A compensation fund for people seeking redress when companies they invest in go bust is grossly underfunded.
The annual accounts for 2012 showed that the investor compensation scheme, which is different from the depositors’ scheme for banks, has assets worth just over €2 million, up from €1.8 million the year before.
Set up 11 years ago to provide a means of protection for investors, the fund’s precarious state was highlighted during court proceedings involving a financial services company that went bust.
The scheme is run by an independent committee appointed by the Malta Financial Services Authority and has 48 participating companies that are obliged to deposit money in the reserve.
Fund’s asset base is miserable
But the fund is nowhere near able to cater for prospective claims that may arise from clients of companies that go bust, as evidenced by a court case against the MFSA initiated by the Żabbar-based firm All Invest.
The regulator does not want the financial services firm to file for liquidation before it oversees the orderly transfer of its client base, some 4,000 investors, to another company. The regulator also accused All Invest director Wallace Falzon of trying to dispose of personal assets by transferring them to his wife and children.
All Invest wants to go ahead with liquidation but the financial services firm is at the centre of numerous court cases after it sold high-risk specialised funds – that later went bust – to ordinary people in breach of MFSA regulations.
In court, it transpired that All Invest managed between €20 million and €30 million in client funds that were “hanging in the balance”. The amount is way beyond the capacity of the compensation fund’s asset base.
The investor compensation scheme kicks in when a company files for liquidation, according to testimony by André Camilleri, chairman of the MFSA supervisory council. Asked about the scheme by All Invest’s lawyer, Dr Camilleri described the asset base as “miserable” but denied the MFSA’s opposition to All Invest’s liquidation had anything to do with the underfunded scheme.
All Invest argued that the MFSA objected to liquidation because it was aware the compensation scheme was not robust enough. According to the annual report, the scheme maintains a fund out of which payments will be made to investors “where it appears that a participant to the scheme is unable, for reasons directly related to its financial circumstances, to meet its obligations arising from claims by its investors”.
The news comes on the back of a similar warning last year by Bank of Valletta chairman John Cassar White on the adequacy of reserves held under the depositor compensation scheme for banks.
But in contrast to the investor compensation fund, the depositor scheme had reserves of nearly €100 million at the end of 2012.