The Pros and Cons of the ever-increasing use of Nominee Accounts – By David Baldacchino

The European finance industry underwent a big revolution in the past decade, with the apex being reached earlier this year with the introduction of the MiFID II Directive. These changes have left financial institutions with a more challenging task at hand, that of constantly improving the level of service being offered while keeping costs under control.

Valuable assets necessitate a certificate or a mere electronic confirmation of holding in order to be tradable. The stock exchange is the place where this trading takes place. Potential investors place their bid while asset holders interested in selling ‘state’ their asking price. Should these two match, the deal goes through. Locally, the two most popular ways of holding financial assets are those held directly with the Malta Stock Exchange (MSE) or under nominee, with an intermediary.

By setting up a nominee account, an investor would be passing on the legal ownership of the asset to the intermediary, while beneficial ownership would remain unchanged. At no point does the intermediary have any right on these assets and these are in fact ring-fenced and protected at all times. The local regulator, the Malta Financial Services Authority (MFSA), acts as supervisor on all local intermediaries and imposes stringent requirements to safeguard investors, and the well-being of the industry alike.

The use of nominee accounts increased exponentially in recent years especially in instances when funds and foreign holdings are purchased. This is because, by holding these assets directly, the investor would be in receipt of correspondence from the international broker, fund manager or provider himself and could also face obstacles when trying to repatriate the assets or in the case of a ‘causa mortis’. For these reasons among others, the holding of direct assets is uncommon in most countries, and rarely used in others.

The first concern that investors raise is the security as their investment, which as explained is ring-fenced, investors seem not to have a problem with holding foreign securities or funds under nominee but object to holding local securities under nominee.

The second most widespread cause for concern is that of charges. Many pose the question of why should I pay for a service which I can do without? What are the advantages and disadvantages of nominee holdings? The answers to some of these questions are simple to understand and quite straight forward, while others are slightly more complex to explain.

The sole disadvantage of holding nominee accounts is that of losing direct voting rights and foregoing the right to benefit from some perks that some equity and bond issuers grant their direct shareholders/bondholders. On the other hand, the benefits of nominee accounts are numerous.

First and foremost, under nominee, the process of buying and selling on a stock exchange is simplified, and can be conducted in a timely manner. In addition to this, less administration work is involved and the fact that possible future transactions are more probable to take place with the same intermediary, enables the broker to lower the charges per transaction.

From his end, the investor also benefits from the possibility of resolving any tax-related issues involving these holdings more swiftly and, following the introduction of MiFID II, the investor is at the receiving end of detailed and complete valuations on a quarterly basis. The one point of contact concept facilitates this, while also enables investors to be duly informed of all due corporate actions, to receive all correspondence and income from their investments from their intermediary of choice, and can possibly benefit from a simplified resolution of inheritance issues pertaining to their portfolio when a ‘causa mortis’ is triggered.

The win-win situation benefits the advisor too.  A portfolio held under nominee in its entirety, enables the advisor to provide a holistic advisory service, if and whenever this is required.

On the international scene, there have been sporadic instances where investors battled hard until they retrieved their assets held under nominee from their defaulted intermediary. The case of MF Global in the United States comes to mind. However, one should not overestimate the occurrence of these isolated cases, as one-off instances of unethical and criminal behaviour can be identified in all industries and sectors, at some point in time.

Trust plays a fundamental role in the finance world. Regulators supervise and enforce legislation, but investors should do their due diligence and entrust a respectable intermediary with a track record of excellence with their finances, both when dealing in assets held directly with a stock exchange, or under nominee. By so doing, the investor can put his mind at rest that his finances are professionally managed, at all times.

 

This article was prepared by David Baldacchino,MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, is Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]

https://www.jesmondmizzi.com