FAIS Ombud: Company not liable for loss caused by broker who sold Fidentia product

Insurance giant Sanlam was let off the hook this week when the FAIS Ombud ruled that a former employee must compensate an East London couple R210000 because of poor investment advice.

Sanlam Insurance Limited was absolved of any blame when Charles Pillai, the Ombud for Financial Services Providers, ordered Willie Jordaan to repay Marna and George Rossouw the full amount of their investment after he alone was found to be liable for their loss by placing the money with beleaguered Fidentia.

Jordaan had placed investments for 19 clients with Fidentia. Seventeen of the clients with a total investment value of R2.19 million were still invested with Fidentia when the order for its judicial management was granted.

In April 2008, Sanlam Insurance Limited was ordered by the FAIS Ombud to repay Mrs Elizabeth September, also of East London, compensation of R245 000 as the company was found to be liable for her loss through the negligence of the same Jordaan who invested the money with Fidentia.

In that matter, the Ombud found that September appeared to have based her decision to invest in Fidentia on the fact that Jordaan was an employee of Sanlam.

The Ombud said at that time that Jordaan was promoting both his and his employer’s interest whilst using the employer’s resources.

“Where the employee is partially promoting the interest of the employer and partially his own, the employer will be liable.”

“Sanlam is no doubt a major role player in the financial services industry. Hence the investors appear to have been lulled into a false sense of security because Jordaan was its employee.

“The Complainant acted on Jordaan’s advice because he was employed by Sanlam.

“Given these facts, I am of the view that Sanlam ought to be liable for the loss suffered by the complainant,” the Ombud ruled last year.

However, in the latest ruling, the Ombud found that Sanlam could not be held liable for compensating the Rossouws. Not only did Jordaan embark on a frolic of his own but, crucially, the Rossouws were clearly aware that there was no connection between Sanlam and Fidentia.

In his defence, Jordaan said that he had explained the different investments and the returns and high risks associated with Fidentia. He said the Rossouws chose the Fidentia investment without being “coerced”.

He added he had made all relevant disclosures for the Rossouws to make an informed decision.

Jordaan was asked to provide the FAIS Ombud’s Office with copies of the record of advice to be kept in accordance with the General Code of Conduct for Authorised Financial Services Providers and Representatives promulgated in terms of the FAIS Act and any relevant documents in his possession. Jordaan failed to do so.

The Ombud found that Jordaan was guilty of recommending or advising the Rossouws about a product which he ought to have known was in all probability a high risk investment.

There was also no evidence that a proper needs and risk analysis was done in terms of the General Code of Conduct.

“The probabilities favour the view that Jordaan was motivated to recommend the Fidentia investment because of the high commission paid to him,” the Ombud said in his ruling.

“The argument by Jordaan that he did not receive any commission, but rather a ‘finder’s fee’ is disingenuous to say the least.

“Whatever label one puts on the income he earned from his clients’ investments in Fidentia does not negate the fact that he earned a recurring monthly income. It has all the hallmarks of being commission.”

The Ombud said Jordaan had failed to exercise that degree of honesty, fairness, due skill care and diligence that is required of a provider with his experience.

“It is clear that he was motivated by the higher than normal commission when he recommended a financial product which he had not properly investigated.

“By doing so whilst employed by a respectable financial institution such as Sanlam, he clearly brings the integrity of the financial services industry into disrepute.”

Jordaan was ordered to pay the Rossouws compensation of R210000 (less any amount of the capital received from the curators of Fidentia) together with interest thereon at the rate of 15.5 per cent per annum.

Click here to read the full determination (PDF file 193kb)