Three weeks have elapsed since the Malta Financial Services Authority announced on December 31 it had ordered Bank of Valletta to pay the additional compensation of 25c to investors who its file review had revealed not to have been eligible investors in La Valette Property Fund. The MFSA provided the list to the bank without advising the investors who had filed complaints.
BoV defied the MFSA by not paying the named investors while the regulator continued to entertain discussions with a recalcitrant BoV until payments to about 25 per cent of the investors were made on Tuesday without the investors having been advised in advance.
Such conduct by the MFSA goes against the most obvious norms of natural justice, namely that a judge or arbiter of whatsoever sort shall invariably communicate with both sides of the dispute and also that decisions made – appropriately motivated - are to be delivered to both parties at the same time rather than only to the guilty party.
In the case of the MFSA, the supposed promoter of the highest standards of openness, public accountability and corporate governance, the legitimate expectations of the public in relation to the application of such norms apply with increased vigour.
BoV remains non-repentant and detached from the lessons it ought to have learned as can easily be assessed from the tone of its company announcement on Wednesday when it restated that it is paying further compensation “on an ex gratia basis, without obligation at law and without admission of any liability or responsibility”.
Investors in this EU member state want compensation by right and the respect of their dignity not morsels of charity from “the consumer bank of the year”.
The MFSA file review was intended to verify the eligibility of investors to be considered as being “experienced” in terms of the fund’s prospectus formal definition. This independent file review covered all BoV advisory subscriptions only. The terms of reference specified by the MFSA in July 2012, in its invitation to offer sent to audit firms to perform the verification exercise, do not spell out the proper methodology and criteria to be followed and, indeed, is a most superficial document.
From the publication of the Mazars report of January 21, it does result that, in the absence of MFSA stipulating the proper criteria to be followed – and this task fell squarely in the remit of MFSA, not Mazars - Mazars made a serious effort itself to adopt proper criteria. However, it is obvious from the reading of the report that there were serious failures, which, no doubt, will have resulted in many cases where additional compensation of 25c per share was denied to many investors who did not, in fact, qualify to be considered as having been “experienced”.
The report does not state that life assurance has been excluded from consideration although clearly these do not fall within the meaning of “investments” as defined by the 2nd Schedule of the Investment Services Act.
The 495 alleged execution-only cases have not been considered by Mazars as to whether they qualified as experienced investors or not.
This number amounts to 22 per cent of the total investors and would have been even higher had Mazars not excluded execution-only transactions where documentation had not been properly completed.
This sheer high number is evidence of the widespread abuse by some investment service providers. The abuse lies in the sale of products that are not suitable for investors but where the client’s signature on an execution-only form is procured in order to bypass the regulatory assessment and appropriateness tests. The MFSA should know about this.
Transactions included up to the day of the application for the property fund were considered as an “investment transaction”. Most purchases of the property fund were the result of switches from other already held investments and these had to be sold before buying the property fund. Counting the sale proceeds of an existing investment in order to purchase the property fund is most unfair as it was a transaction inextricably connected to the La Valette Property purchase.
Mazars have obtained details of investments made by each investor from the records held by the BoV Group which would also include client investments that have been inherited or received by donation during the five years prior to the property fund subscription. Nowhere in the report is it stated that consideration has been made to this aspect to exclude such investments.
Inherited investments cannot be considered as investment transactions because they are the mere acquisition of an investment by a passive operation of the law.
A proper validation exercise ought to have established what information and due diligence BoV advisers had made at the time they advised a client to invest in the property fund. It is most incorrect for the MFSA to allow the bank years later to make an intensive search of its archives to justify what it ought to have justified at the time it gave its advice to clients.
The responsibility for these failures lies with the MFSA, not Mazars.
Investors in the fund who have been denied the additional compensation should insist with the MFSA to be given full dates and details of the alleged investment transactions exceeding $50,000 in five years. Investors have a legal right for this information that motivates the MFSA’s denial of compensation and should have already been made available to them.
The additional compensation of just 25c per share, and only to 25 per cent of the investors, however desirable and in the right direction, is an erroneous and arbitrary decision made by the regulator, the MFSA.
The breach by the Sicav and its fund manager, Valletta Fund Management, of the investment restrictions of the prospectus when investing in nine sub-funds that make up the larger part of the fund and continuing throughout the fund’s lifetime, and the issue of inaccurate annual reports by the custodian of the fund, BoV, as established by the MFSA on June 15, 2011, were to the detriment of all investors. This irrespective of whether investors were experienced or not, advisory clients or execution-only clients and whether purchased through BoV or other service providers.
The massive mis-selling of BoV as financial intermediary of the fund and as established by the MFSA on June 4, 2012, was also committed against all investors, experienced or not. Indeed, mis-selling can also take place in relation to experienced investors. A list of 13 different forms of mis-selling were identified by the MFSA itself, of which the experienced investor formal criterion is only one.
It is superficial that the MFSA adopts formal arithmetical tests rather than substantive criteria to establish who is an experienced investor. An experienced investor is one who, in terms of MFSA rules applicable at the relevant time, is an investor that has “the expertise, experience and knowledge to be in a position to take his own investment decisions and understand the risks involved” and not merely one who invested $50,001 or more in the five years prior to the property fund investment.
Finally, it is an established principle that where breaches of duties and mis-selling is established, the proper remedy is reinstating clients in the situation they were prior to the relative investment decision, meaning the reimbursement of the original capital invested and interest. This remedy has been applied both by judicial and regulatory authorities in innumerable jurisdictions, including the EU.
The proper meaning of “reinstatement” had, in fact, already been unequivocally applied by the MFSA. It had also attributed this meaning to “reinstatement” in at least two rulings issued in favour of investors relating to the property fund itself on June 29, 2011 and August 12, 2011 whereby the MFSA, having determined that the investors were not “eligible investors” because they had not satisfied the required criteria, had asked BoV to pay “original capital invested plus interest”.
The remedy of a mere additional 25c per share, and only to select investors, does not even amount to the reimbursement of the original capital invested by the client. This is an inexplicable volte face by the MFSA.
Therefore, given the result of investigations and the administrative sanctions and penalties announced by the MFSA on June 15, 2011 and June 4, 2012, there cannot be any closure of this sad BOV “fiasco” before a negotiated settlement is reached whereby investors’ rights and dignity is respected and proper compensation paid to all investors.
Paul Bonello is managing director of Finco Trust Group of Companies.