FAIS Ombud Ruling: Company liable for loss caused by its employee broker

The FAIS Ombud’s ruling that insurance giant Sanlam must compensate a widow more than R254 000 because of poor investment by an employee should prod financial services providers to more stringently scrutinise their brokers’ activities.

Sanlam Insurance Limited was ordered by Noluntu Bam (pictured right), the Deputy-Ombud for Financial Services Providers, to repay Mrs Elizabeth September of East London the full amount of her investment with interest as the company was found to be liable for her loss through the negligence of its employee, Willie Jordaan, who placed 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.

The Complainant claimed that on her retirement, she decided to invest R254000 of a lump sump she had received and to live off the income generated.

She said Jordaan motivated her to invest with Fidentia Asset Management. In November 2004 he made the necessary arrangements with a Mr Heydenrych, a trustee of private investment club Antheru Investment Trust to place the investment with Fidentia.

She received a monthly income from her investment until February 2007 when it ceased. She learnt through the media that Fidentia had been placed under judicial management.

The Complainant said she approached Sanlam who informed her that her “investment was with Antheru Investment Trust...and with Fidentia Investment Managers...both of which are in no way connected to Sanlam Life...” and denied liability for any loss she may have suffered.

She was further advised that she should approach Fidentia and/or Antheru, and if she was not satisfied with the outcome, to approach the Office of the FAIS Ombud.

On 22 June 2007 the Complainant wrote to the curator of “Fidentia/Antheru” to enquire about the fate of her investment. On the same day she also wrote to the FAIS Ombud complaining that “As a direct result of a consultant, then in the employ of Sanlam, I invested my pension with Fidentia.”

She sought some assurance from the Office of the FAIS Ombud that she was “not going to be left destitute” and was extremely anxious in this regard.

The FAIS Ombud referred the complaint to Sanlam, the employer of Jordaan.

The Deputy FAIS Ombud was appreciative of Sanlam’s co-operation during the investigation of the complaint.

In its response Sanlam said Jordaan was a financial advisor employed by it until his contract was terminated following disciplinary proceedings in May 2007. It also debarred him.

Sanlam claimed Jordaan had placed investments for clients at Fidentia contrary to explicit instructions as to where investments may be placed. The 17 clients whose monies totalling R2,19m million had been invested in Fidentia by Jordaan “will in all likelihood lose their full investments or most of them”, according to Sanlam.

Most of these clients were retired, were older than 55 years and their knowledge of investments and financial markets were not very sophisticated.

In many cases the money invested with Fidentia was their only or main source of funds available from which to provide an income for themselves.

While Sanlam expressed the view that Jordaan was dishonest - or grossly negligent - in placing the investments for these clients with Fidentia, the company advised its clients it was not involved in the matter and recommended that they submit their complaints to the curators of Fidentia or the FAIS Ombud.

In arriving at a decision, the Deputy-Ombud had to determine whether Sanlam may be held liable for the conduct of its employee. In other words, did Jordaan act within the course or scope of his employment or did he embark on a “frolic of his own”, as claimed by Sanlam.

The Deputy-Ombud said a number of Sanlam’s clients were adversely affected by Jordaan’s advice to invest in Fidentia. According to their statements, many of them appeared to have based their decision to invest in Fidentia on the fact that Jordaan was an employee of Sanlam.

“The common thread running through these complaints is that the Complainant and other investors based their decision to follow Jordaan’s advice to invest in Fidentia because they met him at his office in Sanlam or because he was from Sanlam.

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

She said Jordaan was promoting both his and his employer’s interest whilst using the employer’s resources. Furthermore, he was empowered to invest client monies but, was restricted as to where such investments were to be made.

“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 Depuy-Ombud ruled.

For the first time, the Ombud’s Office also took into account the concept of equity. Each case has to be determined on its own facts in determining when an employee has embarked on a ‘frolic of his own,’ which is often not an easy task, said the Deputy-Ombud.

However, because the FAIS Act enables the Ombud to take into account what is equitable in the circumstances, the Deputy-Ombud pertinently dealt with the concept of “equity jurisdiction”. She referred to labour and land legislation, which provide for the adjudication of disputes on the basis of what is “fair and reasonable” and not just on the application of the strict letter of the law.

The concept of equity finds its basis in the Bill of Rights chapter of the Constitution and “embraces notions of even-handedness, fairness, and impartiality...” said the Deputy Ombud.

Hence, equity demanded that in this case, Sanlam should compensate Mrs September for the loss caused by the negligence of its employee.

She referred with approval to a United Kingdom case where the Ombudsman’s decision was taken on review to the High Court. In dismissing the review application, the Court found that “whilst the ombudsman had to take account of the law, he was not required to decide a case in accordance with the law, as would a court, provided that his decision was fair and reasonable in all the circumstances”.