Case Studies



Two particular funds had been underperforming for quite some time. Despite the fund promoter’s efforts to revive the two funds there was clearly little hope that new investors would be drawn to invest in the fund. Following discussions with the MFSA, the funds were wound down and investors were informed by letter of the mandatory redemption of all the shares in the fund in accordance with the funds’ constitutional documents. Specific timeframes were indicated and a particular date was earmarked as to when the mandatory redemption of the fund would take place.

Some investors left it to the last day of mandatory redemption to exercise their option. An investor noticed that a member of his family, who exercised the option a week or so before, obtained a far better value for his investments – even if there were no dramatic changes to the values of the underlying investment. This investor was not at all happy with the situation and complained to the licence holder who in turn promised to investigate. In the meantime, the investor contacted the Unit seeking further explanations. He was advised by the licence holder that the regulator was constantly being informed of the fund’s actions and that the fund had sought approval prior to its mandatory winding down.

The MFSA commenced a thorough review of the circumstances leading to the dramatic fall in the fund’s value in the last few days before redemption, which was attributed, among other things, to an accounting quirk for a particular expense. Following further discussions between the fund and the MFSA, all investors in the fund who received less than what should have been actually attributed to them were approved an ex-gratia payment based on their respective holdings.

Ms D purchased an investment which promised the repayment of the capital in full on maturity and a potential return linked to the growth of the FTSE 100 share index. When the investment matured, Ms D claimed that the bank in question had applied a method of calculation which was in contradiction with the method of calculation found within the brochure’s terms and conditions. The investor confirmed that given her “experience” in dealing with banks and investments, she was to be considered as an investor capable of handling personal financial matters her own way. A file note provided by the bank indicated that the investor refused to sign the standard form it required clients to sign in respect of investments.

The investor claimed that the way the explanation about potential return was written constituted an unfair contract term. The brochure was made up of two parts – a general descriptive part and a second part which contained detailed terms and conditions.

The investor claimed that had the bank applied the methodology in the first part as compared to that in the terms and conditions the return would have been higher. The Unit reviewed the product documentation in detail and found that in the descriptive part there were references – by way of an asterisk – prompting the reader to refer to the terms and conditions. The first part, therefore, had to be read and construed in conjunction to the terms and conditions which amplified on the methodology the bank intended to use.

The Unit held the view that for the methodology in the terms and conditions to be considered as unfair (compared to the general descriptive part), it had to assess whether the investor would have always been worse off had the bank used the methodology in the second part whichever way the index performed.

A mathematical computation with different scenarios, prepared by the Unit, concluded that there could have been instances in which the investor would have actually been worse off had the “methodology”, claimed by the investor to have rendered a better return in the first descriptive part, been used. The complainant’s contentions were not upheld on the basis that there was no conclusive evidence that the bank’s literature was unfair.

An investor residing in Spain held an investment with a financial intermediary located and regulated in Malta. The investment product was issued by a company domiciled and regulated in another EU jurisdiction.

Sometime during 2006, the investor instructed the intermediary in Malta to liquidate his investment. A few days after the transaction was completed, the investor received details of the redemption transactions by mail from the company which issued the product, giving the sale price in dollars and the conversion rate to sterling, together with the total yield in sterling of the transaction. About four weeks after the initial transaction the investor received by mail another redemption instruction from the same company but with a different exchange rate and a total yield some ₤600 lower than the first document. The complainant alleged false reporting.

The investor following enquiries with the local intermediary was informed that the rate of conversion from dollars to sterling in the first statement was only indicative. The actual rate which was used for the transaction was that disclosed in the second statement. It transpired that, although instructions to redeem the investment were sent to the company within one day, by the time the investor’s request was actually processed by the company the rate which was applied for the transaction had actually deteriorated. The intermediary explained that the investor should not have received the first statement as this was an internal document which the company used for accounting purposes. According to the intermediary, the incorrect schedule had been released to the investor and that this was purely an administrative error. The intermediary produced a record of the actual deal undertaken by the company with its bankers which confirmed that the exchange rate in the second statement reflected the correct surrender proceeds.

The Unit was satisfied that the investor did not suffer any financial loss although it found it unacceptable that the company could manually change the rate which had already been issued on a statement only to re-send a “revised” statement nearly four weeks after the first had been issued. The investor was not in a position to determine which statement was correct as both were identical – except for the exchange rate. There was no indication whatsoever that the rate in the first statement was an estimate nor was the follow-up statement properly accompanied by any statement regarding the exchange rate used. This constituted improper disclosure.

The Unit noted that the intermediary offered its apologies for the company’s mistake but nevertheless suggested compensation on the basis that the company’s “mistake” caused unnecessary distress to the investor. However, as the company was not a licence holder authorised by the MFSA, the Unit offered to contact the regulator of the company for its views about the latter’s apparent mistake. The investor agreed to this.

A few days after the foreign regulator submitted the complaint to the company, full reimbursement of the “notional” difference of £600 was paid ex-gratia to the investor in full and final settlement.

