Currently the Arbiter for Financial Services Act is being finalised following a series of discussions between representatives of the government and the opposition. The Act, which will be coming into force in the coming months, will have an effect on any company that offers financial services from Malta. This act generally gives the authority to one person to settle a dispute between two or more parties which have an issue which is connected to financial services. The idea is to have a faster and more focused court-like setting where the Arbiter has the “power to mediate, investigate, and adjudicate complaints filed by a customer against a financial services provider.” So this act is going to give quite a bit of power to just one person and the Board of Management which would be managed by such person.
The idea looks nice on paper, but how will this all work in practice?
Here I have 3 main reservations
1. Independence of Arbiter
One of the first issues I am finding with this setup is that it is going to be quite difficult to find someone who has the competence required and at the same time is independent. The requirements to be appointed as an Arbiter are that the person should “possesses the necessary expertise in consumer related issues in respect of financial services, including a general understanding of law.” The draft Act also mentions some instances where a person cannot be considered as an Arbiter which again all look nice to have on paper.
So we are saying here that it has to be someone who has acquired an amount of knowledge and expertise in the financial services industry, specifically in consumer related issues. In my view this is not going to be an easy task since the issue of independence is going to be a problem for many potential candidates. Let us consider appointing someone who has been working with the regulator for an amount of years. Such a candidate would have been involved directly with consumer issues in the financial services industry which qualifies him/her for the post. However, if this person has never worked with a financial service provider or has not done so in a very long time, then that person would lack the knowledge and expertise of how things work in the field. 10, 15, 20 years of always hearing one side would not really allow that person to be independent.
What if we consider appointing a current or an-ex judge/magistrate who would possess the legal acumen to actually give a legal ruling – the problem here is finding one with expertise in financial services. Ok, let us consider finding a lawyer who is specialised in financial services. This may well be the best option however the issue of independence is going to come up more than once. Given the small size of the local industry, Malta’s financial services practitioners tend to use the services of a handful of legal firms which have expertise in this industry. So if an employee from such an entity was to be appointed as the arbiter it could well be the case that many a time such person would have a conflict of interest through his/her previous dealings with the financial services practitioner.
What about appointing someone who has been working in the industry in a senior position for many years and thus has the knowledge and expertise of dealing with clients, keeps up to date with financial services regulations and would have a deep knowledge of different financial services instruments. Two main problems here: i) Why would such a person leave his/her current position which is likely to be more financial rewarding and flexible? ii) How can such a person be independent when most financial practitioners know each other and may have done business together?
2. Excessive Powers of the Arbiter
Another very troubling issue is the excessive powers being granted to this one person (or office) which may be beyond the competence of such person and quite possibly anti-constitutional. Here I am referring to the fact that the Arbiter will have the authority (according to this Act):
“to consider complaints which are being dealt with or which have already been dealt with by the Malta Financial Services Authority, and its recommendations, rulings, directives or decisions shall not be considered as a res judicata of the complainant’s case and the consideration of such a complaint by the Arbiter shall not be construed as going against the principles of natural justice”
This is by far the most dangerous clause that exists in this act. It is being said that even when a complainant and a financial service provider have come to a contractual agreement on a settlement, the Arbiter has the authority to supersede such agreement. This creates a very dangerous precedent whereby the legal stance of previously settled cases which have been contractually agreed to by both parties is put into question!
According to the lawyers present during the discussions, up until now it has always been the case that any dispute about the validity of a contract would have to be scrutinised in the Civil Courts. Thus this clause is giving a dangerous and unprecedented authority to one person who is only required to have “a general understanding of law”. So we went from a formal well established procedure in the civil courts to being judged by a person who generally knows the law!
This very dangerous clause, coupled with the fact that the Arbiter can decide on cases going back to 2004 (and not anything earlier than that date) makes one wonder the exact reasoning behind inserting such clauses. It begs the question:
Is this law being enacted in light of the La Valette Multi-Manager Property Fund incident?
One cannot help but wonder about the above question and at the same time keep in mind that at the end of the day the Government (which is pushing for the enactment of this law) is the largest shareholder in Bank of Valletta (BOV) with its 25.23% shareholding. Furthermore, BOV is a publicly listed company with its shares trading on the Malta Stock Exchange. So wouldn’t it be only logical to consider whether one should sell his shareholding in BOV if this Act is passed through parliament as it currently stands?
What does this mean for the Insurance industry? Companies within this sector are involved in many settlements on a regular basis – such is the nature of their business. So if an insurance company can no longer bank on the legal validity of the claims it has settled – how does it provision for this in the policies it issues? Again, Mapfre Middlesea Plc, GlobalCapital Plc and all the publicly listed banks are involved in the insurance industry to one degree or another – so should one also sell all his holdings in such companies if this Act remains unchanged?
In a nut shell, saying that this dangerous clause would open up a Pandora’s Box would be an understatement.
3. Who really benefits?
At the end of the day, no matter what ruling the Arbiter gives in his hastily 90 day target time the right of appeal from that sentence cannot be removed. Thus the end result would most likely be that both claimants and service providers would end up worse off and the people that have most to gain from all this are the lawyers and consultants appointed by both parties. Interestingly enough, it had been proposed in the discussions about this Act that there should be a cap established on the fees that a person representing a complainant can charge. The proposal was to have a cap amounting to the higher of €500 or 0.5% of the net proceeds won on behalf of the complainant. This would serve to protect the complainant from ending up paying exorbitant legal and consulting fees. To date I am not aware that the Government has introduced this clause as it was stated that it needed to be studied further.
The Bottom Line
Like I have said many times before, the best way to help consumers and protect them is to educate them. If consumers are better equipped to assess the products and proposals that service providers propose or recommend to them we will have a much better result. Increasing regulation ends up marginalising the small investors since they become uneconomical to service. The risk involved and the time involved to service the small investor would not make it viable to service them. So as a result they would end up only being offered the same few products and thus creating a concentration risk in those few products. This concept of educating investors has to flow both ways however, the industry and quite possibly to a certain degree the government should come up with ways of organising educational clinics, seminars, conferences, courses and other incentives about the subject to the investors. But from the other hand, the investors have to be make an effort to look for such learning opportunities and not simply play the fool that wants to shift all the responsibility to the service provider. In the words of many before me: “Knowledge is Power” and thus through more knowledge investors would possess the power (ability) to better decide on their financial matters with guidance from the financial practitioners.