The financial services industry in this country has grown steadily over the past few decades but it still has some serious governance weaknesses. One such weakness is the inadequate protection given to investors who are conned into buying high-risk investments.
The MFSA is responsible for financial consumer protection even if its powers are limited because it does not have the right to impose decisions on those found guilty of mis-selling investment products.
Thus, the announcement in the last Budget that the government intended to set up the office of an independent financial services arbiter to decide on complaints lodged by consumers against their financial services providers is an important step to protect consumers’ interests. The sooner this function is set up, the more protected consumers will feel when trusting their money to a financial services provider. But more needs to be done to manage the risks associated with the mis-selling of investment products. When it is established that a particular client has been mis-sold a product, it is essential that proper compensation is given to redress this injustice.
Most large banks would not have a problem compensating injured clients once the regulator decides against them. However, smaller service providers are often unable or unwilling to meet their obligations to such clients. An investor protection scheme is, therefore, an important pillar that supports the trust that should exist between financial services providers and clients.
It is worrying that the investor compensation scheme that has 48 participating companies and which is administered by the MFSA has a ‘miserable’ asset base, according to the chairman of the MFSA supervisory council.
Why has such a situation been allowed to evolve? How are consumers’ rights to be protected in these circumstances? Will injured investors have to wait for the courts to decide on compensation?
As long as these questions remain unanswered investors’ trust in the governance of certain sectors of the financial services industry will be shaken.
Consumer protection legislation needs to be strengthened further.
Setting up a fast and simple mechanism to determine whether a consumer has been mis-sold a financial services product is a crucial first step. Hopefully, this will be achieved later this year with the setting up of the promised arbiter for financial services.
This then needs to be supplemented by tighter legislation that will deal with abuses by rogue investment services providers. More personal liability needs to be attached to those who deceive consumers who may not be sufficiently sophisticated in financial matters.
Finally, an effective insurance scheme financed by investment service providers should be put in place with immediate effect so that aggrieved investors can be justly compensated without delay.
Admittedly, it will take some time for an adequate compensation fund to be built. In the meantime, the government can make provisions to ensure that all investors who have been conned by unscrupulous service providers will be compensated without delay.
Taxpayers should not be made to carry the can if, as is the case at present, the investor compensation scheme is underfunded. Apart from imposing tougher due diligence exercises on those who apply to sell investments, administrative fees charged to the industry should be such that would make good for consumer compensation.
Encouraging more people to save money is a key success factor for our future prosperity. Protecting investors from rogue investment companies is crucial for this success.