A key responsibility of the MFSA is to protect the interests of financial clients, particularly vulnerable ones. Older individuals may encounter difficulties in their financial decision-making due to their limited financial literacy. In light of this, the Authority recently conducted a supervisory review among investment firms to identify good practices as well as areas of improvement in the selling processes of regulated entities.

Opportunities for Improved Practices

The review uncovered several practices which fall short of industry standards expected from investment firms when dealing with vulnerable clients:

• The Need for a More Tailored Approach: Some firms do not adequately assess how their processes and practices could impact vulnerable clients, resulting in insufficient support for these investors.
• The Impact of Automated Services: Understanding how technology affects this cohort is key, especially since this may limit human interaction. Vulnerable clients may wish to contact the firm directly to obtain further information and personalised support.
• More Customised Advertising Practices: There were instances where firms resorted to mass communication when selling their financial products to clients, as opposed to a more customised approach which reaches only those clients who fit the product’s target market.

The MFSA’s Expectations

In light of these findings, the MFSA has stressed two fundamental outcomes for investment firms: acting fairly and professionally in the clients’ best interest, and preventing the mis-selling of products. Achieving these outcomes requires robust Product Oversight and Governance arrangements, as well as appropriate selling practices. Invest firms are expected to:

• Establish the Suitability of a Particular Financial Product for Client(s) by considering several factors, such as:
  • Whether the client is classified as retail or professional.
  • Their knowledge and experience, age, risk tolerance and ability to bear losses.
  • Their investment objectives, hence understanding the needs of the client
  • Their financial position
• Clearly Explain Necessary Details to Clients. This ensures that vulnerable investors fully understand the features and risks associated with a financial product, such as a bond issue, before making a decision.
• Align Policies with the European Securities and Markets Authority (ESMA) Guidelines: Firms should refer to the guidelines published by ESMA and regularly update their policies and procedures to align with evolving regulatory standards.
• Provide Ongoing Training for Investment Advisors. In doing so, they better understand the firm’s policies and procedures so that the right products are distributed to the right clients.
• Maintain High Ethical Standards: Firms must act honestly, fairly and place clients’ interests above all other considerations. This ensures positive client outcomes and contributes to the building of trust and confidence in the financial market.
• Have Compliance Officers Carry Out Random Checks. This ensures that proper internal controls are in place to reduce the risk of mis-selling.

A "Dear CEO Letter" issued following the review highlights common shortcomings, shares valuable lessons, and identifies best practices as well as MFSA’s expectations in this area. In particular, the Authority expects all licence holders to review the findings of the supervisory review and implement better practices to benefit both the retail consumer and ultimately the financial market.