Misrepresentation damages the name of the industry
01 April 2014 | Compliance - Regulatory | FAIS Ombudsman | Jonathan Faurie
Misrepresentation is one of the most rampant adherent practices in the financial services industry, and is one that regulators want to put an end to. But how does one achieve this when regulators and the Ombudsmen cannot take a matter beyond a certain point?
This issue was highlighted at a recent event held at Norton Rose Fulbright by Caroline Da Silva, Deputy Executive Officer for the Financial Advisory and Intermediary Services (FAIS) Act. Michael Blaine, MD at Altrisk, also highlighted this issue at a round table discussion on the future of the Retail Distribution Review.
Keeping the FAIS Ombud busy
Despite the number of determinations that the FAIS Ombud handled last year, there are still a number of people who are being taken advantage of. In one of the latest determinations handed down by the Ombud, Leonie Beukes was defrauded out of over R1 million by Willem Abraham.
Abraham was working for Nedbank at the time that he was first in contact with Beukes and invested her late husband's life insurance policy. After the investment was made, Beukes built up a good rapport with Abraham as he regularly kept her up to date with the investment.
There was a great deal of trust between Beukes and Abraham.
There was a great deal of trust between Beukes and Abraham.
While still at Nedbank, Abraham approached Beukes and told her that he would be going independent and forming his own company called Jam Financial Planning (Jam). Acting on the advice of Abraham, Beukes withdrew R1 million from her initial investment as well as additional amounts of R100 000 for her two children. She invested this with Jam.
Beukes was assured that her investment would be safe and she didn't question this as she assumed Abraham had a valid FSP number. It turns out that he did apply for a FSP number, but no number was issued to Jam and the FSB has since cancelled the application.
Beukes did sign three separate forms to acknowledge the terms of the investment. All of these were on Jam letterheads. The terms of the agreement were that Beukes would receive monthly payments as her investment grew. And she received monthly payments until the end of November 2012. The payments stopped and no further capital was recovered from Jam after that. The determination gave no indication how much capital was recovered at that stage.
After a few enquiries, Abraham told Beukes that the capital was invested under an agreement with Fundco CC and Jam. This agreement from Abraham appears to be a money lending agreement between Fundco and Abraham. Whilst it is signed by Abraham, the complainant's signature appears nowhere on the document which means that she was not party to this agreement.
In his defence, Abraham pointed out to the Ombud that this was a loan and not an investment.
Despite the fact that Beukes was not privy to the investment made between Jam and Fundco, the Ombud ruled that the relationship between Beukes and Abraham was that of a client and financial adviser.
The Ombud therefore ruled that Abraham abused the trust offered to him by Beukes; he misrepresented the investment situation to Beukes bearing in mind that she was unknowledgeable about financial planning; he misrepresented his fees to Beukes and he didn't identify the type of product Beukes' money would be invested in.
The Ombud added that it was unlikely that she would ever recover all of her capital back. The Ombud can only deal with cases up to the value of R800 000. If Beukes was to recover the rest of her money, she would have to pursue Abraham in her private capacity.
Who then can you trust?
Establishing trust and then breaking it is a modus operandi in all of these determinations.
This also happened in the case of Ernst Nolte and Deolene Catsicadellis, the MD of Blue Platinum Ventures, and Reginald Rabie, the MD of iBear Global Investment Strategists.
Nolte invested significant capital through Antoinette Beattie, an employee of Blue Platinum, to invest money in certain ventures which would produce high returns. This would be through various Blue Chip Shares and commodities on the JSE. Nolte invested R100 000 with iBear and R200 000 through Blue Platinum Investments.
Various events raised Nolte's suspicion, after which he approached the FAIS Ombud. Nolte initially invested R300 000, but only received R120 000 back from Rabie.
Again, Nolte was never informed that Beattie was not a registered FSP. The Ombud also found that Nolte was not given adequate advice regarding the risks of his investment. Finally, Rabie and Catsicadellis acted in a deliberate manner which cause Nolte's financial loss.
Are the fraud days numbered?
With the accountability that the FSB hopes to introduce into the market, companies - and advisers - will hopefully think twice before acting in a deceitful manner. The comments made by Da Silva indicate that if new accountability measures are enacted, companies will be responsible for the actions of their representatives. With a case like Beukes, the company might be facing damages of over R1 million.
What can be done to resolve this? Perhaps getting a second opinion on investment advice is an option? Does the client know how to make sure if a FSP is registered with the FSB? How many members of the public will really dig into the credentials of a company or an adviser?
Editor's Thoughts:
This all goes back to education. Who is responsible for educating the public on the proper conduct of brokers and companies? Will this education work? And if there is consumer education, does the public follow the steps which are given to them? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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