One man against the big bank | Paul Bonello

It's been nothing short of an annus horribilis for Bank of Valletta. Caught up in an investigation by the financial services authority in the way its La Valette multi-manager property fund had been managed, and ultimately resulting in the highest-ever fine imposed upon a financial institution by the MFSA, the bank was left reeling from a 35% drop in profits, partly due to the compensation it had to pay to shareholders of the property fund.

And in the months leading up to the MFSA's verdict, it seemed the lofty accusations being made against the bank in a series of judicial protests being filed by a stockbroker in the name of the property fund's clients, were having little effect on Bank of Valletta. The bank appeared inured to the media attention visited upon them as Paul Bonello, the director of Finco Treasury Management, meticulously spelled out various breaches of investment restrictions that had left the fund's investors - some of whom had invested their life savings in the fund - with a quarter of their investments.

At the time of writing, the MFSA is involved in two other separate investigations on the La Valette fund, while Bonello himself is also pursuing new complaints relating to perpetual securities sold by the bank, particularly Lehman Brothers securities. And it seems that the bank's attitude has changed since the time it told Bonello to 'put up or shut up' when he first filed the seminal judicial protest against the bank on the La Valette Fund.

"The bank, correctly this time, did not waste time in starting discussions immediately after we filed a judicial protest in September of this year. The bank is meeting us in the presence of clients and discussing on a case by case basis. The attitude of the bank is definitely more constructive than in the case of the La Valette Property Fund.  There have been several cases where the bank has offered a settlement to clients in a very satisfactory manner. But unfortunately in many other cases, in spite of overwhelming evidence of unsuitable and inappropriate advice, mostly to old age pensioners, the non-disclosure of the legal and financial risks of perpetual securities, and often the absence of signed client instructions, the bank continues to claim it has acted correctly," Bonello says.

This issue is now in the hands of the MFSA. Bonello claims the authority has now of the misselling of complex financial instruments to retail clients for three years now, since the first complaints started reaching it.  But is he even confident that the authority which he once said 'lacked personality' and the teeth to take on giants like BOV, will rise up to the challenge it has before it?

"Personality does not come as a result of being endowed with statutory legal powers, but refers to character and the ability to act in a way that inspires all round respect. It is the ability to act forcefully and with conviction," Bonello says.

"The Authority is not proactive enough, doing too little, and often too late when the primary duty to protect investors is theirs and not ours. Take this issue of perpetuals: the MFSA knew about these cases since a long time and made no public statement. We filed our judicial protest in September of this year and the next day the MFSA issued a media release that it is an advanced stage of investigations in that connection. Did it have to wait until we filed the judicial protest to issue a statement?

"And now that it has expressed itself as being in an advanced stage of investigations and knows that the bank continues to reject most legitimate claims, what is stopping the MFSA from pronouncing itself and using some of the tools in its arsenal to protect investors? The MFSA is not only dealing with people here, but people of an advanced age who have a legitimate expectation that a determination of their claim takes place in a reasonable time and that they are given means of redress that will avoid their having to enter into long and dragged court cases which they may not outlive."

So how did the La Valette property fund saga actually start? When did you realise that some €50 million of the fund's savings had been lost, ostensibly due to the huge debts of the underlying funds?

"I was present at a shareholders' meeting where my clients were investors, and I started making questions in order to have the sudden and severe fall in value to the investment explained to me.  The answers I got were far from convincing and that spurred me to investigate the matter. In a matter of a few weeks I got to the bottom of it and obtained all relevant documents relating to the underlying investments from all corners of the world. And I made my conclusions that there were multiple breaches of the fund's prospectus investment restrictions from a very early stage of the fund's existence.

"I passed all the findings to the MFSA in September 2010 and in June of this year the MFSA issued its report and confirmed these allegations and inflicted VFM and BOV with a record fine."

Bonello's allegations met quite a bit of resistance on BOV's part.

"Unfortunately the bank tried to attack the messenger instead of the message. Perhaps they thought nothing had changed in Malta and they need fear nothing. It is unfortunate that even at this late stage, the bank, instead of unreservedly apologising for what they have done wrong - as all UK banks found to have engaged in misselling have done in the last couple of years - continue to take an ambiguous stand between introducing changes and insisting that they have acted correctly all along," Bonello says.

