At a time when a mania for sweeping reforms are hitting our political agenda, it may be opportune to look deeper into how our consumer protection unit within the MFSA can improve its services, particularly in the light of the La Valette property fund debacle when local consumers lost millions after the fund collapsed. One may question why, with the MFSA’s regular monitoring of banks, this scandal could happen. Perhaps the solution for our financial super regulator would be to borrow a leaf from FSA’s book (the UK financial regulator) and split itself in two. One part to focus on regulated business and another as a separate independent entity responsible for consumer protection.
The time is ripe for change and one may be excused for taking the cue from the antics of Dr Debono (the rebel Nationalist Party MP) who for the past weeks has been threatening to bring down the government. To begin with, he started showing mistrust in the Prime Minister and his coterie of close aides, vowing to topple the government’s slim majority unless urgent institutional reforms were initiated. Perhaps the one vote majority held by the Nationalist Party is an easy target for any disgruntled backbencher to hold the administration to ransom .On the other hand, if this backbencher serves as a catalyst that triggers wholesome democratic reforms, particularly when these matters are postponed then his ploy is to be lauded. Never was a time so suitable than today to redeem past grievances suffered by La Valette bondholders and others who were lured to buy into Lehman Brothers. Observers shower them with sympathy as they battle against unimaginable odds to lodge their protest, to storm the steely bastions of managers in formidable banking institutions. They lament about the feeble protection given by MFSA.
To give some background on the La Valette Multi Manager Property fund fiasco, one can briefly mention that it went bankrupt and its units unceremoniously suspended in August 2008. Sadly, a subsidiary of Bank of Valetta invested in high-risk sub funds that went mysteriously up the creek, leaving a black hole of about €50 million. BOV acted as its custodian and issued a clean bill of health over its tenure while reputed to have earned a cool €7 million in fees. The saga was diffused last year when Bank of Valetta (without assuming responsibility for any wrongdoing) accepted to pay aggrieved unit holders a percentage of their investment on a take-it-or leave final offer which was grudgingly accepted by the majority. This change of heart by BOV resulted mainly after court action was instigated by investors helped by their leader Mr Bonello, himself a managing director of Finco Trust Group (a licensed investment adviser). Following a partial settlement of their losses, investors, aided by Mr Bonello, are insisting for an explanation to be given on how the regulator reached its conclusions when investigating the collapse. Particularly, they claim there was insider information used by top BOV staff when they cashed €16 million in bonds weeks before the fund failure. The plot thickens when one recalls that the long awaited investigative report was not published by MFSA, yet the bank had prior knowledge of its conclusions and promptly declared triumphantly that its staff were exonerated of using confidential information to redeem their holdings in the property fund before it was suspended. It took little time for Mr Bonello to publicly contest the methodology used by the regulator in a letter published in The Times of Malta.
Without going into details, one can explain why Finco is disagreeing as it insists that the investigation date covers the wrong period saying “It is with effect from January 2008 that we suspect the withdrawals increased substantially and we suggested, in writing, that the investigation should at least have started at that point,” Mr Bonello insisted that, although the regulator investigated BOV staff and people connected to them, it did not probe any redemptions made by “favoured clients” who may have been tipped off by bank officials. All this begs the question: who is minding the store? Is the consumer being adequately protected by MFSA when there are alleged rumours that ordinary investors with no financial experience were persuaded to buy sophisticated financial products of high risk? It is a paradox that in a small island where everyone in the business community knows each other and it is very easy to check whether abuse of misselling took place, the regulator’s report on this aspect took ages to be finalised. Back to the question of insider knowledge, one now reads that a board director within the fund had prior knowledge and redeemed over 75,000 units ahead of closure date. In his open letter to The Times of Malta, Mr Bonello states inter alia that in December 2010 he had provided the MFSA with information, including names, about bank staff who had encouraged their prime clients, friends and relatives to sell their holdings in the property. It was in spring last year when investors filed numerous protests in court that fired the trigger for MFSA to start its investigation and much later found BOV in breach of financial regulations in connection with the property fund (the first in a trilogy of investigations.)
