FAIS Ombud calls for financial products to be regulated

The FAIS Ombud has called for financial products to be subject to some form of approval to protect members of the lay public from being exploited by” market forces motivated by nothing more than greed and irresponsibility”.

Charles Pillai, the Ombud for Financial Services Providers, said a complaint that came before him regarding the GAREK scheme made a compelling case for financial products to be regulated.

“This call is in the interests of investor protection and invariably in the interests of the integrity of the financial services industry.

“To have intermediaries with little or no expertise simply marketing products that have not been sanctioned by some qualified state institution will mean that the public interest will not be served and that consumer protection and the integrity of the financial services industry will continue to be undermined.

“It is, therefore, recommended that the Minister of Finance consider appropriate legislation to put an end to the kind of abuse that is evident in this case.

“To do otherwise would be to simply leave vulnerable consumers to the mercy of market forces motivated by nothing more than greed and irresponsibility,” Pillai said.

The Ombud also called for “consideration of possible criminal prosecution of directors and officers” of the GAREK scheme as well as financial services providers who assisted to market the product.

The Ombud recommended that a copy of his ruling be forwarded to the SA Police Commercial Crimes Unit for consideration of further investigation into alleged fraudulent activities by the promoters and marketers of this scheme.

The Ombud’s strong comments are contained in a determination in a matter in which the Complainants, Adolf Jacobus Hare, an engineer from Pretoria, and his wife Christina Elizabeth Hare, demanded that Andre van der Merwe, an authorised financial services provider from Uvongo, Kwa-Zulu Natal, return R40 000 they had given to him to invest on their behalf.

The Ombud said there were many people who had invested in the Garek scheme and had lost millions of rand in the process. He said his Office had 14 other complaints relating to financial services rendered in the course of recommending investments in the GAREK scheme.

The determination involving the Hares was the first of several determinations that will be made in the course of time.

The Complainants said that in December 2004, they met with the Respondent, Andre van der Merwe, who had been Mrs Hare’s mother’s financial adviser.

The Complainants were introduced to MATRIC, and were provided information by respondent on the company and its prospects. They were advised that an imminent listing in three countries was on the cards. Upon listing, shares purchased by complainants for R2.50 were projected to reach R20.

This return was compounded by the fact that the structure of the investment was such that they automatically received two shares in GAREK for every MATRIC share purchased.

The Complaints said the Respondent promoted the company in glowing terms and made much of the fact that he himself had invested in excess of R1 million in MATRIC shares.

The assets of the company were reportedly substantial amounting to some R5, 4 billion.

The Complainants were shown an article in the Time magazine which painted the company in a very positive light, supportive of the Respondent’s claims as to the soundness of the investment. In reality this article was merely promotional material placed on a limited number of copies of TIME magazine. The information contained therein was neither endorsed nor verified by TIME magazine. In short it was an advertorial taken out by GAREK itself.

The Respondent also pointed out an impressive list of company directors, amongst them, the former president of Botswana, Sir Ketumile Masire.

No interview was conducted to assess whether the investment was conducive to the Complainants’ future financial requirements or their present financial position.

The challenges that lay ahead for MATRIC/GAREK and the risks associated with the investment were never mentioned or discussed.

The Respondent advised complainants that the opportunity to invest apparently expired at the end of December 2004 and as such the Complainants were encouraged to “act expeditiously”.

As such, and acting on the advice of the Respondent, the investment was made, and the application forms completed on 30 December 2004 at which point Complainants invested R40 000.

After this expiry date Respondent contacted the Complainants and advised that as they were existing shareholders they had the opportunity to purchase additional shares at the same “good” price. They were advised to take up this opportunity because of the excellent returns that could be expected on this investment. The Complainants did not take up this additional offer.

The promised listing and several future listing dates never materialised. Various reasons were advanced for the delay, several of which supposedly offered increased shareholder value. In addition various company annual financial statements were not issued.

The Complainants said they “were clearly misinformed, offered poor advice and the communication was less than adequate”.

