Determination raises trust issues

The financial services industry is a very technical industry in that many of the procedures and the terminology used to explain these procedures are lost to the conventional member of the public. They would rely on the expertise and trust of a financial adviser or an industry expert in order to secure their capital in the right investment vehicle to gain maximum returns.

However, this does not indemnify the member of the public from ignoring blatant red flag situations which would compromise his/her investment. This was the basis of the most recent determination handled by the office of the FAIS Ombud for Financial (Ombud).

Is ignorance bliss?

The Ombud was approached by Craig Keshwar (the complainant) who alleged that First National Bank (the respondent), through one of its employees, defrauded him out of a significant amount of money.

The complainant was a businessman and was nearing retirement; he approached the respondent and informed him of his intention to leave the formal job market. Because he was nearing retirement age, he also wanted advice on a retirement vehicle which would best suit his needs.

Upon numerous visits to a specific FNB branch, he was approached by Reginald De Ghee who at the time of the complaint, was employed by the respondent in the capacity of Branch Manager at the branch frequented by the complainant.

According to the statement that was given to the Ombud, which was uncontested, the complainant said that during his visits to FNB, De Ghee established a friendship with him which went beyond the conventional client relationship. In fact, De Ghee often went out of his way to give the complainant special treatment during his visits to De Ghee's branch. During the course of his visits, De Ghee introduced the complainant to a savings vehicle, which he described as a million a month account. According to the complainant, De Ghee informed him that this was a high interest account and would be more beneficial than investing money into a conventional cheque account.

The complainant said that he was initially apprehensive about the investment, but after De Ghee showed him the accounts of other clients who invested in the fund, the complainant felt at ease. After a few more meetings with De Ghee, which the complainant felt constituted financial advice given the source, he was persuaded in January 2008 to invest in the fund. De Ghee also boldly told the complainant that he was also an investor in the vehicle.

Gross negligence ignored

If looking at the bank accounts of other FNB clients was not warning enough, the worst was still to come. As a measure of security, De Ghee gave the complainant a R25 000 cash cheque from his personal account stating that if the complainant did not receive returns of 50% over a period of four to six months, he was welcome to cash the cheque. The complainant made it clear to the Ombud that he was aware that the cheque was from De Ghee's personal account.

Following this, De Ghee got one of the employees at the bank to link the complainant's bank account with that of De Ghee's personal bank account. De Ghee also made it clear that he must be listed as one of the complainants' listed beneficiaries. When the complainant questioned this, De Ghee said that it would speed up the process of making investments and payment of interests into the complainants' account. After the linking of the accounts, the complainant went to the ATM and transferred R50 000 into De Ghee's account.

In February 2008, the complainant made a further investment of R10 000 to cover ‘processing and administration costs'. At the end of February, De Ghee advised the complainant that interest was due and it would be paid into his account. De Ghee then asked for a further investment of R50 000 which would bring the portfolio up to R100 000. After this a sum of R18 700 was paid into the complainants account as proof of the original investment earning interest.

Further impropriety

The complainant made the further investment of R50 000 into De Ghee's personal account; and in April, a further investment of R23 000 was made bringing the total investment up to R123 000. Later in April, further interest amounts of R42 000 and R23 000 were paid into the complainants account.

In June, the respondent was called by De Ghee where he was given advice on another investment scheme. The complainant made another investment of R30 000 which was now going into De Ghee's private business account. A further amount of R83 000 was invested in the same way.

Establishing distance

The complainant accused De Ghee of fraudulently divesting into an investment scheme where he lured clients such as the complainant into investing. And he further contested that FNB should be held accountable for the money lost because of their association with De Ghee.

After a number of attempts made by the Ombud to resolve this matter failed, the respondent was asked to explain their side of the story during which they pointed out that:

-The advice given by De Ghee was not valid according to the Financial Advisory and Intermediary Services Act as he was acting outside of his scope of employment.

-De Ghee was unauthorised to offer any financial advice as his duties were limited to running the branch he was working in.

-The complainant failed to prove that De Ghee acted on behalf of FNB as no formal documentation with FNB logo's or letterheads was given to the Ombud.

-There was also no proof that FNB received any money from De Ghee.

-The complainant should have questioned the authenticity of the investments.

-Because the complainant was depositing money into De Ghee's private account and because De Ghee's account was linked to his, the complainant should have known that it was a pyramid scheme.

The ruling is final

The Ombud decided to dismiss the complaint for various reasons. The first one is that as a businessman, the complainant should have been alerted to a number of illegal practices such as viewing other clients banking accounts and linking his account to that of De Ghee's. The second reason is that the complainant should have known it was a pyramid scheme after he made a number of payments into De Ghee's private and personal account. The complainant also should have known that De Ghee's actions would never be sanctioned by the bank and lastly, the complainant should have alerted the bank as to De Ghee's actions.

When one looks at the debacle from FNB's point of view, one can share their concerns about the fact that the complainant should have been aware of the red flags which can up during his interactions with De Ghee. And if he wasn't aware that there were red flags, he should have least questioned or reported De Ghee's behaviour to senior FNB officials.

Shame on you FNB

However, this does not completely indemnify FNB and they should carry a significant amount of guilt as to how this debacle unfolded.

The fact of the matter is, this advice was given at an FNB branch by an FNB branch manager. How can FNB totally indemnify itself bearing in mind the trust given to bank managers by the public? And one has to question how many other people were scammed out of their money in a similar manner?

One also has to question the ruling of the Ombud. If this was a broker and not FNB, would the Ombud have ruled differently? And finally, the Ombud goes to great lengths to point out that the complainant was a businessman and should have known better. But what type of businessman was the complainant? Certain professions do not necessarily understand corporate business ethics and have not heard about "The King Reports - Code on Corporate Governance”. The full determination can be downloaded here.

Editor's Thoughts:
We would all like to return to the days where we can share an "open door policy” with bank managers and administrators in the banking environment instead of dealing with call centre operators who in most cases are not "equipped” to assist. In this way, there is a human element to banking where it is not just about the transaction. But, are these friendships always beneficial? If anything, this determination proves that an arm's length approach to a relationship with banking officials is never a bad thing. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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