The property syndication waiting game

What do Gauteng-based road users; Jacob Zuma; and more than a thousand investors in property syndications have in common? You guessed it, each of the above has been waiting for more than a decade for some kind of regulatory issue to be dealt with… Gauteng-based road users have waited in vain for the final implementation of the AARTO Act and resolution of the infernal e-Tolls fiasco; Zuma has led local courts on a merry dance and has yet to answer fraud and corruption charges levelled against him in 2005; and, as at 31 March 2021, 1036 FAIS Ombud complainants are still waiting for their cases to be finalised.

A decade is hardly a speedy resolution

We opened with a ‘10-years or more to resolve’ rant because there is something sinister about a complaints resolution process, or any legal process for that matter, that burns through 25% of a person’s adult working life without reaching a conclusion. There is also some irony in the following line, lifted from the FAIS Ombud 2020/21 Annual Report, which reads: “In adjudicating complaints, the FAIS Ombud Office is charged with not only doing so fairly but doing so quickly, informally and economically as prescribed by the FAIS Act”. Given the Oxford Dictionary definition of quickly as “at a fast speed; rapidly”, we must assume the complaints resolution body is using its own definition of the word. 

Before we delve into the world of property syndication, we thought it appropriate to consider the FAIS Ombud’s 2020/21 performance in what we call the run-of-the-mill complaints department. In the 12 months ending 31 March 2021 the Office received 10552 new complaints, which number was significantly up on the 8835 complaints received in the prior period. This was also the first time since the 2016/17 financial year that the Office had received more than 10000 complaints. Many of these complaints get thrown out upon receipt, with a sizeable chunk palmed off to other Ombudsman schemes. The Ombud said that 4245 complaints were dismissed and 2877 referred to alternative fora. Of the balance, 1389 complaints were settled in favour of complainants and 2041 carried over. 

Meeting the immediate targets, for now…

Here’s where things get interesting. The Ombud boasts that it “achieved its strategic outcome to resolve a minimum of 80% of all complaints received within a specific financial year” and furthermore, that “84% of all complaints were resolved within three months; 91% within six months and 95% within nine months”. They get to this “80% resolved” claim, we assume, by expressing the dismissed, rerouted and resolved complaints as a percentage of the total received… In other words: 4245 plus 2877 plus 1389, and the sum divided by 10552. In the strictest sense, they only dismissed, referred or settled 4990 complaints out of the 6975 valid complaints, for around 71%. This writer has an issue with how the statistics are presented, but admits that he is probably ‘sweating the small stuff’. 

The Office reported a settlement ratio of 27.6%, which was lower than the 30.0% achieved during the 2019/2020 financial year. “This discrepancy can be attributed to the increased number of complaints that the Office dismissed after initial investigations conducted, which revealed no basis or merit in respect of the complaint; an indication of the economic impact of the response to COVID-19 and the subsequent desperate situation faced by many complainants,” notes the report. Many of these complaints were dismissed due to being about changes in circumstances rather than inappropriate advice at inception. The overall settlement value recovered for complainants in 2020/2021 was R49.773 million. A total of 11 determinations were issued during year, all relating to complaints received in prior years. 

Still 1036 too many

Returning to those pesky property syndications matters, the Office noted that it was on track to reduce active complaints against such schemes by 20% annually. They proclaimed success for 2020/21, having reduced the number from 1300 to 1036. These complaints, many of which feature the now-infamous Sharemax syndications, Zambezi Retail Park and The Villa Retail Park, have been hanging over advisers and investors, many of whom were retirees, for more than a decade. They are also generally high value claims, given that the FAIS Ombud can make a maximum award of R800000. Here follows the shortest ‘wrap’ of a couple of property syndication determinations you will ever find on the internet! 

The first determination published in the annual report involves R120000 invested into Zambezi Retail Park in February 2008, and another R200000 into The Villa Retail Park a year later. The complainant lost the entire investment when the syndication came unglued midway through 2010. The respondent’s primary defence was that the complainant had expressed an interest in making the investments, in other words, the transaction was merely facilitated by the respondent. “The complainant’s decision to invest in Sharemax did not relieve the respondent of her duties as a licensed FSP,” noted the Ombud, ordering the respondent to repay the amounts invested in both syndications, and to pay interest on same. 

Unconscionable conduct, a real shocker!

The second determination involved a then 80-year old investor who paid R700000 into a property syndication scheme known as Realcor Cape. To make matters worse, the investor was diagnosed as “cognitively and functionally compromised” around the time of the investment, which was made in April 2010. A complaint was lodged by the executor of the estate in 2016, opening the way for the respondent to argue that the matter had prescribed. The FAIS Ombud was having none of that, and turned instead to that fact that the respondent “was aware of the fact that the syndication was being investigated by the Reserve Bank for possible contravention of the Banks Act” at the time the investment was made. The respondent was ordered to repay the estate, and the matter was referred to the FSCA due to “unconscionable conduct”. 

This writer would love to go into more detail on these and other FAIS Ombud determinations in future newsletters, but for today we wanted to reflect on the damage caused to advisers, consumers and the industry by a complaints resolution process that proceeds at snail’s pace. “The achievements of the Office show that it remains steadfast in asserting itself as a leading, world-class alternative dispute resolution forum,” writes Acting Ombudsman, Advocate Nonku Tshombe. The elephant in the room is that by allowing serious complaints to simmer for a decade or longer, the FAIS Ombud has not only left investors out of pocket, but potentially allows rotten advisers to continue plying their trades for many years past their sell-by dates. 

Writer’s thoughts:
The saying ‘justice delayed is justice denied’ is particularly relevant in the context of SA investors versus those who advised them to invest in shaky property syndications in the late 2000s. But the decades long complaints resolution process begs another question. How fair is it to leave an investor waiting a decade or longer to recover losses due to poor financial advice? Similarly, how fair is it for respondents to spend a decade or longer ‘sitting on the bench’ waiting to learn their fates? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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