The Office of the FAIS Ombud asked the Respondent to submit a reply to the allegations, taking into account the requirements of the FAIS Act.

Respondent was also advised that the DTI Report was being considered as part of the investigation into this complaint. Respondent was, therefore, requested to provide this Office with any comments which he might wish to make in respect of the report itself.  

In particular Respondent’s attention was drawn to two issues. They are:

Firstly, whether respondent had conducted an appropriate due diligence into GAREK; and

Secondly, as the report stated that respondent had received commission of R4,470,558.92 from GAREK and related companies, of which R3,479,008.92 has been received from ASEM, he was requested to provide copies of documentary disclosures to clients showing that he had had received more than 30% in commission from any particular product supplier.

The above figures made it likely that Section 4 (1) (d) (ii) of the General Code of Conduct For Authorised Financial Services Providers and Representatives (Board Notice 80 of 2003) (the Code) may have been contravened. In particular this requires that if a provider during the preceding 12-month period received more than 30 per cent of total remuneration, including commission, from the product supplier, this must be disclosed to the client.

Respondent replied with a lengthy explanation of the origins and interwoven share transactions of GAREK.

In so far as Commission was concerned, the Respondent contended that the Complainant received full value of their applications in shares and that no deductions whatsoever were made.

Explaining the delays in listing GAREK, the Respondent claimed that in addition to the dates being “expected and/or proposed” dates, the reasons were, inter alia “changes in legislation, political conditions in West Africa and the Department of Trade & Industry’s investigation into GAREK and other companies”.

In so far as the risks of the investment were concerned, the Respondent said “the Complainants were categorically and specifically informed of the high risk coupled to unlisted shares”.  

In his determination, the Ombud said he had no evidence that proper documentation, including a record of the advice given and disclosures made to complainants, had been maintained.

The Respondent had failed to advise whether any declaration was made to Complainants that he had received more than 30% of total commission from any particular product supplier.  

The Ombud found that the Respondent had not complied with the FAIS Act by failing to consider whether the investment actually suited the Complainant’s needs.  

The Respondent had also failed to disclose risks associated with the investment.

“Regrettably the Complainants did not have the luxury of any due diligence reports or appropriate advice before they entered into these transactions.

“Instead it was a rushed process that had a so-called limited offer period of less than a month. They were encouraged to act quickly given the promised imminent listing.  

“The requirement that complainants be able to make an ‘informed decision’ must be interpreted to include an understanding of the financial merits of the investment itself.  

“The Respondent clearly did not possess the necessary skill and as such failed to exercise the required due diligence to ensure that he actually understood what he was dealing with.  

“A far more likely scenario though is that respondent intentionally misled complainants into believing that they were investing in a ‘sure thing’.”

The Ombud found that while the Respondent was an authorised financial services provider, he was, however, restricted to certain financial products. He was not licensed to sell shares in 2004. His licence was only amended in 2007 so as to enable him to sell shares.  

The Ombud ruled that the Respondent had either failed to exercise the necessary due skill care or diligence when rendering a financial service; alternatively he was complicit in soliciting investors to invest in an entity which had no real intention of listing and whose sole purpose appears to benefit the directors and related individuals.

In acting upon the advice of the Respondent, the Complainants had made a bad investment in GAREK.  

“According to the DTI report of the R74, 046,875.99 invested in the companies only R299, 061.89 remained in the bank account. As none of the ‘funds appear to have been utilised for any acquisition of assets’ coupled with the number of shares in existence running into the billions, there can be no doubt that complainants shares are worthless.

“I have no doubt that the many violations of the Code were deliberate, and as such in inducing complainants to invest with GAREK he knowingly placed them at risk from inception.  

“In the circumstances, I deem it appropriate not only that complainants be placed back in the position which they were prior to the investment but that interest thereon be awarded from the 30 December 2004, the date of investment,” the Ombud said, in ordering the Respondent to repay the Complainants their investment of R40 000 plus interest.