1. What an investment service is

When we go to the bank and ask to purchase a share, a bond or any other security, the activity which the bank provides us with is an investment service. Even if we request the handling of a sum of money by purchasing and selling financial instruments, the activity which is provided is an investment service, as are other activities provided by the intermediaries.

The investment services are therefore activities, provided by specific parties, by means of which we can deploy, under various forms, our savings in financial assets.

Investing our savings is too complex and important to be considered as just another daily activity. Accordingly, the legal system pays particular attention here, analytically regulating the investment services and the parties who can provide them.

The investment services and activities, accurately identified by law, (Consolidated Law on Finance, the main Italian law concerning investments), include:

1. execution of orders on behalf of clients;
2. trading on own account;
3. management of multi-lateral trading facilities;
4. reception and transmission of orders;
5. subscription and/or placement with or without firm commitment underwriting or stand-by commitments to issuers;
6. portfolio management;
7. investment advice.

All the investment services concern financial instruments, a term used to refer to shares, bonds, Government securities, fund units, derivative contracts and instruments, etc., or rather those instruments via which it is possible to make financial investments.

The execution of orders on behalf of clients is a service by means of which the intermediary, upon the client’s request, purchases or sells the securities in the various trading venues.

Trading on own account is understood to mean the activities by means of which the intermediary, upon the client’s request, sells the latter its financial instruments or purchases them directly from said client (as a rule, one says that the intermediary operates as a "direct counterpart").

The management of multi-lateral trading facilities involves the management of facilities where, on the basis of pre-established regulations, purchase and sale proposals on securities meet and contracts are concluded. A trading facility is therefore a sort of market open to a variety of operators.

The reception and transmission of orders is a service by mean of which the intermediary, having received a purchase or sale order from the client, instead of carrying it out personally, sends it to another intermediary for execution.

Subscription and/or placement is a service where the intermediary, generally as part of the offer to the public of financial instruments, "distributes" them to investors. They can act:

• with commitment: the intermediary guarantees whomever offers the financial instruments the placement of the same or, even, personally underwrites them and then sells them on to the public;
• without commitment: the intermediary limits themselves to placing the securities with the public. The risk of the success of the transaction remains with the issuer.

By means of portfolio management, the client instructs the intermediary to manage all or part of his assets in financial instruments. It is up to the intermediary to decide how and when to purchase or sell securities.

As a result of investment advice, the intermediary provides advice or recommendations relating to one or more transactions concerning a specific financial instrument. A feature of this service is that the advice or recommendation is customized, or rather presented as adapted to the client or based on the characteristics of said client.

 2. Who can provide investment services

Investment services, precisely because they involve an important matter such as savings, cannot be provided by just anyone, but only by parties equipped with specific authorization issued, according to the circumstances, by Consob or the Bank of Italy.

Not all parties can be authorized. The authorization can be issued to:

• Italian asset management and investment firms (SIMs): they can be authorized by Consob to offer all the investment services;
• Italian banks: they can be authorized by the Bank of Italy to offer all the investment services;
• asset management companies (SGR) : they can be authorized by the Bank of Italy to carry out portfolio management activities, advisory activities and the marketing of mutual or open-end investment funds (SICAV);
• financial intermediaries enrolled in the register envisaged by Article 107 of the Consolidated Banking Law kept by the Bank of Italy: they can be authorized to trade on own account and execute the orders of clients (solely in relation to financial derivatives), as well as carry out the subscription or placement service;
• banks in EU nations: they can offer services in Italy which they are authorized to offer by the supervisory authority of the country they belong to;
• investment firms in EU nations: they can offer services in Italy which they are authorized to offer by the supervisory authority of the country they belong to;
• non-EU investment firms: they can be authorized by Consob to offer all the investment services in Italy;
• non-EU banks: they can be authorized by the Bank of Italy to offer all the investment services in Italy;
• stockbrokers enrolled in the consolidated national register kept by the Ministry for the Economy and Finance: they can perform activities for the execution of orders, placement, portfolio management, reception and transmission of orders and advice.

Authorization is not a pointless bureaucratic procedure. It makes it possible to check the existence of the requisites of professionalism, respectability and financial soundness and subjects the authorized parties to a continuous supervisory regime.

