Consumer confidence in the financial services sector as well as Malta’s reputation could be at risk if certain intermediaries “continue to abuse of the trust that is placed in them by bona fide savers”, the financial services watchdog has warned.

“Anecdotal evidence seems to suggest that the use of terms such as ‘guaranteed’ and ‘protected’ have been loosely used by some financial intermediaries to describe the resilience of saving products and the issuers,” the Malta Financial Services Authority said.

It added: “Many investors can misjudge risk and the potential of default if the investment process is framed in a manner which could lead to a false sense of security in regard to the issuer’s standing”.

This warning was issued in the 2014 MFSA annual report which was recently tabled in Parliament by Finance Minister Edward Scicluna.

The report warns against the risks of chasing high interest returns which in the current low-interest environment might look like an attractive proposition. It notes that risk and return operate in tandem.

Although last year complaints decreased to a seven-year low, cases related to new investments still constituted 40 per cent of the overall number of complaints lodged. Out of the 127 cases filed with the MFSA, 53 dealt with investments, 36 with insurance and 38 with banking.

Last year the authority reviewed and concluded 106 cases, some of which were carried forward from previous years. However, only “13 per cent” were upheld. Asked about the findings of the report financial adviser Jesmond Mizzi acknowledged that trying to convince investors not to opt for high risk investments that promised a higher return was a big challenge.

However, he said that if a portfolio was fairly diversified, such as opting for a multi-asset approach, risks could be mitigated.

He called for efforts to create greater awareness among investors to be more streetwise and understand the risks and rewards of investing in different instruments.

MFSA warns of abuse of trust in investors

The report also showed that payment cards and point of sale terminals increased to 847,190 and 14,010 respectively. This trend confirms the shift from cash payments to card transactions, which businesses are also encouraging.

Mr Mizzi noted that businesses were also allowing customers to pay with their cards even for very small amounts. In future, he said, the use of a PIN number might not even be required for minor transactions.

The report also highlights how bank deposits continued to expand touching an all-time high of €31.2 billion – an increase of eight per cent compared to 2013. Mr Mizzi said this could be attributed to a repatriation of funds and a sign that investors were reluctant to re-invest their profits.

“Investors are now prepared to sit on cash and wait until the next best opportunity arises,” he said. This could be due to the low interest rates and the fact that both local and foreign bonds and shares have seen a sharp appreciation in recent years.

He also pointed out that last year large amounts were invested in new corporate bond issues and Malta Government Bonds.

Another positive trend was a 10.8 per cent increase in the number of newly-registered companies which last year totalled 5,019.

This could be an indicator of new start-ups and hence more investment and jobs. These figures could be augmented further if there is further assistance by government and banks, Mr Mizzi noted.

An analysis of the loans and mortgages sector reveals that lending to ‘households and individuals’ and ‘wholesale and retail trade, repair of motor vehicles and motor cycles’ increased by almost seven per cent and nine per cent respectively. However loans advanced to the ‘construction’ sector contracted by over 10 per cent.

While acknowledging that the latter decrease might indicate a slowdown in this industry, Mr Mizzi said there could be other reasons for this.

He noted that banks were less eager to finance more construction given the large supply and the loan exposures they have in this industry, apart from the fact that some projects could be self-financed.