Strange bedfellows – foreign currency trading and low risk
In November 2004 Willem Johannes de Lange (now 81) and his wife Elma Cornelia de Lange followed their broker’s advice and invested substantial sums of money – R308 327 and R270 804 respectively – in Leaderguard Spot Forex (LSF). A month after investing the funds they discovered Leaderguard was effectively bankrupt and that they wouldn’t be able to recover their investments. On 26 June 2006 De Lange wrote to the FAIS Ombudsman, Charles Pillai, for assistance.
Pillai notes that the respondent, Johan Stander (who conducted business as Johan Stander Makelaars) provided a detailed response to the complaint. Stander did not believe “he was negligent in advising the complainants to invest in LSF,” says Pillai. There were many aspects of the transaction that weren’t disputed. The complainants approached the respondent for advice and subsequently moved cash from an Investec USD Money Fund and an Investec Euro Money Fund into LSF. They believed they would receive ‘more income’ for similar levels of risk. In his determination Pillai went to great lengths to assess whether Stander was ‘authorised’ to market foreign exchange products, whether he acted in compliance with the FAIS Act and whether the advice was appropriate.
Too many failings
Stander’s first mistake was one of omission. During his November 2004 dealings with the complainants he failed to declare that he was providing advice under exemption from the Financial Services Board (FSB). His license application had been submitted in August 2004 and was only subsequently granted on 21 December 2004. Leaderguard Securities (LS), the South African marketing arm of Mauritius-based LSF, was also operating under an FSB exemption at the time. Pillai felt the respondent should have mentioned these facts to the complainants.
The next step was to determine whether the respondent had conducted his affairs in compliance with the FAIS Act. Pillai summarised his findings under headings such as due diligence and disclosure. He noted the complainants were 78 and 72 years of age respectively when the advice was given. He further observed they had a conservative risk profile, a fact not disputed by Stander. Where did Stander go wrong? We summarise some of Pillai’s concerns below:
- Stander failed to mention to the complainants that he was operating under exemption pending the approval of his license application.
- Stander failed to mention to the complainants that LSF had not been approved by the FSB at the advice date, 11 November 2004.
- Stander relied “disingenuously” on an implied approval of LSF during the advice process.
- Stander failed to properly disclose costs. Pillai observed that “the total commission deducted from the initial funds invested was an astronomical 22.2% per annum, making the investment unsustainable.”
Inappropriate advice given the circumstances
A number of paragraphs in the determination were directed at the appropriateness of the advice. Although Stander correctly identified the couple as having a conservative risk profile he proceeded to replace low yield conservative products with a volatile and speculative currency trading alternative. Pillai concluded that:
- The respondent incorrectly believed he had handled the complainants’ portfolio in a conservative manner.
- The respondent made a mistake by determining his clients low risk conservative investment profile and then moving from poorly performing low risk investments into a high-risk volatile solution with LSF.
- The respondent didn’t understand the product. The complainant had turned down other investment products because they lacked capital guarantees, but accepted LSF on the respondent’s interpretation that 80% of the capital was guaranteed.
- The respondent missed provisions in the product brochure which clearly dispelled the notion of such guarantees. The brochure states: “No capital guarantee is offered by LSF and the investor warrants that he/she shall not hold LSF liable for any capital losses suffered by the investor.”
- “In the given circumstances, Stander’s advice to complainants to invest in LSF was negligent and in breach of his duties as provider in terms of the Code,” writes Pillai.
- The complainant failed to complete a “replacement advice” wherein the old and new investment products are compared to each other.
The bottom line, says Pillai, is “if the respondent didn’t fully understand the product, then his claim that the complainant fully understood it falls flat!” He also found that it was wholly inappropriate to switch money market investments into currency speculation, given the complainant was not advised of the factual risks involved and had a low risk profile. And finally, the choice of product made by the respondent (and accepted by complainants on his advice) ignored the complainants’ request for “something similar to offshore money market with similar guarantees!”
Objection your honour – asked and answered?
“As an experienced provider of many years Stander surely knew or ought to have known that forex trading is volatile, subject to the vagaries of almost daily fluctuations in value and is inherently a high risk investment,” says Pillai. So why did he recommend the LSF investment? Pillai concludes: “I can find no other reason other than his own misunderstanding of the nature of the product and self interest or commission to be earned that caused him to recommend it.”
On these facts the FAIS Ombudsman upheld the complaint. He ordered the respondent to pay the first complainant €39 411.43 and the second complainant €34 484.96. Interest at 15.5% per annum would be calculated from seven days after the date of the order to date of payment.
Editor’s thoughts: The FAIS Ombudsman has issued determinations in a number of cases relating to Leaderguard Spot Forex, mostly for the complainant. In this case he found the choice of product was inappropriate for the complainants’ risk profile. Do you agree with the Ombudsman’s conclusion of a mismatch between risk profile and product selection in this case? Add your comments below, or send them to [email protected]
Comments