Therefore, it is as well, when you come into contact with an intermediary, to check that they are authorized.

It is not difficult to check , also because before investing the intermediary must declare that they are in possession of the authorization and indicate the authority (and the related contact details) which issued said authorization.

Consob publishes the register of the Italian investment firms (SIMs), the EU and the non-EU firms on its website. Anyone can therefore check whether the intermediary with whom they are in contact is authorized and for which services.

A similar check can be carried out with the Bank of Italy for banking parties.

3. Investment services in Europe

Within the single European market, the investment firms and banks of the EU nations can freely perform their activities in all the other nations of the European Community.

For such purposes, it is necessary that the rules which govern the investment services are the same in each nation. Accordingly, it is the same EU norms (directives and regulations) which discipline the subject matter in detail.

The national regulations, which assimilate the EU provisions in the legal systems of the individual nations, limit themselves, in essence, to reproducing and possibly itemizing the EU norms: as a point of fact, there are heavy restrictions on the national legislator inserting different rules and provisions (even if more protective for the investors).

It is therefore possible – within the context of the single market, even normal – that a UK bank for example offers investment services in Italy which it has been authorized to offer by the UK authority.

The investment firm or the bank can operate in other countries both directly, under the freedom to provide services regime, from their own country of origin (typically by means of remote communication facilities, such as the Internet), and by establishing a branch office in the country in which they wish to offer their services.

It should be indifferent for the investor whether he is the client of a French intermediary or an Italian or English one; the levels of protection, in fact, are always those established by EU legislation.

Certain aspects, however, change. The supervisory authority which oversees the intermediary, for example, is different:

if the intermediary operates under the regime of freedom to provide services, the competent authority will be that of the country of origin of the intermediary;

if by contrast, the intermediary operates via a branch office, the authority of the country where the branch office is located (host country) is responsible for overseeing the rules of conduct, while the authority in the country of origin is responsible for overseeing the sound and prudent operations of the intermediary (in other words their financial stability).

It is then necessary to consider that, in the event of disputes, the investor may have to apply to foreign jurisdictional or out-of-court settlement bodies for the disputes (conciliation and arbitration systems).

In order to identify the competent out-of-court settlement body, the investor can contact the body in its own country (the Banking Ombudsman at present in Italy).

4. The rule s which protect us

The importance of savings had led to the definition of rules, instruments and aids for protecting investors when investment services are provided.

The intermediaries are thus obliged to observe principles and rule of conduct, whose purpose is that of ensuring the correctness of their conduct and of permitting the client informed and aware investment choices in keeping with their needs.

The Consolidated Law on Finance obliges the licensed parties to observe a number of general principles, and in other words to behave diligently, correctly and transparently, so as to serve the client’s interests as fully as possible.

Behaving diligently means acting in a professionally adequate manner. In other words, being aware of and performing your profession well.

One is upright if one behaves honestly, without ulterior ends (other than that of the client’s interests) and observing all the instructions.

Transparency, as a concept, is linked to information. The essence of this is providing the client with all the necessary information on the service provided.

All these principles have a sole purpose: the interests of the client. Note, these are not empty, even less, pointless words: they are "weighty" words. Let’s always keep them in mind and expect the intermediary to operate really in our interests.

4.1) INFORMATION

When one is dealing with investments, information is always important. Know in order to invest: this is the fundamental rule. If you do not know, it is best not to invest: the consequence.

Rules, instruments and aids which presuppose specific obligations for the intermediaries are envisaged for correctly informing the investor.

The information must be provided both before investing and after.

4.1.1) Before you invest

Information on the service offered

The intermediary must provide information regarding itself and the service it offers. Some information is very simple:

- the contact information and the language to be used for communicating;

- the declaration of being authorized and the authority which issued the authorization.

Other information is more "essential":

- the methods of communication between client and company;

- the formalities for reporting on the activities carried out;

- the formalities by means of which the intermediary guarantees the protection of the sums and the securities of the clients which may be held. More detailed information must be supplied when the instruments are held by third parties;

- the compensation or guarantee system for clients’ deposits;

- a description, also concise, of the policy followed with regard to conflicts of interest; if the client requests (and why not do so?), a more detailed description of this policy.

This is information which might seem pointless: it is not.

