would have been provided.

It has to be stressed here that the recommendation must relate to something specific. So if for example all the clients of a firm who have previously invested in bonds are sent a mailshot about a new bond that is coming to the market, this alone does not necessarily classify as investment advice. If a letter is sent specifically to a client there would for sure have been a solicitation of the product by the investment service provider to the client. Thus an appropriateness test would need to be filled in since the service would not have been at the initiative of the client. However, this does not necessarily mean that investment advice was given.


Test 4: Is the recommendation issued otherwise than exclusively through distribution channels or to the public?

Not all messages to multiple clients would automatically constitute advice, but there are circumstances in which they could. Three elements that should be taken into account:

  1. the target audience (if the personal circumstances that led the individual to be contacted are highlighted);
  2. the content of the message (e.g. if it contains a solicitation or judgement regarding the advisability of the transaction); and
  3. the language used (e.g. the tone and the way it could be understood by the client).

Test 5: Is the recommendation made to a person in his capacity as an investor or potential investor?

Where the client’s primary purpose for seeking advice is in order to generate a financial return or hedge a risk, the client’s objective is patrimonial in nature and if advice is provided such advice would be deemed investment advice. Conversely, where the client’s primary purpose for requesting the advice is for an industrial, strategic or entrepreneurial purpose, the objective of the client is industrial, entrepreneurial and strategic in nature and the advice provided would be corporate finance advice and not investment advice.

The Bottom Line

The aim of this post is to clarify what is understood as investment advice from the perspective of MiFID. There is a big misconception about this topic in the local market and I hope this post helped to clarify issues that might not have been known to investors. As always please refer to my general disclaimer and note that this post was neither investment, legal or any other form of advice. Anyone interested in further discussions about this or any other topic covered in my posts can contact me on


Welcome to FinancebyKD!

The New York Stock Exchange - a symbol of equity markets
The New York Stock Exchange – a symbol of Financial Markets

Welcome to FinancebyKD

The aim of FinancebyKD is to provide a space where people can find useful financial education and investment ideas. Some blogs will be aimed at financial professionals who are looking to refresh their knowledge on certain financial concepts. Other blogs will be intended for the general public at large and will focus on providing financial education on practical matters that many could benefit from. Whether we want to or not we are all affected by the world of finance. Whether it be our personal financial matters, our business financial matters or the financial planning for our dependents.

I am a firm believer in the concept that “Knowledge is Power” and my aim is for people to garner more knowledge in the field of finance. Through my blog posts and further research, based on the guidance provided, readers will be in a much better position to take more informed financial decisions. I do not intend to promote particular products, but rather to equip people with a knowledge to be able to take better decisions on their own.


In my experience (more “About Me” here) I have learnt to appreciate how uninformed people tend to be about basic financial concepts. A person may be an expert in his/her chosen field, but when it comes to financial matters they would tell me that they don’t understand the world of finance so they just leave their money in the bank. You do not need to be a financial expert to be able to recognise good from bad investment opportunities. The primary objective is to make your money work for you and not just leave it dormant.


Some topics that I intend to discuss will be:


The space is aimed to be a living space where feedback from readers will be appreciated and any topic suggestions would be welcome. Posts will necessarily be influenced by current affairs at times but this will not be a place to get a weekly reviews on investments. There are many good quality sites and publications that cover that topic quite well. I will not be giving financial advice through my posts but mere information (see “Full Disclaimer” here). With the knowledge acquired readers would be more informed to make their own investment decision and to know what to ask their financial advisor(s).


Guest bloggers are also welcome. Since finance is such a vast topic, I will also be inviting other practitioners from specialised fields to post their own work on my site. The idea is to create a general hub for finance related articles in order to get insights from different experts in their respective fields.


Thanks for your time and enjoy the posts!