Is this really an attack on the FSB?

This week's Sunday Times features an article billed as the "Clash of [the] financial watchdogs." The article suggests that the FAIS Ombud, Charles Pillai and the Financial Services Board (FSB) are at loggerheads over some of the recommendations contained

Is the press blowing the situation out of proportion? A quick look at the case brought to the Ombud will provide some answers.

Selwyn and Christine Comrie complained to the FAIS Ombud about the financial advice received from one Michael Shacklock, a representative of Ewing Trust Company Limited (Ewing).

Acting on Shacklock's advice, the Comries invested 28, 477 Euro in Leaderguard Spot Forex (LSF)- a company incorporated in Mauritius. LSF and its South African arm Leaderguard Securities (LS) have since filed for liquidation.

Major problems with the financial service provider

Pillai highlighted a number of failings on the part of Ewing. The company had not obtained approval of LSF from the FSB, had no authority to render financial services in foreign exchange in terms of their own licence and represented LS as having FSB approval, when it was operating under an exemption and its licence application was still pending.

The determination is damning of the manner in which LSF and LS operated. In unravelling the business activities of these companies, Pillai stated:

"At the outset, I want to make it clear that my findings and comments regarding LS as stated in this determination does not mean that the Respondent [Ewing], or any other FSP is absolved from carrying out their functions and duties as providers as contemplated in the FAIS Act, its Regulations and the Codes of Conduct to which they are bound."

Pillai had to include this comment due to the flagrant misrepresentations made by various individuals with ties to LS and LSF - particularly in establishing their broker channels in South Africa.

Concerns about the regulator's role

The FAIS Ombud included a number of concerns with regards the Financial Services Boards role in the licensing process. In his determination, Pillai posed the question: "How and on what basis in law did the FSB grant LS an exemption form the provisions of the FAIS Act?"

Registrar of investment schemes, Rob Barrow expressed unhappiness with the line of questioning and ultimate legal interpretation included in the Ombud's determination. The FSB will seek legal opinion in this regard. Barrow goes on to say: "It is unfortunate the FAIS Ombud made this determination in which he criticises the FSB without having fully canvassed the issue with us."

In our view, this question is hardly an attack on the FSB - but rather an examination of the facts, decisions and legislation which led to another massive financial scandal in South Africa. The FAIS Ombud is a watchdog for the financial services industry and should consider any and all facts which might contribute to an unsuitable financial service company being allowed to operate in South Africa.

Many of the events that occurred during the LS licensing process were simply unbelievable. Topping this is the fact that Forex Investment Association CEO, Chris Dela Guerre, played a role in 'approving' Leaderguard, a company of which he was compliance officer and director!

Investors remain the only losers in this battle

Regardless of who is to blame for the failure of Leaderguard Securities and its associated companies, the real losers are the some 3, 600 South African investors who had invested R300 million with the company when LS went under in March 2005.

To date, the FAIS Ombud has received complaints totalling R11.580 million. Only 5.467 million worth of these complaints fall under the jurisdiction of the Ombud. The truth is the entire R300 million is lost to South Africa. Those who receive compensation will be compensated from local financial services providers. The individuals who 'stole' the money have once again walked away 'Scot' free.

Pillai has forwarded his determination to the National Prosecuting Authority, the finance ministry, the trade and industry ministry and the Reserve Bank for further consideration. His main concern is there were no prosecutions in this matter, despite the facts supporting further action.

Editor's thoughts:
The FAIS Ombud and the FSB were established to protect the consumer of financial services. Do you think that the FAIS Ombud was correct in expressing concerns over the licensing activities of the FSB, or should it rather focus on tackling the financial service providers and companies responsible for the financial misrepresentation? Send your comments to gareth@fanews.co.za.