Sooner or later it will be necessary to communicate with the intermediary and it is certainly useful to know whether an order must be made in writing or whether we can also carry it out by telephone or e-mail.

And without doubt, the formalities the intermediary will use to keep our securities and our money, handle the conflicts of interest which may inevitably arise, especially if the intermediary belongs to a group of companies which operate in various sectors, are not irrelevant.

In conclusion, one hopes it will not be necessary, but if the intermediary should have financial problems, such that they lead to the opening of insolvency proceedings , it will certainly be useful to know which compensation system to contact.

Information on the financial instruments

The intermediary must describe the features and the risks of the type of financial instrument to the client (therefore not necessarily those of the specific financial instrument) which they will acquire by means of the investment service.

With regard to the risks, the following elements must be highlighted, if pertinent to the type of financial instrument dealt with as and when:

- the risk of total loss and the incidence of the leverage effect ;
- the possibility of fluctuations in the price of the financial instrument and any limits to its liquidity;
- the possibility that the investment give rise to commitments, obligations, potential liabilities which join the purchase cost of the security. In other words: besides losing the amount invested, we could be required to pay over further cash;
- margining practices associated with the investment.

There are no excuses here. This is important information which we must pay attention to: we are dealing with the possibility of losses, even total, of one’s investments or even, that one may be forced to pay over more than invested (and lost).

Information on the costs

The intermediary cannot carry out the investment unless he has informed the client beforehand of the costs of the service offered. In detail, the intermediary must indicate (always if it is pertinent to the service effectively provided):

- the total price (inclusive therefore of all fees, commission, charges, costs and tax to be paid via the intermediary) payable by the customer for the service or the financial instrument;

- the individual elements which make up the total cost; the costs and the exchange rates for the investments in foreign currency; the possibility that other costs and taxes emerge besides those paid to the intermediary.

It is pointless to emphasise the importance of the costs. Their amount limits the investment’s return, sometimes to a significant extent (see the example in the following box).

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All this information must be supplied to the client in due time before investing and in "hard copy " or, if the client agrees, on a website.

The typical hard copy is paper but, if the client agrees, one can use any other medium, also computerized, suitable for maintaining the information.

4.1.2) After you invest

Detaching the cheque and signing the forms is not enough. The investment should also be followed after .

In general, and for all the services, the intermediary must send the client a report on the activities provided, also inclusive of the costs for the client.

Specific reporting formalities are envisaged for each investment service. We will deal with them when illustrating the individual services in Part II.

4.2) THE CONTRACT

All the investment services, with the exception of investment advice, must be provided on the basis of a written agreement.

Why is the written form envisaged for the agreement? Essentially for two reasons:

- one wishes to emphasise the important of the deed and attract the attention of whomever is doing it, requesting them to sign a sheet;

- one wishes to establish contents of the agreement between the parties in a document, also so as to be able to easily demonstrate them in the future.

It is necessary to specify that the written form is only required for the agreement used for stipulating the provision of an investment service. Another matter is the orders conferred to the intermediary by way of execution of the agreement which do not necessarily have to be in writing.

The agreement must contain the following elements:

- features of the service and the benefits due;

- validity, amendment and renewal of the agreement;

- methods by means of which the client can impart instructions and orders;

- frequency and content of the report;

- for certain services (execution of orders, reception and transmission of orders and portfolio management) and in the event of transactions which may determine losses greater than the value of the investment, the loss threshold beyond which the client must be informed;

- the remuneration of the intermediary and the incentives (see Part I) received from the same;

- the possibility of providing, in association with the service offered, advice on investments;

- any settlement and arbitration procedures in the event of disputes.

The recommendation is always the same (and could not be any other): read before you sign.

4.3) ADEQUACY , APPROPRIATENESS AND EXECUTION ONLY

Does this suit me?

How many times have we asked the shop assistant this question and, if they are good at their job, with a glance, they tell us whether "it hangs well"; then, if they are really good, and maybe they know us a little, they let us know whether it is suitable for our personality and how we are.

An investment must also be "made to measure" and the "assistant", an employee of the intermediary or financial advisor, has a duty (except with regard to the mere execution of orders) to assess whether the product they have proposed, or which we request), is for us.

