Fund administrators and trustees cannot depend on advice given by other professionals

Fund administrators and trustees of pensions funds must carry administer the investments in a diligent manner and not depend solely of what third party advisers recommend. This was held in a Court of Appeal judgement delivered on 26 November 2021 in Jane Coleman -v- STM Malta Trust Company Management Limited. The Court of Appeal was presided by Mr Justice Lawrence Mintoff.

The defendant company, STM Malta Trust Company Management Limited (STM) appealed from a decision delivered by the Financial Services Arbiter following a complaint lodged by Jane Coleman. The Arbiter upheld the complaint and described it as being fair, equitable and reasonable. The responsibility was shared with other players in the case. The Arbiter was ordered to reimburse the losses of investments Coleman incurred.

STM appealed this decision on the ground that the Arbiter should have allowed that the investment adviser should have been called into suit. The appellant argued that the investment portfolio was not according to law and it also contested the quantum of the damages ordered to pay.

The case concerned a complaint against STM which was the trustee of a pension fund. The complainant was of the opinion that STM acted irresponsibly and therefore she suffered damages. STM defended itself by saying that it acted on advice of the investment adviser, Continental Wealth Management. Furthermore, Coleman left signed forms in blank for the adviser to make use of.

As to whether Continental Wealth Management and General Worldwide Insurance Company Limited should have been called into suit and the Arbiter refused the request, the Appellant held it was the complainant that had indicated both companies as being negligent with regard to advising her on her investments. This is allowed in Article 2 of the Arbiter for Financial Services Act.

The complainant argued that her complaint was directed at STM and therefore, the Court of Appeal agreed with Arbiter that the other two companies should not have been included in the complain proceedings. Furthermore Article 19 of the Arbiter for Financial Services Act allows complaints for financial services providers. The two companies are not such providers.

The Court of Appeal agreed with the Arbiter because the Arbiter had objected to the request to include the two companies took place at a late stage, when the complainant had finalised her evidence and therefore, it was not correct for two new replies be included when Coleman’s evidence was closed. Furthermore, the complaint was directed to STM as the Trustee and administrator of the pension fund. Other reasons included were that the two companies do not offer services in Malta and therefore, not licenced in Malta.

As to the second ground of appeal that STM were not to be held responsible for Coleman’s losses, STM held that it was Continental Wealth Management (CWM) which gave her the investment advice and STM acted on that advice. All instruction received were signed by the complainant.  This was rebutted by Coleman. Who held that she is not a professional investor and she expected that STM use more diligence when investing her money, as outlined in the Trusts and Trustees Act and the guidelines issued by the Malta Financial Services Authority? The Arbiter held that there are investments reserved only for professional investors and this was one of them.

The Court also agreed with the Arbiter in this aspect. The Arbiter did correctly analyse the complainant’s application to join the fund. STM was licenced in Malta to administer the pension fund. The Arbiter did also analyse the investments made in collective investment schemes, then described in detail STM’s obligations, functions and responsibilities as administrator of the pension fund and as a trustee, which are also regulated by the Retirement Pensions Act. The Arbiter held that STM had a legal obligation to supervise and protect the investments and make use of the principles of diversifications and prudence. The main scope of the fund was to “provide for pension benefits for its members and beneficiaries”.  The Appellant company did not provide advice to the complainant, since this was done by CWM. The fact that this company was not regulated in Malta, meant that STM should have provided a greater protection to Coleman. STM should not have offer the basic administration services. The Appellant should have used more prudence when the investments made should affect the fund. The company failed in giving additional information on the investment made. Furthermore, STM is not contesting that Coleman made losses. The Arbiter in his research found that the investments gave high interest and therefore, as a fact were high risk investment and should only be made by professional investors. The Appellant company criticised the Arbiter for carrying out an investigation on his own accord. The Court held that there was nothing wrong with this and carried out his duties in terms of Article 25 of the Arbiter for Financial Services Act. The Arbiter’s role is to investigate complaints in terms of the Act and he should not limit himself to the documents presented by the parties. It was not aimed at helping one of the parties, however, to assure that justice is done.

The Court then concluded that although an investment portfolio case make a loss, the risk may be decreased is there is a proper diversification and prudent investments. The case in hand showed that there was a lack of diligence in administering the fund and in carrying out their obligations as a trustee. It did not reach the level of a reasonable and legitimate expectations.

The Court then moved to turn down the appeal and confirm the Arbiter’s decision.