Brokers stumble at the usual hurdles

19 January 2021 Gareth Stokes

A close assessment of the FAIS Ombud Annual Report 2019/20 confirms that segments of South Africa’s financial advice community have learned little over the years. The report, which contains background information on a handful of informal settlements and formal FAIS Ombud determinations, highlights contraventions of the Financial Advisory and Intermediary Services (FAIS) Act and its accompanying Codes that have been tripping up advisers since the Act was promulgated. These shortcomings assisted the Office of the FAIS Ombud in recovering R57.263 million on behalf of consumers during the year.

Informal settlement versus determination

An informal settlement results from a conciliation process between the financial services provider (FSP) and the consumer, facilitated by the Ombud, whereas a determination is a formal instruction issued by the Ombud to an FSP to pay compensation to a complainant. The Ombud said that the high value of recoveries achieved via the informal settlement process during 2019/20 pointed to improving relationships between FSPs and their customers. It also signalled enhancements to the integrity of the financial services industry. Formal determinations fell from 49 issued during the 2018/19 year to only 13 in the latest period. These determinations offer valuable pointers on how not to conduct financial advice. 

The first of four determinations summarised in the 2019/20 Annual Report arose from the well-documented Sharemax Investment (Sharemax) property syndication collapse. Property syndication is a thorny issue for the Ombud; so much so that it keeps a separate accounting of syndication-related complaints. The Office had 1114 unresolved syndication complaints at the end of the 2019/20 financial year. One of these complaints was brought by Mr and Mrs Pelser against Johan Stander Financial Services for advice given on investments into the Zambezi Retail Park (Zambezi) and The Villa Retail Park (The Villa) property syndications. 

The complainants met with the respondent three times, late in 2008, before investing R450 000 in the Zambezi property syndication scheme on 26 November 2008 and another R450 000 in The Villa in May the following year. These schemes were managed by Sharemax. The interest promised on these investments dried up and, soon thereafter, the complainants realised that their capital contributions were lost. The complainants blamed the respondent for the loss and approached the Ombud for relief. 

Passing the buck

The respondent stated that he had recommended the investment after “due consideration of how successful previous schemes managed by Sharemax had been”. He also stated that “the complainants should have inspected and understood the prospectus for each syndication” before investing. The Ombud was unimpressed. It noted that since the respondent, a professed trained financial advisor, had found no cause to steer clear of recommending these investments, he could hardly have expected the complainants to know the perils that awaited them. The Ombud felt that the loss would have been averted had the respondent complied with his obligations under the FAIS Act and the Code of Conduct for Authorised Financial Services Providers. 

The Ombud noted that the complainants were pensioners; there was a significant mismatch in risk between the source and destination of the investment funds; and “there was no evidence to show that the complainants were advised that neither of the properties had been built”. The determination drew attention to one of the most common errors made by financial advisers, namely that there was no record of advice to reflect the considerations that the respondent had taken when recommending the investment product. The matter was concluded in favour of the complainants and the respondent was ordered to repay the capital amounts plus interest from the date of the determination to the date of final payment thereof. 

Another mistake made by South African advisers centres on the identification and management of conflicts of interest. In its determination against Introvest 2000 CC and Another, the Ombud reprimanded the respondent for multiple transgressions. These include failing to advise the complainant in the manner demanded of him by the FAIS Act and General Code of Conduct; failing to disclose to the complainant the risks implicit in the investment scheme; and not disclosing to the complainant how he was conflicted when rendering the advice. “Ultimately, the evidence revealed the respondent to have contravened sections 2, 3(1), 4(1)(d), 7(1) and (8) (1) (a-c) of the General Code of Conduct,” wrote the Ombud. The respondent was ordered to compensate the complainant for the value of her investment plus interest thereon. 

Fairness in adjudication and other matters

The Ombud addressed accusations that its adjudication in Sharemax and other property syndications were biased and unfair. These accusations had been referred to a Tribunal which “highlighted that fairness in an adjudication process will eventually depend on, and therefore be informed by, the facts of a complaint and the nature of the dispute”. The Tribunal also found that the Ombud could not be expected to revert to court procedures to resolve factual disputes given its mandate to resolve such disputes in an expeditious manner. 

On the matter of expeditious resolution, this writer cannot help but wonder whether it is fair to make complainants and respondents wait more than a decade to resolve disputes? Many of the FAIS Ombud’s syndication-related cases have been on the books for more than a decade while other matters frequently take nine months or longer to finalise. 

Financial advisers who comply with South Africa’s exhaustive regulatory framework have nothing to fear from the Financial Sector Conduct Authority’s enforcement arm and will seldom find themselves answering complaints at any of the country’s ombudsman schemes. These schemes are there as a last line of defence against unscrupulous advisers who show a flagrant disregard for consumers’ wellbeing. “Consumers of financial services are consistently encouraged, when looking to purchase a financial product, to seek the services of an authorised FSP to assist them in doing so,” noted the Ombud. 

Consumers should be able to transact with authorised FSPs with full peace-of-mind and should not, as in some of the cases determined in 2019/20, be “purposely misled” by individuals who “facilitate elaborate schemes with a calculated modus operandi of targeting selected investors under the auspice of extravagant returns, with no evidence of how these returns would be generated”. 

Writer’s thoughts:
One of my concerns with the FAIS Ombud and other ombudsman schemes is the time taken to resolve complex matters. How, for example, can we applaud the fact that 96.25% of FAIS Ombud complaints are resolved within nine months given that we conduct business in a digital age where communication and complex transactions take place in real-time? What are your thoughts on advice complaints in the property syndication field taking more than a decade to resolve? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].


Added by Tim Jones, 19 Jan 2021
A lot of the previous issues stem from advisors being lured into selling products that are not their main focus,I.e. insurance and unit trust related investments. These products usually have been through a rigorous approval process by the Insurance Registrar and have the financial backing of a financially sound product provider.
We need to stick to our knitting!
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