For a correct assessment, the intermediary must however know us. Do not be amazed, therefore, if on first meeting them, they ask us for information on our situation and let’s give them this information. Who asks for it is operating correctly so as to carry out their work better. On the contrary, we should be wary if the intermediary starts the relationship without asking us anything or inviting us not to provide our information, playing down its importance.

The assistance provided by the intermediary has different degrees, according to the service provided, until its cancels itself out for the mere execution of orders (execution only).

4.3.1) Adequacy

The most extensive assistance, comprising the assessment of the adequacy of the investment, is envisaged for the investment advisory and portfolio management services: these are the most complex services with the highest added value for the client who request specific assistance from the intermediary.

The intermediary can assess whether the investment is appropriate for us only if they know us well from a financial point of view. Therefore, they must ask us for information relating to:

- knowledge and experience with regard to investments – They will ask us what type of services, transactions and financial instruments we are familiar with; the nature, the size and the frequency of the financial transactions already carried out; the level of education and profession exercised;

- financial situation – It is useful for the intermediary to know the source and extent of our total income and assets, as well as the financial commitments already undertaken (for example mortgage repayments);

- aims of the investment – The intermediary will inform himself on how long we want to invest our money for, on our propensity towards risk and the purposes for which we are investing.

It is not possible to provide advice or manage a portfolio without this information. Therefore, we have no choice: either we provide the information or we give up these services.

This is not intrusion into out private sphere by the intermediary, but a necessary condition so that the latter can correctly perform their activities, in the interests of the client: how can one recommend a transaction (advice) if, for example, one has not the minimum idea of the client’s propensity towards risk? And, likewise, how is it possible to manage the money (portfolio management) is you do not know when it will be necessary to liquidate the investment so as to return the equivalent value to the client?

Having acquired the information, the intermediary assesses whether the management service, or the individual transactions carried out by the manager, as well as the transactions advised within the sphere of the advisory service, are such that they:

- correspond with the investment aims of the client;

- do not place the client in a position of risks which he cannot support;

- involve risks which the client, given his level of experience and knowledge, is able to comprehend.

Only at the end of this process, can the transaction be considered to be adequate. This involves a form of really effective protection for the investor and, at the same time, a onerous commitment for the intermediary who will have the liability, and the corresponding responsibility (to be enforced also in the event of disputes), of setting up or advising adequate transactions only.

4.3.2) Appropriateness

With regard to all the investment services – except investment advice and portfolio management, in relation to which the assistance which the intermediary must provide is particularly extensive as we have seen – the intermediary must assess whether the investment proposed or requested by the client is appropriate. It is a less important assessment when compared with the adequacy, because it takes into account a minor number of elements:

In order to assess the appropriateness, the intermediary must request the client for information regarding, exclusively, his knowledge and experience of the type of instrument or service proposed or requested. In more detail, they must request the clients what types of services, transactions and financial instruments they are familiar with, the nature, dimension and frequency of the financial transactions entered into in the past, and the level of education and profession exercised.

A product is appropriate if the client has sufficient knowledge and experience so as to be able to comprehend the risks associated with said product.

If the intermediary considers the investment to be inappropriate, they must inform us. If we receive this warning, therefore, pay attention: we are acquiring a product whose risks we are not in a position to assess.

Obviously, the mechanism functions if we provide the requested information. If we decide not to provide it, the intermediary may in any event provide us with the service but they will not be in the best of conditions to assess (and they will warn us of this circumstance) the appropriateness of our investments.

Is it worth waiving this type of protection so as not to provide any information on ourselves and on our past conduct with investments?

4.3.3) Execution only of orders

Execution only of orders is a method of carrying out order execution and order reception and transmission services. This method can only be adopted if the service refer to:

- shares listed on an organized market;

- monetary market instruments;

- bonds and other debt securities (such as Government securities);

- harmonized funds (these are mutual investment funds);

- other simple financial instruments .

With regard to execution only, the intermediary carries out the order without having to assess whether the transaction is appropriate for the client and, consequently, does not have to request any information.

The other obligations, however, remain unaffected such as, for example, that of informing the clients and observing the rules concerning conflicts of interest.

The exclusion of the obligation to assess the appropriateness is a disadvantage for the client who is deprived of a form of protection. Greater responsibleness is consequent because said client will have to assess, without any help from the intermediary, whether a certain transaction is appropriate or otherwise for them.

