Is a bank licensed to gamble?

Source: George M. Mangion¸ PKFMalta

As published in the Malta Independent on the 4th  November 2012

University students in the Faculty of Banking and Finance have had a field day following the saga of alleged mis-selling of bonds at Bank of Valletta and repeated accusations of BOV by Paul Bonello of Finco Trust. Mr Bonello had paid a high price for conducting his crusade in favour of his beleaguered clients¸ as his credit facilities were summarily withdrawn by BOV earlier this year. Many unbiased commentators said the government has always remained aloof from the controversy¸ insisting that the Malta Financial Services Authority was an independent¸ regulatory authority and BOV a commercial entity.

It comes as no surprise¸ once the appointment of top officials both at MFSA and BOV is at the behest of the government¸ that it has taken a non-combative or neutral role. Arguably¸ it is saying that its duty is to facilitate matters and bring the parties as close to one another as possible and not to impose¸ as the Opposition implied it would do.

It condemned the Opposition for “its irresponsible comments” with which it was destabilising the financial sector in Malta and endangering more than 1¸500 jobs in the financial sector. In the past year¸ MFSA has found BOV in breach of licence conditions in a number of separate cases¸ in respect of which it was fined more than €700¸000. It was ordered to pay back 70 cents in each unit sold of the La Valette Fund and quite recently MFSA appointed local audit firm Mazars (mysteriously done by a direct order) to check all applications and determine if any clients who were wrongly classified as experienced investors were eligible for higher compensation.

It should be further noted¸ that MFSA (a sole banking regulator) established and reported in detail that Valletta Fund Management (a fully owned BOV subsidiary) had wrongly applied the investment restrictions in the prospectus¸ and had failed to properly monitor its delegates¸ including those from Insight investment management. BOV (which is controlled by the government¸ including the appointment of the chairman) acted as custodian to the failed La Valette Fund since its inception. To rub salt in the wound¸ it was declared that BOV¸ as a sales intermediary agent¸ committed gross mis-selling practices. Nobody at the bank accepted responsibility and no resignations followed. For the record¸ it is relevant to reveal that BOV was generously compensated in its function as a custodian¸ as it earned more than €7 million in fees.

But that is not all. Students of banking studies can feast their eyes and enrich their dissertations by quoting more accusations – namely the mis-selling of perpetuals (mostly in the collapsed Lehman Bros) which left a huge €60 million loss in the pockets of allegedly misguided local investors. It is strange that the bank itself refrained from investing in such preference shares.

Finco Trust compared perpetuals to the edge of the cliff with people being pushed over when the financial stampede struck the markets in 2008. It is certainly no consolation for the hapless small savers that MFSA recommended compensation since the bank continued to refuse to settle the matter. In this context¸ it is relevant to remind readers th