Ms T was an 82 year old when she approached Mr P enquiring about the possibility of an investment to sort out her savings portfolio. Mr P suggested that Ms T could invest in an investment bond, a product available to investors aged between 18 and 89 (both ages inclusive). The investment was finalised in May 2006. The product also provided for the possibility of appointing more than one life assured with regards to the insurance policy underlying the investment; however, Mr P did not seem to have offered Ms T this opportunity. During the same period, Ms T had been diagnosed with cancer and passed away shortly after. For this reason, upon Ms T’s death, the death benefit became payable together with an early encashment charge since the policy had to be surrendered before lapse of the minimum period of eight years.

Ms S, Ms T’s daughter filed a complaint with the MFSA claiming that the investment sold to her mother was not suitable. Furthermore, she claimed that even if one had to ignore her mother’s age and consider the product as fit for her, Mr P was certainly negligent in omitting to advise her to appoint a second life assured. The investment would have reverted on her daughter who would have kept the investment up to maturity, thereby avoiding the incurrence of early encashment charges. For this reason, Ms S was claiming a refund of the early encashment charges.

The MFSA argued that Mr P was aware that Ms S was Ms T’s only daughter. Even though nobody could not reasonably assume that Mr P should have been aware of Ms T’s terminal illness or that Ms T had told Mr P of her medical situation, but given Ms T’s advanced age and the early encashment charges during the first eight years of the investment bond, it is clear that Mr P should have asked Ms T to name a second life assured.

Following lengthy discussions with Mr P, the latter offered a partial refund of the charges which Ms S accepted in full and final settlement of the complaint lodged.

Mr R acquired bonds issued by a UK company. These bonds which were held through a nominee account of a licenced Maltese entity (“MTL-LH”) were due to be redeemed on 1 December 2006. On 5 December 2006, Mr R received a letter from MTL-LH whereby he was informed that a cheque of £16,000 representing the capital amount due on maturity and the interest due on the bonds was sent to his account for deposit.

During the second week of February 2007, MTL-LH informed Mr R that they had received a letter stating that the bonds were erroneously redeemed by their bank in the UK. He was told that, in error, the bonds should have been redeemed at £0.40 rather than at par. This resulted in an overpayment to Mr R of £9000. Mr R was also informed that the interest payment too was also paid in error. MTL-LH requested that the full amount paid in error should be returned.

In subsequent correspondence exchanged between MTL-LH and Mr R it transpired that the alleged overpayment was not MTL-LH’s fault.

On 25 November 2006 (a few days before maturity of the bond) the UK company which issued the bond announced that it would be notifying bondholders that an extraordinary meeting was planned for the first week of January 2007 (i.e. after redemption date) for the purpose of assenting to an extraordinary resolution to amend the terms of the bonds to provide for their redemption and any accrued interest for a total consideration of £0.40 for each £1 face value.

It transpired that this announcement was made on a weekend in one of the leading UK newspapers. Although the UK company was liaising with its principal paying agent on the proposed resolution, the latter effected payment for these bonds (including Mr R’s bonds) in full. Some three days after, a reclaim notice was issued. The bondholders’ meeting was held and approved the extraordinary resolution with retroactive effect. The paying agent reclaimed back the excess funds from the bank in the UK, which in turn reclaimed it back from MTL-LH.

MTL-LH acknowledged that the events which led to the repayment of excess funds were certainly not Mr R’s fault. However it stated that the mistake was certainly not its fault, either. It stated that the bank in the UK had blocked the amount which it overpaid from its own account, pending Mr R’s refund. In turn, MTL-LH was partially withholding proceeds from another bond which had matured in the meantime to set-off what it claimed to be Mr R’s debt.

Mr R stated, through his lawyers, that MTL-LH was acting illegally and that he should not suffer financially as a result of other entities’ negligence. It was also obvious that the UK company had acted in an unorthodox manner when it informed bondholders of the resolution purely through an advert in a UK newspaper on a weekend.

Although the UK Financial Services Ombudsman was asked to intervene in this case, it had no jurisdiction to review the case. On the other hand, the MFSA had to consider the approach and behaviour adopted by the MTL-LH vis-à-vis its client.

The Consumer Complaints Unit argued that anything which might have happened subsequent to the payment date cannot be attributable to either MTL-LH or Mr R, unless of course MTL-LH had, before the payment date, received instructions which were not executed correctly. In this case MTL-LH were duty bound to inform Mr R about the instructions immediately. Indeed, any mistake or omission taking place at the level of the UK bank or any other instructing entity should not be suffered by either Mr R or MTL-LH.

In the meantime, Mr R claimed that, from his contacts in the UK, other brokers and banks were not claiming a refund from investors and therefore he should not be treated differently from other investors (if what he was claiming was true). The Unit could not verify if Mr R’s claim was correct.

Given that MTL-LH was acting as nominee, the Unit attributed a high degree of responsibility on it to obtain information about the “mistake”. The Unit argued that unless MTL-LH proved beyond reasonable doubt that the reclaim was being made to all investors, it would be unfair for Mr R to refund any funds. Despite several requests for this information, MTL-LH informed the MFSA that its counterpart in the UK was not able to provide it.