The service is therefore usually suitable for those who have satisfactory experience and knowledge regarding investments and therefore consider they know how to go it alone. Not by chance can execution only be provided solely upon the express request of the client.

Especially those who are not particularly expert on the subject should not request execution only of orders: they would deprive themselves of a form of protection deriving from a price obligation which the intermediary is responsible for, which could also be of importance in subsequent cases of dispute.

As always, however, the instruments in themselves are neither good nor bad; it depends on the use. Even execution only could be advantageous since, given the minor involvement and responsibility of the intermediary, it should involve lower costs.

Expert investors (aware, however, that in the case of a wrong investment, they cannot blame the intermediary for anything) and those who want to invest exclusively in commitments with a very high risk profile (for example treasury bills) can take advantage from this. In both cases, the assessment of appropriateness carried out by the intermediary could be less useful.

4.4) THE INCENTIVES

The incentives (often also referred to as inducements) are payments, fees or non-monetary benefits paid or received by an intermediary in association with the provision of an investment service. For example, a portfolio manager receives a payment for each order from the executor of the orders chosen to carry out the transactions: this payment is an incentive.

The rule is that incentives are forbidden, unless:

a) they are received from (or paid to) a client;

b) they are received from (or paid to) a party other than the client provided that:

- the nature and the amount (or the method of calculation) are clearly communicated to the client before the provision of the service;

- they are aimed at increasing the quality of the service provided;

- they are compatible with the obligation of the intermediary to serve the client’s interests as fully as possible;

c) they are necessary for the provision of the services.

The provisions pursuant to letters a and c) are taken for granted: it is normal that the client pays fees to the intermediary and likewise it is normal that the fees necessary for the provision of the services are permitted, such as safekeeping costs, foreign exchange commission, etc.

Letter b) is more problematic. Under what circumstances do the incentives increase the quality of the service provided and which conditions are compatible with the obligation to service the client’s interests as fully as possible?

For such purposes, it is necessary that the payments received by the intermediary are instrumental to improving the content of the service rendered to the client and, therefore, bearers of advantages for said client.

If, for example, an issuing company pays a contribution to an investment advisor and this contribution is used to improve the analysis instruments, it can be stated that it increases the quality of the service provided. Provided that, obviously, the payment cannot distort the recommendations of the advisor to the client.

The client must in any event be informed of the existence of incentives, their nature and extent. It is useful information, which could also lead to preferring intermediaries who do not receive incentives or do so to a limited extent.

4.5) CONFLICTS OF INTEREST

A conflict of interest occurs when the intermediary - when providing an investment service – has their own interests, or is the bearer of interests of third parties, in contrast to those of the client.

It often occurs that the intermediary operates, also via other group companies, in many sectors: it offers investment services, carries out banking activities, issues bonds, is a member of security underwriting syndicates, etc.

Under such circumstances, the possibility, at least theoretical, of conflicts of interest is evident: if the bank which controls the intermediary issues bonds and the intermediary introduces them into the portfolio management which it carries out for the client, it is possible that it does so not so much in the client’s interests but in order to facilitate the distribution of the bond issue of the parent bank.

Obviously, the conflicts of interest must not damage the clients. For such purposes, the intermediaries must observe the rules.

In the first instance, they must identify all the internal situations which could generate conflicts of interest.

Having identified the conflicts, the intermediaries must handle them, by means of organizational measures capable of preventing them from negatively influencing the clients’ interests. These measures must ensure that the parties physically involved in the provision of the service can act with an adequate level of independence.

The identification of the conflicts and their handling forms part of the conflict management policy which must be drafted in written form and communicated to the client before providing the investment service.

In exceptional cases, it may also occur that the conflictual situation is such that it cannot be realistically neutralized by means of the organizational measures. In this case, the intermediary must inform the client, clearly and in hard copy , of the nature and the sources of the conflict.

If, therefore, the intermediary informs us that it has a conflict of interest in providing the service which we have requested, do not read this communication absent-mindedly (or worse, ignore it entirely) and try to understand if and how the interest of the intermediary may damage ours. And if we have any doubts, why not contact another intermediary?

In any event, the communication of the conflict to the client does not excuse the intermediary from adopting all the expedients necessary for avoiding that this situation effectively damages the client.