The bank and its subsidiary company La Valette Fund Management Ltd were fined a total of €347,816 for regulatory breaches − and the net loss of €15 million in its accounts. Recently, the bank was again fined €175,000 in respect of regulatory breaches related to Lehman Brothers financial products it sold. The final investigation, which is still in progress, concerns incorrect selling of the fund to inexperienced investors. One may ask if there is any modicum of political responsibility when one reads about such events. It is common knowledge that the chairman who is a full time executive at BOV rebutted any failures (no heads served on a platter), but as a politically appointed officer he acts as a steward for the state, which is the major single shareholder. So in the light of an era of reforms and counter reforms instigated by the energetic Dr Debono’s crusade in Parliament (a latter day Savonarola), can one expect some heads to roll? When Finance Minister Tonio Fenech was asked about his opinion on the saga, he refused to comment, saying the government did not get involved in matters involving a regulator and a bank.
He did, however, endorse the way the issue was being dealt with by the Malta Financial Services Authority. So the financial community agrees it is time to take stock and take a deeper look at who is minding the store? Is investor protection being assured at the highest levels? Perhaps it is not ostentatious to copy the UK’s prime minister’s formula, proposing the splitting of the FSA to assure better surveillance especially where banks are concerned. One reads in the Financial Times, how the British government is putting the final touches to legislation to break up the Financial Services Authority into a prudential regulator and the new Financial Conduct Authority (FCA), which will have expanded powers to police markets and regulate the way firms treat their customers. As a top watchdog, it plans to revamp financial regulation to make sure the right products are sold to the right people. Is this the lesson Malta needs to learn from the La Valette collapse that was partly due to the recession that hit world markets in 2008. A split MFSA branching into a muscled consumer protection unit could be headed by a specialist (not unlike the expatriate who’s running the debt stricken Air Malta) in a pragmatic way to fend off potential future misselling scandals. Sometimes people make irrational choices guided by overzealous banking sales reps and succumb to buy structured products they do not understand.
In Britain, Martin Wheatley is chief executive designate of the planned new Financial Conduct Authority, (FCA). He vowed to protect consumers from making irrational decisions. It is useful for us in Malta to follow this reform within the FSA closely.
It is already reorganising itself internally into two business units, and firms/ banks will begin to feel the effects of the new approach this year when they start to get visits from two separate teams of supervisors, one focused on conduct and the other on safety and soundness.
It comes as no surprise that reform in Malta is sorely needed to weed out weaknesses in investment banking regulation. Mr Wheatley says, “The watchword for the new institution will be more intensive supervision. We will be looking at things from a consumer perspective, rather than from an industry perspective.” Naturally, more regulation usually means higher costs for the financial institutions but this in turn affords a better service to their clients who in the past were taken for a ride with signing off financial products / derivatives designed for more experienced investors. Drawing a parallel with the La Valette fiasco, one can recall how embarrassed Mr Wheatley (previously the former head of Hong Kong’s securities regulator,) was when faced with angry protesters who lost money in structured products linked to the failed Lehman Brothers investment bank. Comparisons can be odious so one cannot liken the Hong Kong experience to that endured by 12,000 La Valette bondholders who belatedly took BOV and its subsidiary La Valette to court.
The bank can boast a successful remedy that after much cliffhanging publicity, all unit holders accepted an out-of-court settlement of 75 cents in the euro. But in Malta the regulator did not intervene on behalf of bondholders whereas in Hong Kong it was the regulators together with the banks who ultimately worked out a solution that saw 31,000 investors recover up to 96.5 per cent of their money.
To conclude on a positive note, while the ghost of Dr Debono still hovers ominously around the corridors of our Parliament crying for repentance perhaps it is opportune to make a clean sweep of our financial regulation. This is not a revolution but an evolution which can see new faces (please do not regurgitate the usual political appointees muzzled with multiple conflicts of interest) and fresh blood which will start anew to face the challenging times that banks and their investment arms are facing. Remember how much they were blamed during the sub-prime crisis leading to the demise of Lehman Brothers that triggered a global recession in 2008. Where were the rating agencies then with their triple A endorsements? With this in mind, it is not an impossible task for our political leaders (who wholly support the financial services industry beyond partisan politics) to wipe the slate clean and emulate the massive reform triggered in Britain. It is no shame to copy the Union Flag carriers; after all they are the masters in European financial markets and can teach us all a lesson or two after the fracas linked to the Royal Bank of Scotland and /or Northern Rock adventures.
The writer is a partner
in PKF an audit and
business advisory firm
[email protected]