Replicating a British ISA in Malta

In recent weeks, I published a series of articles highlighting a number of challenges across the Maltese capital market and urging policymakers to adopt a number of reforms to reignite investor sentiment and enthusiasm for local equities.

These recent media contributions may not have been what many policymakers, regulators or several investors wanted to hear. However, they provide a factual reflection of the current state of affairs of the Maltese capital market.

My mission is to highlight the actual state of affairs of the capital market and to proactively promote reforms to improve the health and depth of the capital market. Only by acknowledging the current difficulties can these be addressed and eventually overcome. It is not impossible to envisage a more active capital market in Malta as we had until some years ago.

However, this can only be achieved through hard work and commitment from various parties to discuss a number of required reforms in order to restore investor appetite for securities listed on the Malta Stock Exchange which will then encourage other companies to consider an equity listing.

A number of countries with much larger and developed capital markets are also carrying out several reforms to encourage higher levels of activity and share ownership. As such, local policymakers and regulators can easily consider whether some of these reforms being introduced internationally can be replicated in Malta.

One of these reforms that could be considered in Malta relates to the recent changes proposed in the UK Spring Budget to the individual savings account (ISA).

An ISA, which has been in existence in the UK for several years, is an investment portfolio in which investment income is free from UK income tax and capital gains tax. Over the years, this proved to be popular in the UK with an annual investment allowance currently at GBP20,000. Investors are free to choose their specific investments to be placed in the ISA and investors are also able to withdraw funds from the ISA whenever required. There are different types of ISAs to suit the needs of various investors throughout their lifetime.

In the US, a similar system also exists which is called the individual retirement account (IRA). This also offers tax advantages to individuals to encourage them to save for retirement. There are several types of IRAs, each with its own tax implications and rules regarding contributions, withdrawals and investment options.

In last week’s Spring Budget, the UK’s Chancellor of the Exchequer Jeremy Hunt announced that a consultation period will be commencing for the introduction of a British ISA. This will allow an additional GBP5,000 tax-free savings allowance annually for investments exclusively in UK equities, over and above the existing ISA allowances of GBP20,000.

The overall aim of this new savings product is “to encourage more people to invest in UK assets” as explained by the chancellor of the exchequer. This new initiative has the support of numerous organisations within the financial services sector which have been placing pressure on the British government for several months in order to boost the base of “natural owners” of UK stocks. The background to this is that over the years, UK pension funds have reduced their allocation to the UK stock market in a significant manner. In the 1990s, the allocation to UK investments was more than 50 per cent and this has reduced to below 10 per cent in recent years.

While performing research on the current ISA’s in the UK, I came across this statement which I believe is particularly important to highlight for the purposes of today’s article: “Equity markets exist to finance the economy. They are founded in many jurisdictions across the world on a strong domestic investor base that invests in its own economy and is incentivised to do so”.

The appetite for local equity investment is lacking

Unfortunately, the very essence of the precise role of the equity market is still not well understood in Malta despite the fact that the MSE commenced operations more than 30 years ago. A concerted effort needs to take place to drive the equity ownership across the investor community.

Moreover, the statement mentions ‘a strong investor base that invests in its own economy’ and ‘incentives’ to promote such an investment culture. Once again, although this may appear to be rather basic and notwithstanding the fact that a wide investor base is clearly present in Malta with high levels of liquidity as can be seen from the huge amount of idle cash across the banking system, the appetite for local equity investment is lacking and incentives would indeed be necessary to channel some of these funds into selective shares listed on the MSE.

As indicated in one of my articles published last month, the secondary market activity in equities listed on the MSE has shrunk markedly since 2019. The introduction of a savings product similar to the British ISA could be one of the initiatives that should be actively considered by policymakers in Malta to give added importance to the capital market. Incidentally, only last week, Malta’s social policy minister urged people to invest in private pension plans.

The current private pensions schemes in place locally provide tax rebates of a maximum of €750 on an annual basis which is possibly too low and needs revisiting to encourage more investors to channel their idle savings into the capital market. Moreover, if one wishes to kickstart a renewed interest for Malta-based investments, then additional benefits for investments in Malta would be required similar to the proposed British ISA.

With several companies in Malta paying regular dividends which at times are superior to bond yields, an exposure to these shares as part of a wider portfolio packaged via an ‘ISA’ type portfolio could be ideal for the large majority of retail investors in Malta to supplement their pension income.

A proper consultation would need to take place among various policymakers and practitioners across various areas in the industry to discuss the merits of replicating the British ISA in Malta. Assuming this can indeed be introduced, the investment allowance does not need to be too large to create the necessary impact across the equity market.

If an investment allowance of, say, €5,000 per annum will become available for retail investors for Maltese equities and this is subscribed by 10,000 people annually, it would equate to €50 million per annum – a welcome inflow into the market to bring activity to more reasonable levels similar to those seen in prior years.

The ultimate objective would be to have a proper functioning capital market in Malta. In many countries, this is considered a vital part of a diverse funding ecosystem for a variety of businesses across the country. This is also what Malta needs to achieve.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

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