Update 2 | Bank of Valletta fined €203,000, MFSA orders further compensation

Updated with Bank of Valletta statement at 2:01pm.

The long-running, two-year saga on the investigations of the Bank of Valletta multimanager property fund has finally come to an end, after the financial regulator pronounced itself on the third and final investigation into the mis-selling of the fund to retail clients.

The Malta Financial and Services Authority fined BOV the maximum fine available under the applicable legislation of €203,150 for breaching license conditions when selling units in the fund to its clients.

The authority also issued a directive which requires the bank to cooperate with a review by an independent professional services firm, engaged by the MFSA at the expense of the bank, that will prepare a list of ineligible investors to whom the bank should offer the further compensation.

BOV will have to notify investors of their compensatory payment to them, which must also include investors who had already accepted the bank's conditional compensation, and which the MFSA said will amount to €1 per unit.

"The objective is to finalise the review process and pay any further compensation by the end of December 2012," the regulator said.

In June 2011, BOV offered investors a conditional compensation offer of 75c per share after the La Valette fund was found to have lost some €50 million in value, which prompted a series of judicial protests against the bank in the name of the property fund investors by Bonello's accusations were later confirmed in the investigation by the financial services authority that fined BOV and its investment arm Valletta Fund Management €350,000 over a breach of investment services rules.

The MFSA then issued a reprimand to former La Valette property fund director John C. Ripard, for having sold his holding in the fund on the basis of insider information.

In its investigation, the MFSA said that 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 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."

The MFSA also found instances in which advisory investors' client fact-finds were not updated or did not contain information which corroborated the experienced investor declaration; bank officials were not provided with proper training and guidance regarding the nature, characteristics and risks relating to the property fund; and the bank failed to keep appropriate records in relation to transactions in the property fund carried out on behalf of clients.

Reactions: BOV and Finco

In a company statement, Bank of Valletta said it will be cooperating fully with the review.

BOV said the MFSA will consider returning a proportion of the €203,150 fine following the conclusion to its satisfaction of the file review.

"The bank, together with its advisors, is in the course of studying the MFSA communication in detail, and will be giving careful consideration to its position. The bank believes that it has at all times used its best efforts to cooperate with the MFSA during the course of its various investigations," Bank of Valletta said in its statement.

"The board acknowledges that there are valuable lessons to be learned from the property fund experience. In this regard, 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, and 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 board of directors said that they did not believe the 2012 financial year statements will contain a material charge against profits arising from the La Valette Multi Manager Property Fund matter.

On his part, Finco managing partner Paul Bonello noted with satisfaction that th einvestigation had confirmed his claims in the course of the last two years. "The additional compensation is an improvement of about 33% of the value of the conditional offer of May 2011. It is noteworthy that this additoinal compesnation will be paid in spite of the waiver of investors' legal rights embodied in the conditional offer of 2011."

Bonello said BOV had not yet announced any intention to accept or appeal the MFSA decision. "We're please to note that BOV's press release today treats investors with a modicum of respect when it "readily acknowledges that there are lessons to be learnt from the LVMMPF experience" and that the bank commissoned an independent review of its policies and sales processes.

"Overall we're satisfied with this reults affecting inexperienced investors and augur this saga gives rise to a new beginning of genuine and reciprocal repsect between BOV and consumers of financial products," Bonello said.

But the Finco partner also said the bank had appealed a decision by the MFSA which fined the bank a penlty over the misselling of Lehman Bros and RBS perpetuals. "We appeal to BOV to respect, honour and implement forthwith the recommendations the MFSA is regularly issing to BOV to reintegrate clients in whose favour the MFSA had found, to their previous financial position."

MFSA independent review

The independent review of the bank's client files will now determine the validity of the 'experienced investor' declaration held by the bank. Applications with fact-finds indicating the presence of qualifying investment instruments in excess of $50,000, which were transacted during the five years prior to the investment in La Valette fund, will be treated as having met the experienced investor criteria.

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

The 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 MFSA said the fund should only have been sold to experienced investors who met the specified criteria applicable at the time.

"There is evidence that units in the fund were sold to individuals who did not meet these criteria and so were not in fact experienced investors, despite the fact that they had signed a declaration stating that they were," the MFSA said.

The regulator said investors must filed a complaint to the MFSA within the next 30 days to make their claims.

The authority's decision can be appealed before the Financial Services Tribunal and also before the Courts.

The MFSA said that verifying the facts and ensuring a fair process always takes some time. "However, where there has been sufficient evidence of wrongdoing the Authority has taken decisive action to address that wrongdoing and to ensure that those entitled to receive compensation get appropriate compensation," the regulator said.