What to do when you find someone else is working on the same masters research
Masters projects generally do not aim to produce top-quality original research, rather they give masters students an introduction in the art of doing research. So the fact that two people at two different institutes are doing more-or-less the same thing does not matter. It would only become a problem if 


One student plagiarized the work of the other.
The two students collude, reducing their workload to produce one thesis that will be submitted twice.
Both students tried to publish their work – whoever gets in first will receive the credit and the other will possibly not get published.


Even in the last case, it is not unheard of that parallel submissions of the same results by different parties occurs. Sometimes it is worth publishing both, especially if they approach the problem differently. I have heard of one case where the editors asked the two parties to produce a single combined paper.