FAIS Ombud orders broker who invests in risky bridging finance scheme to pay

Maintaining his trademark no-nonsense approach, the FAIS Ombud has once again ordered a broker who claimed the Ombud had no jurisdiction to hear the case to make good on a complainant’s claim.

The broker Willie Jordaan has had his fourth encounter with Charles Pillai, the Ombud for Financial Services Providers, arising out of dubious investments made on his advice.

Jordaan, a former employee of insurance giant Sanlam, had recommended to several clients that they invest in the now collapsed Fidentia Holdings and, as in this case, a bridging finance scheme.

In the latest determination, Jordaan (whose Financial Services Provider licence has been withdrawn by the FSB) recommended to his client of 20 years that he should invest in a bridging finance scheme.

The client, Wilhelm Julius Malan of East London, who had wanted to invest in either retail bonds or a two-year fixed deposit plan at Nedbank, was advised rather to invest in a bridging finance scheme.

The scheme was managed by Auctum Capital (Pty) Ltd, the sole director of which was one Hermann Heydenrych who, according to the Ombud, was “the same individual who recruited investments for the now spectacularly failed Fidentia Group”.

An amount of R110000 was invested in the scheme which subsequently collapsed causing Malan’s total investment, including interest which was apparently reinvested, to be lost.

In response to the complaint, Jordaan did not dispute that Malan was advised by him to invest in Auctum Capital. Instead he relied on the fact that because bridging finance was not a listed financial product as defined in the FAIS Act, he did not need to comply with the FAIS Act. Thus, so his defence went, the Ombud had no jurisdiction to hear the complaint.

The bridging finance was ostensibly to be provided to estate agents who were owed commission by sellers of property. The commission would only be paid to the agents on registration of transfer of the property by the conveyancing attorneys.

As property transfers usually take some time to be registered in the Deeds Registry Office and estate agents want immediate access to their commission, bridging finance is a means by which the agents are paid their commission (minus a discount) immediately.

The discounted amount accrued to the benefit of the person or entity providing the bridging finance, usually a bridging finance company.

Dealing with the crisp issue of whether or not he had jurisdiction to deal with the case given that bridging finance is strictly speaking not one of the financial products as defined, the Ombud said the matter did not simply end there.

In finding that Jordaan’s conduct indeed fell within his remit, the Ombud said: “One may also

look at general principles of interpretation where one of the issues one looks at in

interpreting legislation is what mischief the particular piece of legislation was

designed to prevent.

“If schemes such as bridging finance and so-called investment clubs were to be

allowed to be marketed by financial services providers (FSPs) on the basis that they

fell outside of the FAIS Act, then it would frustrate the very purpose for which the

FAIS Act was designed.

“Unscrupulous financial advisors will continue to ensnare unwary investors who may

then have no recourse against the provider concerned.

“It may be tempting for the FSP to market products that do not fall within the

definition in the Act in the knowledge that they may not be called to account by this

Office or the Financial Services Board for the financial service rendered in that

regard.

“In the matter before me, the product bears all the hallmarks of a financial product,

that is, an instrument marketed to the public as worthy of investing in to earn a profit

or some 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.

He said his Office had been seized with several cases where intermediaries hid

behind the fact that “this is not a financial product”.

Quoting extensively from a previous case in the matter of Nebbe vs Oosthuizen wherein a broker had invested her client in her own property company, the Ombud said: “As I said in the Nebbe determination, the Respondent in that matter was by the very nature of her work entrusted with the financial well-being of those who consult her.

“In rendering financial services to her clients, Respondent would at all times have to ensure that complainant as a consumer of financial services is assured of the protection of his investment.

“Thus any advice that she offers would have to be in the interests of the client and the integrity of the financial services industry. To do otherwise would immediately defeat the objectives of the FAIS Act.”

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 (emphasis added) . . .”.

“In other words the adviser is not to give advice on a product that is not a defined financial product.

“If he or she 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.”

The Ombud said on the basis of facts before him, Jordaan must be held liable for complainant’s loss of R110 000.