Investment advisors : legal obligations towards investors

Abstract

After the unprecedented 2008 world financial crisis which reached its peak with the collapse of Lehman Brothers in the United States, the financial world feared the possibility of the entire financial system breakdown. After this crisis a number of cases which involved the provision of investment advice also emerged in different countries, including the United Kingdom where major banks such as Barclays and HSBC were being named. Malta is no exception to what was happening worldwide, and the first cases of mis-selling started emerging with the most notorious cases concerning Bank of Valletta and MFSP Financial Management Ltd. Considering this background, financial authorities started rethinking their strategies, primarily to provide more protection to investors. The retail investor started being viewed as a vulnerable consumer and regulation in this regard is being proposed. This is the backdrop against which this thesis is being written. Chapter 1 of this thesis provides definitions of the main terms being referred to, particularly, investment, investment advice, the investment adviser and the investor. These definitions are arrived at through case-law and legislations, principally Maltese and UK legislations and the main EU Directive relevant to this topic, the Markets in Financial Instruments Directive (MiFID). The major focus of this thesis is concerned with the laws that regulate the relationship between the investment adviser and the investor. Chapter 2 lists all the laws that have a bearing on the rapport that exists between the two parties. Particular importance is given to the regulatory aspect which is explained in further detail in Chapter 3, and Chapter 4 provides an analysis of the proposed MIFID II by focusing mainly on the proposals that are directly re The contractual and tortuous obligations that the party enters into are expounded in greater detail in Chapter 5. This chapter puts forward the standard of care and degree of diligence which should apply for an investment adviser considering that our law is silent on the degree of diligence required from licence holders. Finally, Chapter 6 presents the view that retail investors are to be considered consumers. Reference is made to case-law, European Union Directives and renowned authors who back this hypothesis. This thesis is focused on the role of the investment adviser and the obligations entered into once a relationship with the investor is established. The current legislative framework will be analysed in detail to understand whether retail investors are offered effective remedies in cases of mis-selling or in cases of breaches committed by an investment adviser.