But in presenting the 2011 annual figures, BOV chairman Roderick Chalmers also announced the restructuring of the bank's selling processes but qualified this by saying that the bank had not done anything wrong.

"That is exactly the ambivalence I was referring to. A document that has recently come to light actually says more than what the chairman revealed in his press conference. The bank is making a root and branch review of its sales processes, of its custodian procedures and of the monitoring of its delegates: why would an organisation make such deep-rooted reforms if it has done nothing wrong?"

The MFSA seemed to have worked 'silently' in the way it handled the BOV matter, even though the saga attracted genuine media attention. But does it act impartially or is it in awe of institutions like BOV?

"Generally the MFSA acts impartially. However it appears to be too psychologically inhibited from being decisive in relation to the big players. Take the long time taken in order to conclude the second and third line of investigations relating to misselling and improper use of information not in the public domain relating to the La Valette property fund: that are still not published after all this time. The last time MFSA gave a timeframe in this respect was on the 3 November when it announced the "imminent" publication of one of them, but it looks like that the meaning attributed by the MFSA to "imminent" is different from what common people understand."

But the authority did act when BOV refused to extend the time limit of its 30-day conditional offer to property fund investors last June. And the authority did issue a directive to the bank so that  acceptance of the BOV offer would not prejudice those clients who were not eligible to be considered as experienced investors.

"Yes that is true, but why did the authority not publish the fact that it issued the directive, when it has a clear responsibility to keep the public informed, obviously in a timely manner? Perhaps, acting in a subconscious manner, in order not to encourage affected investors to file complaints on that basis?" Bonello asks, before accusing the MFSA of "indulging" in four months of correspondence with BOV which he says "pretended that it had failed to fully understand its implications".

"Why did the authority extend the 30-day appeal period on three successive occasions, an act they now appear to have regretted and which we very much doubt the MFSA had the legal power to do?"

Bonello however concedes that it was to the MFSA's credit that the authority has now come up with a forceful reply to both BOV's appeal to the MFSA directive as well as to the bank's request to have the appeal proceedings heard in camera. "The MFSA has done a lot of good, but in my opinion it is time to enact some far-reaching reform in the field of investment protection in order to make it effective."

Bonello also says he has instructed the property fund's clients' legal advisor to submit an application to the tribunal to intervene in the appeal proceedings.  "More than a 100 complainants that consider themselves to be a victim of misselling in this case will argue that they have a legitimate juridical interest.  It cannot be that proceedings take place that affect in a very material manner the investors that are the subject matter of the appeal, without their being heard. It would run counter to the most basic principle of natural justice, which is to hear the other side out."

Turning to the current eurozone crisis, I ask Bonello whether he thinks banks in general are also to blame for the 2008 financial problems?

"They have a large share of blame. The lobby of the big global Anglo Saxon banks was strong in the 1990s in influencing governments and regulators to forget the great lesson emanating from the Great Depression of the 1930s. At that time, the Americans had enacted the Glass Stegall Act and imposed a very clear demarcation between commercial and investment banks believing that if banks wanted to risk their capital it should be their own and should not endanger the savings of depositors and their lending function.

"The result of the bankers' lobby, the Glass Stegall Act was repealed just before the turn of the century and the result was universal banks that became too big to fail and that exported their business model on a global basis with a sales and bonus culture that replaced clients-centered approach.

"Governments and regulators were caught in a catch-22 situation: leaving the markets to follow its rules - as in other industries - would lead to banks becoming bankrupt, which would cause irreparable financial turmoil as a result of the contagion or domino effect, also called systemic risk.  This was clearly evidenced with the Lehman bankruptcy. That's why the Americans (and others) are now grappling with how the big universal banks can be broken up again, in order not to have any financial player that cannot be allowed to fail, and to have commercial banks stick to their traditional roles of deposit taking and lending."

Do you see Europe surviving the current crisis?

"I have high hopes in the leadership qualities of Germany.  The eurozone is not an optional club membership where members can select its benefits without subscribing to the discipline that permeates its survivability. Inevitably such discipline causes a degree of reduced sovereignty, not least in fiscal matters.

"Members are free not to give up such sovereignty but for those countries where all convergence financial ratios have gone out of the window - and Malta is not one of them - such members cannot have the cake and eat it. Malta on the other hand is not one such country and any central attempt to have its fiscal sovereignty transferred to Brussels ought to be resisted as it should not be expected that Malta pays a price for sins it has not committed."