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 policy makers 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 £20,000. 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. This also offers tax advantages to individuals to encourage them to save for retirement. There are several types of IRA’s, 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 £5,000 tax-free savings allowance annually for investments exclusively in UK equities, over and above the existing ISA allowances of £20,000.

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 who 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 1990’s, 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 ISAs 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”. 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 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 policy makers 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 kick-start 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 policy makers 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.

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

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