Needed, a financial services ombudsman

Marilyn Mifsud
Securities Associate, PKF

The new government's commitment to appoint an Ombudsman specifically dedicated to investigating investor-complaints and mediating disputes between investors and financial institutions has recently made headlines.

Such an Ombudsman is proposed to be flanked with two charters; one tailored to small investors and the other tailored to bank customer rights.

All this resounds as very relevant in the light of the recent cases of mis-selling such as MFSP, the BOV property fund debacle, and the mis-selling of shares in heavily subordinated paper pertaining to the bankrupt giant that was Lehman Brothers Bank, among others.

Hundreds of investors lost their savings in qualifying on both counts as small investors and concurrently as bank customers and where importance of due disclosure and non-commission based advice were among the highlighted areas in the aftermath.

MFSA also issued penalties in relation to the shortcomings of bank employees in this regard that served as a warning to other banks.

Having the above-mentioned charters in place can, if not lend the small investors the requisite experience to make certain investments, shed light on the absence thereof and better identify, before any money is parted with, whether the objectives and risk profile of a particular financial product match those of the potential buyer.

Looking back at these cases one immediately notices two components at play: aggrieved consumers and license holders in breach of their obligations.

The glitch lies in that whereas the MFSA, a single super-regulator, can and does heavily penalise license holders for mal-practices, its hands are metaphorically tied in view of the official limits of compensation it is able to impose.

Let us discuss the BOV perpetuals case that saw the MFSA 'strongly recommending' reinstatement and its expectation that BOV should repay original capital invested plus an equitable rate of interest.

However, BOV was completely free to pave its own way forward with regards to reaching settlement of claims with its former clients, and so far has not acceded to their request to repay the capital invested.

Enter the proposed Ombudsman who could deal directly and exclusively with investor to help resolve financial institution complaints.

Currently the existing Consumer Complaints Manager figurehead comes closest to the description of the Ombudsman, given that he is an MFSA official whose role is specifically to mediate 'private consumer' complaints related to financial services transactions. 

The Consumer Complaints Manager comes into play only when the complaint in question is not simultaneously being taken cognizance of by another body (such as a court or other out-of-court entity), handles only individual complaints (non-corporate ones), and is classified as a representative of the EEA's 'out-of-court-settlement-scheme' by virtue of its membership in FIN-NET (network for settling cross-border financial disputes out of court).

It is opportune to explain that the role of FIN-NET is to facilitate dispute resolution in instances where the consumer's complaint relates to a financial institution in a state other than that in his or her own state of residence.

Continuing on the Consumer Complaint's Manager, his role is triggered in something of a hierarchal climb of exhaustion of available remedies.

That is, before a disgruntled consumer (who within financial services commonly doubles up as an investor) can direct his complaint to the office of the Consumer Complaints Manager, he or she must first attempt to resolve the issue directly with the license holder in question.

In addition, in instances when no reply is forthcoming from the license holder, the consumer cannot immediately refer the matter to Consumer Complaints Manager but must allow a peremptory period of two months to elapse before he or she can claim deemed-refusal of his cause, and present the case to the Consumer Complaints Manager.

The law purports a further tier whereby the Consumer Complaints Manager may (not shall) refer the matter to the Supervisory Council for its consideration, where the Supervisory Council is the licensing and supervisory arm of the national regulator.

So where does the new Ombudsman for small investors feature in all this, and how could he supplement the mechanism already at play?

The Consumer Complaints Manager may on paper seem well and good, but this mechanism is hampered by evident shortcomings that have been long-felt from a pragmatic standpoint.

The first major short-coming emanates from the wording of the law which states that the private consumer shall not have the right "to require the Consumer Complaints Manager to give him advice on any particular matter or to act on his behalf in any dispute with a licensed person before any court or tribunal, except to the extent, if any provided for by this or any other law."

This description fits the bill for an Ombudsman figure, who once, elected can be engaged with the de facto advice-delivering and representation of distraught investors in their disputes.

