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GUEST POST: APS Selling Its Own ‘Unholy’ Subordinated Bonds Is A Major Conflict Of Interest

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APS finally issued its €55 million of 3.25% Subordinated Bonds due 2025-2030 which started trading on the Malta Stock Exchange on 19th November 2020, weeks after a Lovin Malta opinion piece revealed the “unholy coincidence”.

The aspects arising out of this bond issue a mere 6 weeks before a new EU Directive (BRRD II), intended to eliminate serious loopholes in the regulatory regime and protect further retail investors from investment misselling of subordinated bonds, comes into effect have already been discussed and will not be repeated.

In a fresh twist, APS Bank plc has been one of the appointed Authorised Intermediaries who will have sold the issue. It means that APS has been expected by the regulator, MFSA, to objectively confirm the appropriateness or suitability of any investment in this bond by those retail clients who will have done so through APS’ branch network.

This when APS has a manifest conflict of interest in selling its own junior bonds, a process known as Self-Placement.

The EU’s European Securities and Markets Authority published a Statement in June 2016 in which it emphasised the potential conflict of interest of banks issuing subordinated bonds and selling them to own clients.  ESMA says that in the case of self-placement “there is a heightened risk that the interests of a firm may come into conflict with the best interests of its clients”.

In a Paper prepared for the European Parliament of June 2018 under the title “Misselling of Financial Products: Subordinated Debt and Self-placement”, it is explained how “many of the retail investors do not realise that the financial instrument they are buying is dangerous and could be subject to complete loss of value in case of restructuring” and that this is especially dangerous when “financial institutions use their branch networks to sell to their depositors subordinated debt issued by them”.

The EU Paper concludes that “the issue of misselling of subordinated debt by financial institutions to retail investors is, without a doubt, the most serious regulatory and enforcement failure in the EU since the 2008 crisis”.

BRRD II has been enacted in order to close this and other loopholes.  Alas, this comes into effect on 28th December 2020, six weeks after the APS issue.  Naturally, in spite of this coincidence, all has happened in good faith.

Of course, MFSA has enough troubles of their own to care about such niceties at this moment in time, and this in spite of the raison d’etre, functions and objectives of the MFSA being none other than consumer protection.  Dealing with its’ officers jaunts in Las Vegas takes priority to rocking the boat with the Church’s bank on such petty scores.

Here is APS’ reply:

“This Subordinated Bond Issue is part of the Bank’s Capital Development Plan announced years back as the bedrock for the Bank’s future growth and strategic development. Already in the 2017 Annual Report we made reference to this Plan and again in subsequent years. Phase 1 was executed in May 2019 with a €25 million equity injection resulting from a Rights Issue and 2018 Retained Earnings. Phase 2, i.e. the Tier 2 Subordinated Bond Issue, was always earmarked for 2020 and there have been numerous more recent references to this such as in the 2019 Annual Report, interviews and also the announcement of the 2020 Interim Financial Results on 31 July 2020.”

“Whilst your questions (conflict of interest, self-placement) seem to suggest that this Bond was issued under some free-for-all regime, we assure you that this cannot be further from the truth as current EU legislation is already comprehensive in this regard.  Suffice it to mention that besides having the Bond Issue prospectus and the admissibility to listing on the Malta Stock Exchange approved by the Listing Authority, under current EU rules (including the voluminous MiFID II requirements), investment firms and banks are already obliged to ensure that when selling investment products they ensure that the product is properly distributed to the correct target investors. Moreover they are required to comply with their regulatory obligations to avoid misselling and to suitably address and mitigate conflicts of interests in line with law and current best practice.  APS Bank complies with all these rules and has adopted numerous policies and procedures, about which the MFSA has also been consulted.”

“The Board and Management of the Bank take their legal and regulatory responsibilities very seriously, mindful of the implications of all our actions on the various stakeholders involved, whether they are shareholders, employees, bond holders or the general public at large. We have a long and unblemished history in this regard and as a bank we pride ourselves with having one of the most comprehensive and robust governance structures in line with the most modern practices. Nothing less is expected of a bank of such systemic and community importance in these times of great challenge for the Maltese Islands. Insinuations of lack of ‘good faith’ are very serious indeed.  Whilst the Board and Management will do what it takes to protect our personal reputation and that of APS Bank, likewise we expect and trust that an established institution like Lovin Malta will pay due regard to its obligations of ‘fair comment’ under Maltese law, mindful also of the serious reputation damage that can be caused by misplaced comments not based on facts.”

Paul Bonello is the Managing Director ay Finco Treasury Management Ltd.

Lovin Malta is open to external contributions that are well written and thought-provoking. If you would like your commentary to be featured as a guest post, please write to [email protected], add Guest Post in the subject line and attach a profile photo for us to use near your byline. Contributions are subject to editing and do not necessarily represent Lovin Malta’s views.

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Julian is the former editor of Lovin Malta and has a particular interest in politics, the environment, social issues, and human interest stories.

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