On August 7, the Malta Financial Services Authority issued an ominous public notice concerning Maltese Cross Financial Services Ltd, an investment services licence holder, operating until recently under the name of Island Financial Services.
A couple of days later, it issued a second public notice on an ongoing investigation into “the company’s assets and to protect the interests of investors”, clearly implying that the clients’ investments and cash had gone missing.
At this stage, the MFSA required that the mastermind involved resigns as director, stops advising clients, stops acting as compliance officer and stops acting as money laundering reporting officer. But how could the financial watchdog have thought it fit and prudent in the first place to agree to putting all these functions in one key official when a prudent regulatory authority would ensure that such functions are vested in separate company officials?
It would not be unreasonable for external auditors to hold periodic reconciliation of client assets
Such separation of duties is an elementary way of putting in place effective checks and balances against fraud and misappropriation, at least in the absence of collusion.
Is it another case of closing the garden gate after the horse has bolted?
What has happened at Maltese Cross could not have happened in a matter of days, nor months. Furthermore, it appears that this case came to light only as a result of an internal whistleblower.
In view of this, could the MFSA say how many routine and surprise regulatory visits it carried out over the past 10 years at Maltese Cross Financial Services, excluding those two-hour-long visits that typically used to take place until some years ago and that in reality resembled courtesy calls?
Furthermore, in a case of putting the cart before the horse, the investor compensation scheme has already repeatedly invited affected investors to file claims for compensation, limited to the lower of 90 per cent of total eligible claims or €20,000 per investor. In filing for compensation, it appears that a claimant would be subrogating the scheme for all of one’s rights against Maltese Cross and not limitedly to the amount of compensation received. This is, at least, the understanding one gets when one examines the relevant legal notice and the investor compensation scheme’s own notices.
Whichever is the correct interpretation, there exists enough doubt about this fundamental issue to warrant an authoritative and unequivocal written statement from the investor compensation scheme to advise affected investors about its interpretation of the matter and, if need be, to have the legal notice amended accordingly.
This is especially important because the investor compensation scheme and its officials – similarly to the MFSA and unlike us common mortals – enjoy statutory immunity from any liability. Until investors establish the limit of subrogation taking place in favour of the investor compensation scheme, no affected investor who has more than €20,000 at stake can really make an informed decision on whether he ought to submit an application for compensation or not.
The proper way for MFSA to handle this issue would have been to conclude the investigations and make public its findings, not least in the name of transparency and public accountability.
The affected investors also have a statutory right in terms of the MFSA Act to receive a copy of the report on the basis of which the investors can then assess the extent to which their particular assets held in custody with Maltese Cross have been misappropriated and gone missing.
In another MFSA media release, published on August 22, the regulator again recommends to investors to seek professional advice “in order to identify any other legal action that may better safeguard their rights at law”.
Investors will be in a position to decide – and their advisers will be able to give suitable advice – when the question of subrogation rights is determined with certainty and when the extent to which an individual client’s specific assets are dissipated are known.
The number of clients and amount involved in the case of Maltese Cross may be relatively small but its implications seriously dent the trust that MFSA-licensed financial services companies servicing the retail general public should enjoy. Therefore, it would not be unreasonable if regulatory provisions for the outsourcing to an external firm of auditors of periodic reconciliation of client assets were to become mandatory and for any discrepancies to have to be reported immediately to the regulatory authorities.
The financial services consumer has repeatedly had a bad deal in Malta and rightfully demands proper safeguards for his hard-earned savings.
Paul Bonello is managing director of Finco Treasury Management Ltd