Income acceleration always ends in misery
What do you do when you reach retirement with too little capital to provide your desired income? Your financial adviser will probably tell you to cut your expenses and lower your living standard expectations. That’s the sensible approach. Unfortunately many South African retirees are lured by the high investment returns on offer from a range of high-risk trading products. The country’s tough regulatory environment was implemented at a time when local investors were gleefully investing in a range of foreign exchange (forex) offerings. The result was expected. Investors lost money and had to turn to consumer protection bodies for compensation.
Ian Scott (the complainant) is one such investor. He lodged a claim for compensation with the FAIS Ombud because he felt the advice received from Wayne Gray (the first respondent) and Quantum Leap Forex (the second respondent) “violated the duty placed on providers to act with due care, skill and diligence and the provisions of the FAIS Act.” Wayne Gray was an authorised financial services provider (FSP No 16498) accredited to render financial services in respect of long and short term insurance and health services benefits. He was also a representative of the second respondent. Quantum was accredited as a discretionary financial services provider (FSP No 16994) and could render intermediary services only!
The facts of the case
Scott – age 59 – had taken early retirement after 18 years of service with a financial institution. The claimant and respondent met for the first time in May 2004. Upon (and despite) an assessment of his financial situation the complainant favoured a forex investment. The complainant believed this was the only investment that would provide the income he required. “Sufficient records have been submitted to this Office by respondents indicating the process they went through to identify complaint’s needs and the advice offered to the latter,” said FAIS Ombud, Charles Pillai.
On 24 August 2004 Quantum was confirmed as an introducing broker for Kerford. The latter applied for a category 11 (2.13) Foreign Currency Denominated Investment Instruments licence with the FSB on 29 September 2004 (FSP No 18222). As is often the case with forex products there was a complicated remuneration structure in place. Quantum would receive commission in the event its clients earned more than 3% in a given month. Quantum would also be responsible for making monthly income payments on client accounts where due. Gary Gray, key individual at Quantum, invested some of his own funds with Reymount. As part of his due diligence he visited London (21 to 28 May) and met with representatives at Reymount’s offices.
In August 2004 Scott invested an amount of R270 000 into a forex investment. Funds were deposited with a clearing house identified as Reymount Investments Limited and were to be traded by a company called Kerford. He made additional investments in January and August of the following year.
Some cracks in the investment opportunity
The initial investment was made despite concerns about Reymount. In April 2004 the second respondent became aware of an email circulated by the Jersey Financial Services Commission. The correspondence advised that Reymount had been instructed to stop trading. The commission further advised that “Reymount had never been registered, or applied for registration, under the Financial Services Law. Therefore any financial services business, as defined in Article 2 of the Financial Services Law and carried out since 1July 1999, is a breach of Article 6 of the Financial Services Law.” Instead of taking action – such as approaching the local regulator for further assistance – the second respondent merely queried the email correspondence with Kerford. Kerford advised the second respondent that the ‘warning’ only applied to Jersey residents.
The determination
After considering the facts Pillai issued a lengthy determination. He said the respondents’ documentary submission shows the complainant had a “clear appreciation of the volatile nature of the investment.” It was also apparent the risk in the investment had been disclosed to the complainant and a number of alternatives presented to him. And – alarmingly – the “complainant defied the first respondent’s advice and insisted on making his own decisions in making the last two investments!” So what went wrong? Why did Pillai find for the complainant? We cannot cover Pillai’s entire determination in this article, but we can reflect on some of his concerns.
The first is that three months after the Financial Services Board warned the respondents to desist from dealing with Reymount and Kerford, Scott invested another R130 000 with the company. “The complainant was not privy to any of the details regarding the authorisation of the entities,” says Pillai. The respondents didn’t share this warning with Scott and remained happy to carry on dealing with the entities in question. A second is with the key individual listed with the FSB by Quantum. The Act requires the key individual to be “any natural person responsible for managing or overseeing, either alone or together with other so responsible persons, the activities of the body, trust or partnership in relation to the rendering of any financial service.” In this instance, the key individual was in fact in the employ of Kerford.
Pillai ruled for the complainant. He couldn’t award compensation for the complainant’s initial investment of R270 000 as this occurred prior to the Office’s mandate. Instead he calculated the settlement based on Scott’s additional investments of R200 000 (January 2005) and R130 000 (August 2005). He subtracted the amount of R134 514 paid out to the complainant in monthly payments and R95 311 received by the complainant when he closed the investment in June 2006. Pillai ordered the first and second respondents to jointly repay an amount of R100 174.15.
Editor’s thoughts: On the balance of facts we believe the FAIS Ombud was correct in this determination. The case does raise some interesting questions. What happens if a client concludes financial transactions without consulting you? How do you separate your financial advice from the client’s own decisions? Add your comments below, or send them to [email protected]
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