Bridging finance ‘advice’ costs broker dearly
What happens when a broker challenges the FAIS Ombud on his jurisdiction? In the cases we’ve encountered thus far such bravado usually ends with the broker reaching for his cheque book. On 5 February 2010, FAIS Ombud, Charles Pillai ruled on a complaint brought to his Office by Wilhelm Malan of East London. Malan went up against his broker, Willie Jordaan, who was reportedly answering his fourth complaint. Jordaan’s previous cases related to the collapse of Fidentia Holdings.
This time round he advised his 20-year old client to invest in a bridging finance arrangement. Bridging finance is traditionally defined as an interim financing arrangement to tide an individual (or company) over while they wait for permanent financing to be put in place. The respondent approached his broker to invest R110 000 in retail bonds or a two-year fixed with Nedbank. Instead, Jordaan persuaded him to invest in Auctum Capital (Pty) Ltd, a company that was fronting commissions to estate agents. Hermann Heydenrych, Auctum’s sole director, was “the same individual who recruited investments for the now spectacularly failed Fidentia Group,” said Pillai.
R110 000 up in smoke
The bridging finance scheme subsequently collapsed, leaving the complainant out of pocket. His entire investment and interest on the investment was lost. An interesting aspect of this complaint is the defence applied by Jordaan. He admitted to advising his client to invest in Auctum, but questioned whether Pillai had jurisdiction to hear the complaint. He reasoned that since ‘bridging finance’ was not a listed financial product in terms of the FAIS Act he didn’t need to comply with the Act’s provisions.
The Ombud agreed the product was not included on the list of financial products defined by the Act, but concluded the broker’s conduct still fell within his remit. “One may also look at general principles of interpretation,” said Pillai. In drawing his conclusion he considered the “mischief” the FAIS Act was designed to prevent. “If schemes such as bridging finance and so-called investment clubs [can] be marketed by financial services providers (FSPs) on the basis that they fall outside of the FAIS Act, then it would frustrate the very purpose for which the Act was designed,” he said.
Under such circumstances investors would have no recourse when an adviser provided questionable financial advice. Pillai added that the product marketed in the complaint had “all the hallmarks of a financial product.” It was marketed to a member of the public as something worthy of investing in for profit or benefit. “To put it colloquially, if it looks like a duck, walks like a duck and squawks like a duck, then it must be a duck,” the Ombud said.
An ingenious defence
It seems more and more brokers are hiding behind the “this is not a financial product” defence. Financial product or not, these brokers still run foul of the advice component of the FAIS Act. In a previous case – Nebbe versus Oosthuizen – a broker had invested her client in her own property company. Commenting on that determination, Pillai said: “The respondent in the Nebbe matter was by the very nature of her work entrusted with the financial well-being of those who consulted her.” Advice offered by the respondent had to be in the interests of the client and the integrity of the financial services industry.
The Ombud said in his ruling that Section 8(1) (c) of the Code provided that after seeking information about a client’s financial position and conducting an analysis thereof, the adviser must “identify the financial product or products that will be appropriate!” This in itself would preclude the adviser from giving advice on a product that is not defined as a financial product. “If [the broker] does, they are clearly acting in contravention of the FAIS Act and this Office is, in my view, duty bound to determine such a matter not on the basis whether it does or does not have jurisdiction but on the basis that the FSP is falling foul of the FAIS Act in recommending a product not defined in the Act.”
Pillai upheld the complaint and ruled that Jordaan must make good the complainant’s loss of R100 000. Jordaan’s Financial Services Provider licence has been withdrawn by the FSB.
Editor’s thoughts: As we read through the various FAIS Ombud determinations we wondered whether the cases reaching the office were just the tip of an iceberg. A broker who is censured for inappropriate advice to one of his clients will have surely repeated this mistake across his entire book. Should brokers who run foul of the FAIS Ombud be thoroughly investigated? Add your comments below, or send them to [email protected]
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