On September 15, the Court of Appeal (Civil, Inferior) pronounced its judgment in case 62/2019 LM involving two investors as plaintiffs against the investment company Crystal Finance Investments Ltd. This judgment was given upon an appeal application by said company as it disagreed with the first instance judgment given on June 12, 2019, by the arbiter for financial services.

Initially there were two separate cases against the investment company in front of the arbiter, by which the investors claimed that they lost two separate amounts of €16,000 and €12,000. The investors asked the arbiter to declare the investment company responsible for such a loss and to refund said amounts by way of compensation. The compensation decided for by the arbiter and confirmed on appeal was of €8,920.27 (for the investor claiming €16,000) and €6,933.81 (for the investor claiming €12,000).

The arbiter had found in favour of the investors and the Court of Appeal confirmed such a finding in full, stressing that the investors had acted on the basis of advice sought from and given by the investment company. This advisory relationship is central to the arguments and findings of the arbiter, as confirmed in full by the Court of Appeal. Given the advisory relationship, a resulting central notion is the suitability of the investors for the particular investments made. This had to be determined by the investment company.

All defensive pleas raised by the investment company failed in front of the arbiter, as confirmed in full by the Court of Appeal. The most salient ones were that the (i) the arbiter had no competence to decide the dispute between the parties as the parties had expressly contractually agreed that the courts of Malta are so competent; (ii) the choices made by the plaintiffs were not on the basis of advice by the investment company and so much so that they signed Standard Warning Forms; (iii) the losses resulted from events beyond the control of the investment company; (iv) the investments were done by the investors following various risk warnings and the investors could not expect the investment company to make good for losses due to events which were unforeseeable at the moment of the investment; (v) the investors knew that the investments were performing badly and they failed to make other choices; and (vi) there was no guarantee on returns or that the capital invested might yield profits or be returned.

The arbiter dismissed the plea on the lack of competence to consider and decide the complaint, even though it could have seemed contractually stipulated between the parties. This was because upon concluding the contract, the same arbiter for financial services did not exist under Maltese legislation.

This line of argumentation had been confirmed by our Court of Appeal in other cases involving such a plea. Of note is that a reference was made to the remedy of complaining to the arbiter and that agreements excluding it are concluded by a party (investor) with weaker bargaining strength. However, there was no determination that this renders such agreements inapplicable as this was not relevant to the case under comment.

A point of central importance is that legislation such as the Arbiter for Financial Services Act often seeks to provide for less formalistic and supposedly more expeditious avenues for aggrieved weaker parties, in this case investors versus investment companies. That is commendable and, in fact, said Act explicitly allows for the arbiter to determine and adjudge a  complaint by reference to what, in his opinion, is fair, equitable and reasonable in the particular circumstances and substantive merits of the case. This is what the arbiter did in the case being commented.

The investment company had to refuse to give advice and if it did give advice, as it did, it could not advise the investors to invest in the products they invested in

Against the position of the investment company, the arbiter and the Court of Appeal concluded that the investors sought and never stopped seeking investment advice from the investment company, and the investment company failed in providing evidence to the contrary.

The investments were diverse and changed during the investment relationship between the parties, and for some of these, the investment company made the investors sign standard warning forms.

This was allegedly in situations in which the investors acted against the advice of the company, particularly when certain information on the investors was not collected by the investment company.

Significantly, the Investment Services Standard Licence Conditions as issued by the MFSA and as applicable at the relevant time, required that if the service provider does not acquire relevant information from prospective clients (as was this case) then the service provider must refuse to provide any advisory service.

As said, the relationship was an advisory one and rather than refusing to provide the service, the investment company went for the previously mentioned standard warning forms, which were found to be inapplicable for this case.

Furthermore, in the context of providing investment advice, the EU’s MiFID Directive on financial instruments provides that when offering a financial service, the service provider must perform a suitability test to ensure that the advice given fits the best interests of the client.

The suitability test had to be performed to assess whether the investments concerned reached the goals of the investors, whether the investors had adequate knowledge and experience to assess the risks involved in the transaction, and whether the investors were in a position to absorb the risks involved in the investments concerned.

Through this test, the investment company had to determine the best advice to give to the particular investors. In considering these three criteria, the arbiter found that when considering the evidence and submissions by the parties, the investment company satisfied none.

The result of all this is that the investment company had to refuse to give advice and if it did give advice, as it did, it could not advise the investors to invest in the products they invested in. In the end, the investors proved their case and were granted compensation.

This was confirmed in full on appeal.

 Edric Micallef Figallo is an associate at Azzopardi, Borg and Associates Advocates.