MTL-LH agreed to release all funds to Mr R and dropped its claim for refund.

Mr X invested in a foreign unsecured direct bond, also classified as a complex security in terms of MiFID, following advice from an investment firm. After a few years, the issuer of the bond entered in financial distress and the investment firm advised Mr X to sell his holdings. Mr X incurred a loss on the sale. Sometime later the issuer of the bond was declared bankrupt. Mr X wrote to the Unit complaining that the features of this bond had not been adequately and correctly explained to him at the time when financial advice had been provided. On this basis, Mr X declared that this security was not suitable for his circumstances. Mr X claimed that he had always made it clear to his investment firm that he would prefer to earn a lower rate of interest rather than putting his capital at risk.

The Unit requested the investment firm to provide a number of documents in relation to Mr X’s portfolio. The documentation illustrated that Mr X’s portfolio was quite diversified and, in fact, prior to his investment in the bond on which he was complaining about, he had already invested in four other securities which had very similar features and were also complex in nature. Mr X was not complaining about the other four securities. Mr X explained to the Unit that since the other four bonds were giving a return, he did not feel it was opportune to submit a complaint in this regard.

As Mr X deemed the bond on which he incurred a loss as unsuitable for his circumstances, the Unit initially held the view that the other four securities, which were very similar in nature to the former, were also unsuitable. From the documentation procured, it also came to light that Mr X’s wife had also invested in this security but she had redeemed the investment in good time prior to the issuer's default and, indeed, made a small gain. The documentation illustrated that one of the main reasons which appeared to have enticed Mr X to purchase this security was the relatively low market price compared to other securities available on the market at the

In view of Mr X’s statement that he would have preferred to invest in an investment which gave him less interest but preserved his capital, the Unit compared the overall return on Mr X’s whole portfolio with the investment company to the return he would have received had he placed his savings in a fixed deposit account. In aggregate, Mr X did not suffer any financial loss from his portfolio of investments (on the contrary he had made a good return) and therefore there was no basis for requesting the firm to pay him any compensation.

Mrs A wrote to the Unit disputing the level of bonuses declared by her insurance company on an investment bond. She claimed that, after placing a hefty sum and devoting her loyalty to the firm for a stretch of years, the bonus levels were not justifiable. Mrs A’s policy matured mid-year and she contested that the insurance company unfairly calculated the level of bonuses declared for the final six month term of the policy instead of for a full calendar year with the result of her getting a meagre sum by way of terminal bonus.

The Unit reverted to the insurance company concerned and requested a report indicating the allocations made into the investment bond along with the charges applicable. Unfortunately the report received lacked the total transactions over the life of the investment bond. The Unit was made aware that an estimated interim bonus was calculated on a daily basis and allocated to the investment bond once a month. The insurance company explained that the interim bonus rate for each financial year was based on the previous years’ actual final bonus declared by the company. Once the actual investment returns were established by the insurance company at the end of a calendar year, the company declares (at its discretion) a final bonus attributable to that financial year and then an adjustment is made upwards or downwards depending on whether the final annual bonus was higher or lower than the interim bonus.

In its review, the Unit pointed out that according to the policy document which encompasses the terms and conditions regulating the investment bond, all investment risks were borne by the policyholder and the investment bond had no inherent investment guarantees. Annual bonuses were not guaranteed and were payable at the discretion of the company – however once declared, these cannot be retracted and accrue on the policy account.

Terminal bonuses were likewise not guaranteed. These were payable at the discretion of the company and once declared accrue on the policy account. All bonuses declared by the company were accumulated on the policy account.

The Unit did not find any evidence to suggest that the insurance company was negligent in its procedures or that the computation of bonuses was erroneous. There was no obligation on the part of the insurance company to maintain the same level of bonuses year on year.

Mr B traded foreign currency using an online currency trading platform. Following a number of profitable trades he decided to withdraw the funds and close the account. The company operating the platform refused to allow Mr B to effect this withdrawal and informed him that his account was being investigated by its compliance department. The compliance department concluded that Mr B had been engaging in off-market trading and consequently decided to return to Mr B the amount he originally invested and made him forfeit any profits he had accumulated. Mr B felt that the company’s action was unfair and lodged a complaint with the Unit.

The Unit contacted the licence holder’s compliance team who explained that the company had a security system in place to identify suspicious trading. These accounts would be monitored for some time but no action would be taken unless there is clear evidence of unfair exploitation of the system by the user. If a trader submits a request to withdraw the funds while an investigation is on-going, the company would temporary block the respective accounts until the investigation is concluded following which it will either give the green light or decline the withdrawal request.

In this case, the licence holder discovered that Mr B was using an ingenious piece of software to manipulate prices and exchange rates, thus giving him an unfair advantage over other users. It became evident that Mr B was using off-market pricing which incidentally was always skewed in his favour. The Unit was satisfied with the evidence provided by the platform operator which amongst other things included transaction logs and graphs from which doubtful activity could easily be identified. The complaint was not upheld and Mr B was informed accordingly.

Last updated: Sep 07, 2016