Does treating advisers fairly extend to the FAIS Ombud?
This weekends’ Personal Finance led with a story titled Court action could stop Ombud from getting back your money. It was a pro-consumer piece that heaped scorn on a financial adviser and his professional indemnity insurer for their decision to challenge a FAIS Ombud determination in Court. The urgent interdict – lodged with the Pretoria High Court – seeks to prevent the FAIS Ombud from registering a recent determination as a civil judgement. Personal Finance editor Bruce Cameron reckons the application “threatens to undermine the very reason for the existence of the Ombud: to provide [consumers] with a cheap and quick way to obtain redress if [they] suffer loss because of bad advice.” But there is another side to the story. For how long can advisers allow the steamroller justice handed down by the Ombud to go unchallenged?
I invite you to obtain a copy of the 38-page determination handed down by the Ombud for Financial Services Providers in the matter of Elise Barnes (the complainant), D Risk Insurance CC (first respondent) and Deeb Raymond Risk (second respondent). The document is freely available at http://www.faisombud.co.za/. Read the ruling from beginning to end and then ask whether the FAIS Ombud has conducted an independent and impartial hearing, whether it has performed its function without fear, favour or prejudice – or whether the organisation is simply hell bent on compensating the consumer regardless of fact. I believe this matter is going to Court because the FAIS Ombud has failed in its mandate.
It begins with financial advice
This complaint is similar to most landing up at the Office of the FAIS Ombud. It deals with a financial loss suffered by a client due to failings in the financial advice process. On 2 December 2008 the complainant invested R1.4 million in the Sharemax scheme marketed as Zambezi Retail Park. She said that her decision to move capital out of her money market accounts and into the Sharemax investment was based on Deeb’s financial advice. Deeb allegedly told her that the interest rate she was receiving on her money market investment was likely to decline further (an accurate prediction). He also said that any capital invested in Sharemax – the only alternative investment presented for Barnes’ consideration – could be withdrawn after 12 months (clearly incorrect). In May 2009 Barnes made a second investment of R400 000 in the scheme marketed as The Villa after obtaining assurances from Deeb that the first investment would be available (paid out) by December 2009.
The events that ensue are familiar to brokers and clients entangled in the various Sharemax property syndications. During November 2009 the complainant asked Risk when she could expect the R1.4 million to be returned. He advised at the time that she might receive it by March or April of 2010. By September 2010, when interest payments on the investment ceased, the complainant decided she had lost the entire R1.8 million. Barnes lodged a complaint with the FAIS Ombud on 3 November 2010, summarised in her own words: “As a pensioner, I was persuaded to buy Sharemax shares by Deeb Risk. This is a high risk investment which was never disclosed to me. I am unable to sell my shares in Sharemax and redeem my capital – and no interest has been paid since 1 September 2010.”
Deciding the complaint
The relief sought by Barnes was the full amount of capital lost – namely R1.4 million in the Zambezi and R400 000 in The Villa. She was prepared to forego R600 000 of the Zambezi claim to bring the matter within the jurisdiction of the Office.
The FAIS Ombud determinations follow a rigid structure. The parties to the complaint are listed, background detail provided and the complaint clearly stated. The Ombud summarises the complaint in point 13 of the determination as follows: “In recommending the investments the respondent is alleged to have failed to properly advise the complainant, in that he failed to make material disclosures including risk and liquidity as required by the General Code of Conduct.” In addition Deeb failed to comply with the requirement that providers act in the client’s interest when rendering financial services. The adviser received a large commission for placing the complaint’s capital in a high risk investment.
With the basics out of the way the FAIS Ombud set about unpacking the respondent’s version of events. Deeb filed a comprehensive response titled “Response in the form of an application in terms of section 27 (3) (c) of the FAIS Act on 10 January 2011. He tackled the issue from two angles, namely the merits of the complaint and whether the Ombud was the appropriate forum through which to deal with it.
I’ll skip over most of this “defence” to focus on two arguments that may have swayed a Court of law. The Ombud notes: “Respondent states that when he assisted complainant to invest in the Villa and Zambezi, he was not aware of any questions regarding the solvency and the legality of the business model of the two schemes – it was only about August / September 2010 that he learnt [of concerns] through the public media.” I think it is time for the Courts to determine to what lengths an independent financial intermediary must go to satisfy the due diligence requirements outlined in the FAIS Act. Even an institution with massive resources (think of the Financial Services Board) takes months to thoroughly investigate questionable product providers.
An indeterminable quantum...
The second argument: “Respondent finally submits no decision can be made concerning negligence on the grounds alleged by the complainant, unless it is established whether or not the Sharemax model was legal, what the causes of non-payment of interest were and what was in the public domain when he discussed the investment with the complainant.” I’m not a legal expert, but it seems strange the FAIS Ombud can rule on the quantum of the complainant’s loss while there is still so much uncertainty around the Sharemax case. Don’t get me wrong. It would be dangerous to allow Sharemax to remain in limbo (under permanent restructure if you prefer) to prevent consumers from filing for damages. Likewise, no Court should award damages unless such damages can be accurately determined.
I think there are some other points which could be challenged in the Courts too. In determining its jurisdiction the FAIS Ombud observes: “All of the allegations made by the complainant are matters of compliance with the Code. These are matters that can and are answerable by records maintained by the financial services provider!” They basically state that the complainant’s “word” doesn’t have to be backed by evidence, but that the respondent must provide evidence to prove his / her innocence. The Ombud system affords greater protections to the accuser...
The advice was inappropriate, but...
Based on the determination there is little doubt Deeb’s advice was imperfect. But I’m more concerned with process and whether the FAIS Ombud lives up to the objectives stated in the opening paragraphs. The flimsiest of evidence leads to the following conclusion: “The respondent should have clearly seen the discord and not continue with the sale. He did not, because right from the start, he had intended to sell the complainant the Sharemax investment whether this was consistent with the circumstances or not.” The Ombud’s assertion (or should we say assumption) is probably 100% correct. But in the same vein we might say that the Ombud is glossing over certain obstacles in this case because it decided at the outset that the respondent was guilty!
Editor’s thoughts: The FAIS Act places a tremendous burden on the independent financial adviser. It seems crazy that a system requires each and every adviser to carry out due diligence on a financial product when a single FSB stamp of approval would suffice… Would the financial services industry be safer if the Financial Services Board investigated and approved new financial products before they came to market? Please add your comment below, or send it to [email protected]
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