Malta: MFSA Consumer Complaints Unit - Annual Report 2013

CHAIRMAN'S STATEMENT

Since 1999, some years before the Consumer Complaints Manager had later been set up in 2002, the Authority had in place an informal structure which handled consumer queries and more importantly, implemented a number of consumer education initiatives relating to financial services.

The opening up of our retail markets for financial products and the creation of investment funds which could be sold from local bank branches, brought about new investment opportunities for Maltese consumers. This meant that the manner in which financial products were being marketed and sold to consumers required close attention.

Many investors, familiar with fixed deposit accounts, were being offered investments promising better returns. Marketing information, which at times wrongly compared equity or bond funds to fixed deposit accounts, led many investors to acquire investments which were not at all suitable for their circumstances. There is evidence to suggest that inherent risks had not been adequately explained to investors. Many investors bought these products simply because they trusted the financial planners, who unfortunately had only received basic training about sales techniques with perhaps very little consideration for investors' real needs.

Since 1999, the Authority has been very active in the field of financial education. The various publications, media participation and online presence have been seminal in the creation of awareness of the existence and role of the Authority in consumer affairs. Investment diversification, as well as risk-reward weightings have featured as common themes in consumer awareness campaigns, along with other key messages relating to investments.

There is scope in trying to understand and analyse why therefore many investors, who I am sure that at some stage or another, came across the Authority's consumer education initiatives, had been convinced to invest substantial amounts of their savings in particular investments which were complex in nature, identifiable simply by leafing through the glossy brochures prepared by product manufacturers. Clearly, many investors who feel that they have been deceived and mis-sold an investment product would have placed extreme trust in the financial providers. Investors should not be chastised for doing so.

It may be easy to identify the roots and causes of the alarming number of mis-selling cases that the Consumer Complaints Unit has been asked to review during these past five years. It is equally more disturbing to learn about the approach and conduct of a number of financial entities, and some of their employees, which have completely disregarded the very essence of the regulatory regime that the Authority has in place: the obligation to act in the best interests of clients.

Many investors have been provided with products that failed to perform as firms have led them to expect. The majority of these investors were not provided with clear information on the terms of the contract before they committed themselves to purchasing these products and only got to know about the true risks attached to these products when problems started to emerge. The Consumer Complaints Unit has also encountered a number of investors who were sold complex investments or investments which were only suitable for those who were experienced in the investment field, while other investors thought they were receiving advice but then, when it was too late, learnt that they were signing paperwork which stated the contrary.

As a consequence, the Authority took severe regulatory action against firms which had mis-sold investments.

Through its impartial and fair assessment of a wide range of complaints, the Consumer Complaints Units has over the years given valuable input to the Authority's regulatory structures about the manner some financial firms have operated and sold products to consumers.

The Authority has embarked on a thorough review of the current framework of conduct of business which now needs to take into account the evolving needs and expectations of financial services consumers. The Authority will be consulting widely on a revised code which should set out the mandatory requirements that all financial services providers are obliged to satisfy when dealing with clients. The dichotomy between differing conduct rulebooks will end and market players have to play by the same rules, while respecting the legislative and regulatory sectorial frameworks at European Union level.

Naturally, the Authority will continue to actively pursue its role in financial educational as part of its overall responsibility to take care of the legitimate expectations of consumers and to restore their confidence in the provision of financial services.

RESPONSIBILITIES OF THE CONSUMER COMPLAINTS UNIT

The Consumer Complaints Unit is empowered to investigate complaints from private individuals relating to any financial services transaction in a fair and impartial manner. The Unit cannot give advice to or act on behalf of consumers in any dispute with a licensed person. Its main responsibility is to liaise with consumers and licence holders with a view to assist in the solution of any consumer dispute that may arise between them.

The Unit has an educational role in which it provides consumer education and information about financial services. Moreover, the Unit handles different queries from the public on financial services matters and financial products. The Unit also assists the Authority's Supervisory Units to identify any new issues that require prompt attention as they may lead to consumer detriment.

In addition, the Consumer Complaints Manager, who is the director of the Unit, provides administrative support to and is also the secretary of the Compensation Schemes Management Committee, which administers the Depositor Compensation Scheme (established under the Banking Act) and the Investor Compensation Scheme (established under the Investment Services Act). The Manager is also secretary of the Protection and Compensation Fund (established under the Insurance Business Act).

The Legal Framework

The office of the Consumer Complaints Manager was formally established on 1 October 2002 with the coming into force of the Malta Financial Services Authority Act. In terms of Article 4 of the Act, the MFSA is tasked to promote the general interests and legitimate expectations of consumers of financial services and to promote fair competition practices and consumer choice in financial services.

The duties of the Consumer Complaints Manager are established in Article 20 of the MFSA Act. The Manager investigates complaints from individual private consumers arising out of, or in connection with, any financial services transaction. Where required, cases may be referred for consideration to the Authority's Supervisory Council.

The legislation authorises the Consumer Complaints Manager to communicate with a consumer, whose complaint is being investigated, and request information concerning any matter which may have come to his cognizance in the course or as a result of an investigation into a complaint.

The Consumer Complaints Manager can also encourage the parties to a dispute to reach a settlement whenever circumstances so warrant. The MFSA may only issue a recommendation in respect of a complaint which has been investigated by the Consumer Complaints Manager. A consumer who refers his complaint to MFSA may still use other mechanisms to seek redress. The type of complaints which are usually referred to the Unit may not necessarily require judicial intervention to be resolved.

In addition, the Manager is required, to the extent possible, to assist and cooperate with bodies of other EU and EEA States responsible for the resolution of consumer complaints to settle local and cross border consumer disputes concerning financial services.

Article 26 of the Financial Institutions Act empowers the Complaints Manager to investigate complaints from payment services users arising out of, or in connection with, any alleged infringement by a service provider authorised to provide payment services activities in terms of the said Act.

The Complaints Manager is also required to inform the complainant of his right to seek independent professional advice, especially if he is not satisfied with the outcome of the complaint. For cases related to payment services, the Complaints Manager is required to inform the complainant of the possibility of having the dispute settled through arbitration proceedings (in terms of the Malta Arbitration Act) without prejudice to the right of the consumer, as defined in the Consumer Affairs Act, to submit a claim to the Consumer Claims Tribunal or to exercise any other rights under that Act.

Sharing of Information With Regulatory Units

When a matter arises during a case review which may be indicative of any kind of pattern or suspected regulatory breach, the supervisory unit concerned with the licensing and supervision of the relevant entity is informed so that appropriate action can be taken.

During the year, the Unit has also referred a number of cases to the Authority's Enforcement Unit.

CORE PRINCIPLES FOR OUT-OF-COURT SETTLEMENT OF CONSUMER DISPUTES IN PRACTICE

The Consumer Complaints Manager is an active member of FIN-NET and is required to comply with all the seven principles set out in European Union Commission Recommendation (98/257/EC) on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes. The Consumer Complaints Manager and other managers within the Unit follow these principles when reviewing complaints:

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