Highlighting the value of registered advisers

13 July 2017Myra Knoesen
Myra Knoesen, FAnews Journalist

Myra Knoesen, FAnews Journalist

Receiving an inheritance often requires taking the time to decide how to use the inheritance wisely before clients make any major financial decisions. Without clarity and a clear plan on how to preserve and manage their wealth, hasty decisions result in anticipated inheritances that do not materialise.

In this determination by the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud), we see the loss of funds when an inheritance is wrongly invested and poorly utilised. 

A consequence of non-payment 

In terms of a written agreement between Teddy Maditse (the complainant) and the first respondent, Magajana Trading and Projects, Maditse had invested R150 000, with the undertaking that after 12 months the investment would provide him with interest of 15% on the original capital invested. 

Maditse was 22 years old at the time and the investment had come from an inheritance he had received of R310 000 from his late father’s estate. He had made the investment with a view to utilising the capital to further his tertiary studies in 2016. 

In accordance with the Rules on Proceedings of the Office, Maditse had been forwarded to the respondent, however no response was received from the respondents. The only interaction the Office had with the second respondent, Lindiwe Mtasa Magajana (a key individual of first respondent), was a telephonic conversation on 4 April 2017, which was confirmed in writing with the respondent on the same date. 

During the conversation the respondent confirmed that she was still indebted to Maditse for the amount of R100 000 and that she was in the process of sourcing funds to repay Maditse. The respondent undertook to make payment by May 2017. No payment was made, notwithstanding the respondent’s undertaking. 

Upon the conclusion of the 12 month period, Maditse did not receive his capital as promised. Whilst some payments have been made by the respondent totalling R54 000, the remaining balance of R96 000 remains outstanding. As a consequence of the non-payment, Maditse submitted the present complaint to the Office requesting a refund of the R96 000 plus interest at 15% per annum. 

One and the same entity 

It is important to note at this point that Magajana Financial Services and Magajana Trading and Projects are one and the same entity, as revealed by the registration number on the agreement, which matches the registration number issued to the first respondent by the Registrar of Close Corporations. 

Magajana Financial Services was an authorised Financial Services Provider (FSP), which licence was withdrawn by the Financial Services Board (FSB) on 12 January 2012 for non-submission of financial statements and compliance reports. 

Magajana Financial Services was therefore an unlicensed entity when this transaction took place, during May 2014, in contravention of Section 7 of the Act. 

No evidence makes it clear 

According to the FAIS Ombud, the monies outstanding is not in dispute; the respondent has, despite several opportunities afforded by the Office, failed to pay Maditse the remaining R96 000.

Furthermore, the FAIS Ombud points out that there is no evidence as to where or how Maditse’s funds were invested, if the funds were invested at all. One thing that is clear to the Ombud is that they were not securely invested. In fact all indications at this stage are that the funds may have landed directly with the second respondent, highlighted the Ombud.

According to the FAIS Ombud, this investment in no way meets even the most basic requirements in terms of the rendering of financial advice, and it says it is not at all surprising that the respondents’ licence was withdrawn by the FSB. The respondent, according to the Ombud, at the time the transaction was concluded with Maditse during 2014, had been providing financial services without the required licence in contravention of Section 7 of the Act. 

In addition to not being in possession of a licence, the respondent, according to the FAIS Ombud, violated practically every single section of the General Code of Conduct for Authorised Financial Services Providers and Representatives (“the Code”). 

There is no evidence, according to the Office, that the respondent had even the most basic of infrastructure that is necessary before a provider can collect monies from members of the public. It highlighted that there is no indication that the respondent had a trust account and whether such trust account was protected by law. Likewise, there is no indication whether the respondent possessed any indemnity insurance of any nature. There is no basis to even infer that the money was used in pursuit of economic activity. 

The respondent’s conduct, according to the FAIS Ombud, violated section 2 of the Code because there is no evidence that Maditse was informed of the risks involved in participating in the respondent’s venture; there was no mention at all in the agreement of what the costs attendant to the investment would be, there was no attempt to identify a suitable product, likewise and despite the requirements of section 9 of the Code, no record of advice was furnished to Maditse. 

Not in dispute

There is a clear and direct link, according to the Ombud, between the failure to heed the requirements of the FAIS Act and the loss of Maditse’s funds.

For all the reasons set out in this determination, the Ombud mentions it necessary to hold both the respondents liable jointly and severally, the one paying the other to be absolved, to pay Maditse the amount of R94 000.

Editor’s Thoughts:
Without following the right protocols every action has a consequence, and you have to wonder what the respondent in this case was trying to achieve without a license. It is obvious that the client’s best interest was not on the respondent’s agenda, which in itself is worrying because a client relies on the expertise and trust of a financial adviser. However, it is pointless to say that one man’s doing will destroy the efforts of others because one bad apple, as mentioned time and time again, does not spoil the bunch. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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