The second major short-coming is that the rest of the provisions concerning the Consumer Complaints Manager fail to mention any decision-making power, and which is consequently limited to only 'recommend' a (non-binding) way forward.

Such a decision-making power would certainly go the extra mile as far as effective dispute resolution goes, and certainly also in supplementing the Consumer Complaint Manager's 'powers' of 'encouraging', 'assisting' and co-operating' in his out-of-court dispute settlement terrain with more toothed, and perhaps more pro-active weapons of choice for any future incoming Ombudsman.

By comparison, the UK Ombudsman for Financial Services disputes is well-known for his powers and unique performance regarding the resolution of recent mis-selling of complex financial instruments - namely cases featuring Barclays Bank plc, HSBC Bank plc, Lloyds Banking Group plc and Royal Bank of Scotland plc.

The UK's Financial Ombudsman is an impartial figure set-up by Parliament who in 2012 was seen reversing two decisions taken by banks not to pay compensation in view of mis-selling of swaps.

Having a similarly impartial institution of a Financial Services Ombudsman in Malta would be addressing an age-old moot point in terms of the impartiality, or lack thereof in related matters.

In fact the MFSA's arm using its binding decision making powers (the Financial Services Tribunal) does not relate to investor-license holder disputes but to license holders aggrieved by decisions of the MFSA, and obviously there has long been a lament in terms of the absence of a fair hearing and equality of arms in this regard, particularly where such body is at once both party and arbiter to the same case at the same time.

While the Consumer Complaint Manager has no decisive role in dispute settlement, it is still being a central member of the regulator where there is an involuntary element of bias perhaps in the consumer's perception - although this is contrary to the MFSA's objectives that hold consumer protection as the heart and kernel of its very constitution. That said an independent Ombudsman would no doubt give a lot of comfort to aggrieved investors.

Back to UK, we find that the parties who refer a dispute to the UK Financial Ombudsman have a right of refusal to the latter's decision. At face value, this may seem to draw parallels with the Consumer Complaint Manager's recommendation that the parties to a dispute locally may similarly choose to refuse.

However, the vital difference lies in that while the acceptance of the Consumer Complaints Manager's recommendation can, at most, facilitate an amicable route to a dispute resolution, the acceptance of a decision of the UK Financial Ombudsman would be final and binding on both parties, levying an element of weighted permanence that is certainly not part of our own Consumer Complaint Manager's fabric.

While at present locally very little has been disclosed about how the Financial Ombudsman skeleton will be fleshed out, a worthwhile question is whether the proposed local Ombudsman will be moulded along similar terms as the UK one.

This is perhaps at once possible, plausible and probable given the Maltese legislator's trend of following very closely the UK developments in this sector, citing as an example Malta's transition to a single regulator and the setting up of various tribunals (although the UK have reverted back to separate regulators breaking the mould of FSA the single financial regulator).

Beyond this, a more direct inference that the UK model will once again be pursued can perhaps be deduced from speculation over how recourse to the UK Financial Ombudsman must be preceded by direct complaint to the license holder, which when has eight weeks to reply - a rough equivalent to the two-month window accompanying an identical requisite under the current Consumer Complaints Manager regime.

In conclusion, while one hopes that the proposed the establishment of a Malta Financial Ombudsman is realised rapidly yet smoothly, there is in this context a greater need than ever to drive home the importance of reasoned caution (let the buyer beware) that should underlie any investment decision.

This includes the notion of moral hazard when making investment decisions, where the inherent risk of loss is always present and any resultant losses never translate into an automatic right to compensation.

One must thus not run away with the idea that a Financial Ombudsman will pose as a gilded shield protecting all and sundry from potential losses as they draw near.

Investors must always remember that the guarantee 'safety net' catches only those losses resultant from the (proven) mal-practice of the license holder, and not the mal-performance of an investment product.

Dr Marilyn Mifsud LLD is a Securities Associate at PKF, an audit and business advisory firm

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