FSCA suspends the licence of Ecsponent Financial Services (Pty) Limited

22 May 2020 The Financial Sector Conduct Authority (FSCA)

The Financial Sector Conduct Authority (FSCA) has suspended the licence of Ecsponent Financial Services (Pty) Limited (Ecsponent FS) for breaches of financial sector laws.

The FSCA is also considering further enforcement actions, which will be made public in due course. The suspension and possible further enforcement actions are the result of the Authority having considered the findings of its investigation report into this case.

The FSCA investigated the marketing activities of Ecsponent FS, an authorised FSP (FSP no. 32968), after receiving several complaints from the public. The investigation looked at how Ecsponent FS was selling and marketing the shares of its holding company, Ecsponent Limited (Ecsponent Ltd), which is a JSE-listed entity not under the jurisdiction of the FSCA. The FSCA’s investigation focused solely on the advice and intermediary activities of the entity within its jurisdiction, Ecsponent FS and not Ecsponent Ltd.

During the period of investigation Ecsponent Ltd raised capital through the sale of redeemable preference shares. These preference shares consisted of classes A, B, C and G. Ecsponent Ltd’s preference shares were marketed through the media and leads generated in this fashion were dealt with by Ecsponent FS, through a network of representatives. During interactions with potential clients, Ecsponent FS staff provided advice on the investment product, i.e. the classes of preference shares. Whilst the classes of shares that paid monthly dividends were popular amongst pensioners as they mimicked a monthly pension payment, the one major difference between them and a pension investment was that they exposed investors to substantially more risk.

It is the view of the FSCA that Ecsponent FS paid insufficient attention to whether or not these shares were suitable investments for their clients. Section 8 of the General Code of Conduct applicable to FSPs makes it clear that FSPs have a duty to consider the suitability of the proposed investments for clients when providing financial advice. During the investigation the FSCA found that - due to various factors including the size of Ecsponent Ltd’s business; its capital structure; and other investment considerations - Ecsponent Ltd’s shares were high-risk and not suitable to be marketed as an investment to clients without appropriate suitability testing. The most important aspect of suitability testing is to ensure that the investment does not pose an unacceptable risk to the client. In simple terms, a high-risk investment will not always be suitable for a retired person with modest means. There are many suitable low risk investment alternatives available to such clients.

Ecsponent FS undertook to correct its approach to suitability testing and made suitability testing mandatory. However, recent events and a material change in the financial circumstances of Ecsponent Ltd (the product supplier) have rendered this exercise of little value. This is because the change in the financial position of Ecsponent Ltd has diminished the chances of unsuitable clients redeeming their investments without loss.

For this reason, the FSCA has decided to suspend the licence of Ecsponent FS as a first step to deal with the situation. This, and other intended future actions, is necessary to highlight the importance of suitability testing by FSPs to avoid exposing investors to high risk investments they may not be suitable for. Taking this step also helps to maintain the integrity of the financial sector. The Authority notes that it is not permissible to encourage or expect a client to waive any of their rights or benefits conferred in terms of the FSCA General Code of Conduct. The FSCA encourages FSPs and key individuals to always act in the best interests of their clients and treat them fairly.

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