Updated: Adds BOV, Finco statements - The Malta Financial Services Authority said today that it had imposed an administrative penalty of €203,150 on Bank of Valletta after an investigation into the bank's sales practices in relation to the selling of units in the La Valette Multi-Manager Property Fund to investors.

It said it had determined that in various instances Bank of Valletta had failed to act in the best interest of investors, as required in terms of the applicable regulatory framework.

The following is a summary of the Authority’s findings and conclusions:

Disclosure to Clients: The MFSA said there were various instances where investors interviewed by the Authority stated that Bank of Valletta’s officials had not provided them with adequate information or explanations about the La Valette Multi-Manager Property Fund.

Nor were the implications of signing the experienced investor declaration form sufficiently well explained.

Moreover, nearly all investors interviewed by the Authority as part of the investigation stated that they were not offered a copy of the prospectus of the La Valette Multi-Manager Property Fund.

Suitability: The MFSA said the La Valette Multi-Manager Property Fund was an unsuitable product for unsophisticated retail investors or investors having a cautious risk profile.

The Authority said its findings showed that there were instances where the La Valette Multi-Manager Property Fund was sold to investors with a cautious risk profile. Several advisory clients had material over-exposure to the La Valette Multi-Manager Property Fund compared with Bank of Valletta’s internal guidance, but there was no record made of the rationale for this exposure.

The Authority said it carried out an investigation to verify amongst other things the nature of the advisory investors.

"Bank of Valletta appears to have regarded many of these investors as experienced investors solely based on their self-declaration," it said.

"In several cases, there was no evidence that Bank of Valletta made any effort to verify the validity of the self-declaration made by these investors. On this basis, the Authority has concluded that on a number of occasions Bank of Valletta’s advisors did not take reasonable steps to ensure that these advisory clients were indeed experienced investors before advising them to invest in the La Valette Multi-Manager Property Fund."

Client Fact-Finds: The Authority said it had also found instances in which advisory investors’ client fact-finds were not updated or did not contain information which corroborated the experienced investor declaration. In some instances, advisory investors’ client fact-finds could not be found in Bank of Valletta’s records. Moreover, Bank of Valletta also failed in some cases to take reasonable steps to obtain sufficient financial and other information from each investor relevant to the services to be provided.

Staff Training: The MFSA said Bank of Valletta did not provide it with adequate documentation and explanations which demonstrated that its officials had been provided with proper training and guidance regarding the nature, characteristics and risks relating to the La Valette Multi-Manager Property Fund, taking into account its unique features and risks and the fact that this could only be sold to experienced investors.

"During the period when the La Valette Multi-Manager Property Fund was launched and the majority of the sales effected, Bank of Valletta did not have adequate written procedures in place on the manner in which the selling of financial products such as the fund had to take place."

Record Keeping: The MFSA noted that Bank of Valletta was required to maintain sufficient records to be able to demonstrate compliance with the regulations and with the conditions of its investment services licence at all times. "There were instances where Bank of Valletta failed to keep appropriate records in relation to transactions in the La Valette Multi-Manager Property Fund carried out on behalf of clients."

File Review: In view of the findings, the Authority said it had issued a directive on the Bank to cooperate with a review of investor client files by an independent professional services firm, engaged by the Authority at the expense of the bank.

The objective of the review is to determine the validity of the experienced investor declaration held by the bank.

"The bank has been directed that, where shares in the La Valette Multi-Manager Property Fund were sold to advisory client investors who were not experienced investors under the applicable criteria, those investors should be entitled to compensation."

This file review should be completed by 31st December 2012.

This was the last investigation into the La Valetta Funds.

MFSA STATEMENT

In a statement, the MFSA explained that the review process will be the following:

An examination of all application forms relating to the La Valette Multi Manager Property Fund, together with the required fact find, where applicable.

Those applications with fact finds indicating the presence of qualifying investment instruments in excess of $50,000 which have been transacted during the five years prior to the investment in La Valette Multi Manager Property Fund, shall be treated as prima facie meeting the experienced investor criteria.

Where the fact finds are incomplete or missing, the independent professional services firm shall be entitled to refer to transaction histories and/or other information available in Bank of Valletta client files, in order to confirm or otherwise determine qualification under the experienced investor criteria.

Qualifying investment holdings shall constitute instruments as defined in Schedule II of the Investment Services Act at the relevant time.

This review process will also be applied to execution only transactions, where the documentation has not been correctly completed and signed off in all respects.

The independent professional services firm will prepare a list of ineligible investors to whom the Bank should offer the further compensation, to which the Authority may add individuals whose position the Authority believes merit further consideration.

The bank will communicate with investors on the final list notifying those investors of its intention to make a compensatory payment to them. The further compensation shall also be offered to the investors who had filed a complaint with the Authority with respect to whom an agreement to compensate was reached between the Authority and the bank.

The compensation to be paid will amount to €1 per unit, less any amounts previously received for each unit. The objective is to finalise the review process and pay any further compensation by the end of December 2012.

"It is important to note that any investor receiving such compensation will be receiving it solely as a result of this directive issued by the Authority to the bank," the MFSA said.

The decision can be appealed within 30 days.

BANK OF VALLETTA STATEMENT

In a statement, Bank of Valletta said that although it has not always concurred
with the MFSA’s approach and/or its findings, it believed that it had always used its best efforts to cooperate with the MFSA during the course of its various investigations and enquiries – and readily understood and appreciated the extreme pressures, both at the Bank and at the Authority, that staff concerned had been working under.

"The Bank will continue to cooperate with the Authority in all respects, including in the carrying out of the file review referred to above.

"The Bank also readily acknowledges that there are lessons to be learned from the LVMMPF experience. In 2011 the Bank commissioned an international financial services consulting firm to carry out a comprehensive independent review of policies, procedures and processes so that these are benchmarked against best-in-class standards in other developed jurisdictions. The recommendations arising from this review are being implemented.," the bank said.

"It is believed that this initiative has enabled the Bank to learn not just from its
own experience, but also from the collective wisdom and experience of many other institutions and regulators arising from the 2008/09 financial crisis.

"The Bank will now be giving its careful consideration to the communications received from the MFSA following the conclusion of its Sales Process investigation.

At this time, the bank said, the Board of Directors does not believe that the FY 2012 financial statements will contain a material charge against profits arising from the La Valette Multi Manager Property Fund matter."

FINCO NOTES INCREASED COMPENSATION

Finco, the financial services company which had spearheaded the protests against La Valette Fund, welcomed the decision by the MFSA.

It noted that the bank will be obliged to pay additional compensation where the review exercise establishes that the relative investor could not be considered as being an experienced investor. The compensation will be calculated at €1 per share less the compensation of 75c per share that investors may have received when they accepted the conditional offer of the bank on May 26.

“This additional compensation is an improvement of about 33% of the value of the conditional offer of May 2011. It is also noteworthy that this additional compensation will be paid in spite of the waiver of investors’ legal rights embodied in the Conditional Offer’s terms”, Finco observed

See BOV company announcement and Finco statement by clicking the pdf links below.

Attached files

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