On 24 October, Bank of Valletta issued a Press Release entitled “BOV clarifies the position relating the selling of investment products” with reference to the sale of perpetual securities. Far from “clarifying” the position, the press release was an exercise in misinformation meant only to confuse.
BOV’s press release mentions a number of 138 complaints, implying that the victims of misselling of perpetual securities were contained in number. This claim is repeated by Charles Borg in the interview entitled “BOV’s recent ‘very satisfying results” (TMIS, 11 November).
The figure of US$61,300,000 does not appear to be an invented on. Copies of documents I received of Bank of Valletta’s proof in Lehman Bros’ Chapter 11 bankruptcy amounting to US$61,300,000 under the signature of Michael Borg, Costanzi, its Chief Officer, Legal and Compliance and dispatched to EPIQ Bankruptcy Solutions in New York by UPS Airwaybill No M753 356 4227 on 10 November 2008 indicate that this figure is real.
Of the aforementioned sum, €15,300,000 was owned by Bank of Valletta itself in senior unsubordinated paper whereas the bulk of the rest consisted of deeply subordinated perpetual preference shares sold (or rather missold) to its clients. An excellent example indeed of how fiduciaries are meant to place their clients’ interest before their own (in Roman law, the concept of bonuspaterfamilias) when Bank of Valletta sold the securities last to rank in a bankruptcy and thus very risky to its elderly clients and bought the senior bonds for itself.
The number of BOV clients who were sold Lehman, RBS, Lloyds, HBOS and other perpetual securities exceeded 400.
While it is true that some perpetual securities, in particular Svensk and Barclays, and to a lesser extent RBS, are recovering strongly, many clients have realised their loss as they were strongly advised to sell in November 2008 when prices where at their worst with prices ranging from 10 to 40 for over 100. For these clients, even if the perpetual securities recover their full purchase value, their realised loss cannot be recovered.
Numerous other clients who bought perpetual securities on the advice of Bank of Valletta claim that they were made to sign execution-only instructions. In theory, execution only instructions did not require the bank to apply appropriateness tests prior to the implementation of the EU Directive MiFID in 2008. These clients claim that the import of this type of instructions was never explained to them. These execution-only clients have the intention to file imminent legal action on the basis of their allegation that Bank of Valletta did not use the execution-only instrument but abused of same.
I augur that the MFSA, true to its mission of consumer protection, order a thorough investigation into all the cases where these 400 investors were sold perpetual securities, similarly to what they appointed Mazars to do with La Valette Property investors and what they intend doing with sales of ARM Products by MFSP.
Besides, time has now elapsed sufficiently for MFSA to realise that “BOV will not shoulder their responsibilities” in the matter and MFSA should hence start immediately judicial action in terms of Article 21(3) of the Investment Services Act in order to enforce the rulings issued by MFSA itself in favour of clients and whereby they strongly recommended the bank to reimburse client purchase cost and a fair interest loss.
Lest I am accused of being partial, it will not make the assessment of Bank of Valletta’s performance itself; it need only quote verbatim a sample of statements made by MFSA technical executives in assessing clients’ complaints. The undersigned challenges Bank of Valletta to deny the veracity of same.
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“The Investment Services Guidelines and the Investment Services Rules require disclosure to clients to be ‘fair, clear and not misleading’. By failing to indicate the true nature of these instruments to clients, the bank has fallen short of these obligations.
“Bank of Valletta refers to perpetual securities as being ‘fixed income’ instruments’, ‘investment grade bonds’ and finally ‘hybrid instruments’ in portfolio statements it sent to clients. By using this sort of terminology, such as ‘straight bonds’ and ‘investment grade bonds’, investors with little or no knowledge of the market and its perceptions were lulled into a false sense of security and invested in these products. The reality however was that these products had characteristics and potential repercussions which were different from the characteristics and repercussions of bonds.
“In the light of this and the other issues raised further on in this letter, this raises concerns as to whether there was adequate background and training provided to the bank’s financial advisers and portfolio managers involved in selling these particular instruments.
“The Authority is very concerned at the way the bank has represented and sold these instruments to retail clients. Following a detailed review of complaints, the Authority remains unconvinced that the bank invariably acted in the clients’ best interest. Rather, there is every reason to believe, that, in many instances, the bank failed to act with the due skill, care and diligence which one would expect it to exercise towards its clients. In particular, the Authority notes that the bank appears to have failed in its duty to provide correct and complete information and sufficient disclosure in relation to these instruments in fact-finds, contract notes and other relevant documentation. Moreover, in certain instances, investments in perpetual instruments were recommended notwithstanding the fact that these were not suitable given the clients’ respective risk profile and objectives.
“In light of the above, the Authority strongly recommends that the bank reinstates each of the above-named complainants such that each of them is in the position s/he was prior to effecting the investment which was the subject of the identified breaches of licence conditions. In reinstating the complainants, the Authority would expect the bank to repay them the capital originally invested as well as an equitable rate of interest at least equivalent to the minimum payable on a fixed deposit account, for those years during which the complainants did not receive the expected income distributions from the securities in question.”
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