Mobilising savings into investments

In last week’s article I mentioned the need for the equity market in Malta to grow in size and also in depth if Malta wants to adopt the recommendations of the EU’s Savings and Investments Union (SIU) in order to have investors channel their savings into productive investment opportunities and in the meantime offer better financing options for companies.

Essentially, the European Commission is encouraging member states across the EU to introduce savings and investment accounts similar to the Swedish ISK or the ISA in the UK which aim to incentivise savers to invest a larger proportion of their bank deposits. It is reported that currently only a few countries have a dedicated framework in place for such savings accounts. There is widespread belief that the introduction of new saving and investment accounts similar to the highly successful one in Sweden could indeed channel a material proportion of bank deposits into securities available across capital markets. This would not only strengthen the financial ecosystem but also ensure a transparent and diversified investment environment for citizens allowing them to participate in value creation and private retirement savings.

In early 2024 I had recommended that Malta should consider the possible introduction of individual savings accounts similar to the model in the UK since I believe this to be one of the key initiatives necessary for the Maltese capital market to become more liquid. While in last week’s article I spoke about the importance of the reduction in the free float that can instigate larger companies to the market, which in turn should result in generating increased appetite by larger investors, we also need to have a better investing culture among the retail investing public providing a consistent flow of funds seeking investments into securities listed on the Malta Stock Exchange (MSE). The introduction of such savings and investments accounts also in Malta, which the European Commission has identified as a key measure in its SIU strategy, would be the major channel to divert a portion of the large amount of savings in cash and bank deposits in Malta into long-term investments.

Following the decision by the European Commission earlier this year on the strategy of the SIU, various articles and reports are being made available online which deal with this hugely important topic across Europe. My article of today deals with the main characteristics that have been identified to form the basis of a successful savings and investment account.

One of the most comprehensive reports that I came across was prepared by a UK-based think tank that promotes the need for bigger and better capital markets across Europe. The study identified the following factors behind the most successful savings accounts across the world. Effectively, the following key features that have been identified as a blueprint for a successful savings and investment account are: (i) the ease of use; (ii) the availability of tax incentives; (iii) high deposit limits if at all necessary; (iv) no withdrawal restrictions such as minimum holding periods; and (v) allow savers to invest in a broad range of assets.

In order to be well-accepted and achieve wide-adoption across most savers, a savings and investment account must be simple to use for both the savers as well as the administrators or providers of the investment product. The report by the UK-based think tank states that such accounts must be “easy to open, easy to understand and easy to access”. Moreover, these accounts should be designed in a manner that there would be no reason why savers would not use these vehicles.

Tax incentives are regarded as a key feature to encourage investment in these accounts. The savings and investment accounts currently available in various parts of the world all offer some sort of tax incentive to savers.

In order to meet the EU’s objective of channelling more money out of bank accounts and into the capital markets in a rapid manner, the savings and investment accounts should have no deposit limits on the amount of money savers can hold in them.

Moreover, savings and investment accounts should be designed in a manner that do not have any minimum holding periods to ensure that savers can withdraw money from the accounts whenever they like and still benefit from any tax benefits. Alternatively, if Malta wishes to consider the introduction of minimum holding period to encourage longer term investing, the tax benefit can be designed in a manner that gradually increases over time with the full tax-free benefit available after a stipulated period.

One of the features that has been widely-debated across the international media relates to any requirement or restrictions on the investment mandate specifically towards the imposition of favouring the home market. The former Chancellor of the Exchequer in the UK, Jeremy Hunt, unveiled the idea of a British ISA in his March 2024 budget but this was formally scrapped in the first budget of the Labour Government on 30th October 2024. The objective was to introduce an additional ISA allowance to provide a new tax-free savings opportunity for people to invest specifically in the UK in view of the specific issues surrounding the British equity market.

The comprehensive report published by the UK think tank concluded that the savings and investment accounts in the EU should not have a geographic investment mandate since the objective is for these accounts to be as successful as possible with a high take-up among the population. Moreover, the report also indicates that retail investors in most markets already have a home bias and therefore such a restriction may not be effective. In view of the current limited investment universe in Malta, the reduction in the free float and the introduction of tax incentives for companies seeking an equity listing should also be given urgent consideration ahead of a savings and investment account. There are many companies that are still in private hands that would require new equity funding for their overall growth aspirations, and a public listing is the right avenue to achieve this wider equity base.

Moreover, another critical feature of such accounts to achieve wide distribution would be to launch these new investment vehicles through a public information campaign aiming to educate savers about the new framework for savings and investments and highlighting the benefits of using these accounts. Likewise, another possible feature would be the consideration of an account for young savers to create a culture of investing from a young age. Naturally, a key element is that savers need to trust the framework being established for the savings and investment accounts and government should avoid frequent changes that can be detrimental to those seeking early adoption.

The Maltese authorities would do well to engage international consultants with deep knowledge of savings and investment accounts and capital markets to stimulate a public debate on the future of Malta’s capital markets. The success and experience of other member states should be used to create the right framework to be adopted in Malta as part of the country’s strategy to adopt the EU’s SIU. Malta truly needs a larger and better capital market to provide a proper functioning and diverse funding ecosystem for businesses across various sectors.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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