Avoiding unfavorable rulings and risks for non-compliance
A broker who is rendering ongoing financial services to a client in respect of one or more financial products, is required to comply with the Financial Advisory and Intermediary Services (FAIS) Act.
However, it is often difficult for brokers who are under increasing pressure with legislative bodies that are demanding more, to maintain the right balance between providing all the required information to clients and presenting this information in a clear, concise and effective manner.
This was the issue in the recent determination by the FAIS Ombudsman (FAIS Ombud). The case was between Johnnie Pringle (hereafter referred to as the complainant), Vaidro Investments (hereafter referred to as the first respondent) and Andrea Moolman (hereafter referred to as the second respondent). The complainant’s claim against the second respondent, who acted on behalf of the first respondent, was based on the latter’s failure to appropriately disclose the risks involved in investing in a scheme, which the complainant believed at the time was totally legitimate.
A tale of discrepancies
Over the period September 2008 to February 2012 and whilst acting on the advice of the second respondent, the complainant made various investments in the Relative Value Arbitrage Fund (RVAF), which in total amounted to R664 205. Against this, an amount of R379 199 must be offset as being the proceeds of a disinvestment which the complainant made in May/June of 2010.
The fund was managed and operated as a hedge fund - by one Herman Pretorius, (now deceased) - with no license of its own. Accordingly, the RVAF is currently in liquidation and funds have been lost. With the collapse of the RVAF, the complainant is actually out of pocket in the amount of R285 006.
In essence, the complainant claims that he was advised that the risk involved in the investment was medium to high. However, given that RVAF traded with the top 70 companies on the JSE it was safe to say that if these companies were to go insolvent then the whole country would be in trouble.
Accordingly, the complainant claims he regarded this investment as akin to blue chip shares, with the understanding that whilst the value of the share can drop, it can also recover. In addition, the complainant was advised, not only that RVAF had won a top award in 2008 but that it was a part of another FSP known as ABANTE Capital and had been in existence for many years. However, in reality, ABANTE Capital was a separate legal entity and was licensed as a FSP by the Financial Services Board (FSB), while RVAF was not.
In November 2011, the complainant received communication from another financial adviser warning him about the RVAF and its lack of transparency. The complainant took this up with the respondent, requesting that ‘the respondent play open cards’ stating that the investment was vital for the beneficiaries’ future. The respondent in turn countered that RVAF had weathered the recession without a problem as they had a method of trading in all sorts of markets.
In summarising it, the complainant states that the complaint is about being advised to invest in a scheme that was clearly not above board. In addition, and despite numerous conversations with the respondent wherein concerns were expressed regarding the RVAF, the complainant was assured that these concerns were unfounded.
Saving grace
The FAIS Ombud invited the respondent to respond to the complaint. The respondent stated that the risks inherent in this product were explained clearly to the complainant.
With regard to the due diligence the respondent conducted, the respondent advised that Herman Pretorius explained the strategies and how the risk was managed. In addition, the respondent spoke to fund managers about Abante and their use of the fund in their portfolios. Investments however, were made into the bank account of RVAF and not Abante.
She stated that by having reasonable knowledge of Hedge Funds, she concluded that the strategy, as explained to her, was a suitable investment for the client. The respondent contended that she was satisfied that persons investing in the fund were fully appreciative and aware of the risks involved; and she had explained the process and operation of the fund to the complainant as she understood it.
The respondent advised that as an adviser it was her duty to ensure that all products and all investment avenues are explored on behalf of clients. The respondents’ research showed that Abante was one of three hedge funds in South Africa.
It was explained that as in any investment involving shares the risk is of a high nature. In this regard the respondent stated that hedge funds may actually be a lower risk than traditional investments as the target is to protect capital.
Failing lawful duties
The complainant relied on the respondent’s advice when making this investment and the respondent failed in this regard. The respondent, as a FSP, failed to meet the requirements set out in the FAIS Act and blindly accepted whatever she was told about the RVAF without any attempt to verify such information. The respondent was out of her depth and could have had no understanding about the economic activity that generated the returns, or the sustainability of the investment.
The issue determined is that the respondent failed to act honestly, with care and diligence. This shows poor behaviour towards the Ombud. It can thus be concluded that the complaint is upheld and the respondents are ordered, jointly and severally, the one paying the other to be absolved, to pay to complainant the amount of R285 006.
Editor’s Thoughts:
While the determinations handed down by the Ombud are not a reflection on the industry, it is concerning how one small incident can damage the reputation of an adviser and no adviser wants to face the harsh rulings of the FAIS Ombud. By presenting information in a clear, concise and effective manner and keeping records, advisers can possibly escape these harsh rulings.Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
When the FSB were challenged on the fact that there had been no action from the Enforcement Division, Mr Gerry Anderson had the following to say in a FSB Press Release dated August 10, 2012:
"As a starting point, the manner in which members of the public may invest their savings may or may not, depending on the nature and structure of a particular investment vehicle, be subject to FSB regulation. For instance, the following types of investment vehicles would NOT be subject to FSB regulation:
- A partnership where individuals invest their monies in a partnership and utilise the capital to produce positive returns."
And later in the Release:
"The ambit of the FAIS Act is focused on the rendering of financial services which typically involve three parties, namely a product supplier, an intermediary and a client. Unless a financial product is involved, the FAIS Act does not apply"
If the FAIS Act does not apply, then the Ombud has no jurisdiction. Please read the definition of a 'complainant' and a 'compliant' in the Act for further elucidation. Report Abuse
The Ombud does not have jurisdiction over products that are not financial products but the Ombud has jurisdiction over FSPs. It is a requirement that an FSP must consider a client's position and recommend a suitable financial product. Surely the FSP doesnt meet this requirement if something other than a financial product was recommended? Even more so, if what was recommended was not suitable. In such instance the Ombud would have jurisdiction on the basis that the FSP did not meet the requirements of the Code of Conduct Report Abuse
If the amount invested was in a limited partnership, then the investment is not a financial product and therefore no financial service as defined was rendered and therefore the Ombud has no jurisdiction in the matter.
It will all become more clear when the appeal is heard . . . Report Abuse