Goliath versus Goliath… Can the High Court pin the FAIS Ombud?

Gareth Stokes, FAnews Online Editor

In November 2011 I wrote a newsletter titled: The elephant in the financial advice space. I suggested that Sharemax was the proverbial “elephant in the room” as far as South Africa’s broker community was concerned. Best estimates are that some 40000 South

Why should financial advisers be concerned? If an intermediary’s advice falls short of the standards set out in the Financial Advisory and Intermediary Services (FAIS) Act and its accompanying Codes, they can be ordered to compensate their client’s losses. Successful complaints against a financial adviser can result in an award equivalent to the client’s total investment, subject to the Ombud’s statutory maximum of R800 000 per case. The bottom line is that many FSPs and brokerages would be pushed to the brink of receivership if even a handful of Sharemax related complaints went against them – and there are hundreds of cases pending.

The court battle to end all court battles...

The impact of the collapsed Sharemax scheme on a single broker or broker practice is illustrated by FAIS Ombud determinations made since 2 November 2011. Deeb Raymond Risk and his company D Risk Insurance Consultants CC feature in four determinations to date, wherein the Ombud has ordered the brokerage to compensate clients to the tune of R2.2 million. (Personal Finance reports a fifth case – and a R3 million total – but the record of that case has not yet been published at http://www.faisombud.co.za/). The point is that an award based on just four or five client interactions is enough to cripple most small brokerages.

Of greater concern is the apparent arrogance with which the FAIS Ombud has carried out its duties. Nolantu Bam dismissed request by Risk to delay her ruling on Sharemax-related complaints until such time as the extent of the financial losses were quantified. “The issue is not whether some monies will be recovered by the complainant at some future unknown date,” she said. “But rather whether the advice, given the complainant’s circumstances, was appropriate.” At the time FAnews was surprised that the Ombud could award damages without knowledge of the final loss suffered by the client.

Given the sums involved it is no surprise this matter found its way into the mainstream judicial system via a motion to the High Court. The result from this court action will have major ramifications for each and every stakeholder in the domestic financial services industry.

Professional indemnity insurers have a massive vested interest

Risk, backed by his professional indemnity insurer Stalker, Hutchinson and Admiral (SHA), has asked the court to rule on a number of issues (summarised from Bruce Cameron’s article: Threat to out-of-pocket investors, published on iol.co.za, 5 August 2012). Risk wants the Judge to order that the FAIS Ombud refers all complaints involving property syndications to the High Court for trial, based on the premise that the Ombud denied Risk his constitutional right to a fair hearing. Failing this the Judge is requested to refer the case back to the Ombud and order her to reconsider her decision not to allow Risk to take his case to the High Court. It is implied that Bam was not “procedurally fair” in coming to her initial decision. Risk’s counsel goes so far as to suggest that the Ombud’s determination was “based on a whim and not a formal process”. The bottom line is that Risk wants the Ombud determinations against himself and his firm set aside.

The following question, again lifted from Cameron’s article, succinctly asks what many FAnews readers have raised since the first determination against D Risk Insurance Consultants.  “Who rules? Is it the [FAIS] Ombud or the rule of law?” asked Senior Counsel Piet Louw in arguing the case for Risk. “The essential question is whether a determination by the Ombud where there was no hearing, no legal representation, no knowledge of the particulars of the case that was eventually held against the applicants [Risk and his company], and that culminated in what is in effect a judgment of the High Court and can be executed as such, is an instance of the rule of law or an unconstitutional aberration?”

Another intricate web to untangle

We cannot escape the intricate relationship between broker, product provider and consumer in this unfolding saga. If Risk’s appeal to the High Court fails then South Africa’s professional indemnity insurers – and brokers – will be exposed to millions of rand in professional indemnity insurance claims. (Some suggest the insurers’ decision to take this matter to court relates to its exposure).

But the consequences if Risk succeeds are dire too. Consumers will be forced to battle for their money in the Courts rather than through the FAIS Ombud… Providers and advisers may feel vindicated despite offering shocking product or advice… And – in the extreme case – the FAIS Ombud and its structures could collapse in a heap! Notes Cameron: “The FAIS Act, which, among other things, established the office of the Ombud, [could] be declared unconstitutional, effectively disbanding the office.”

Editor’s thoughts: There have been many complaints about the apparent one-sidedness of FAIS Ombud determinations. As consumer, we would hate to have to take a broker (supported by a professional indemnity insurer) or large financial institution to Court. On the flipside we cannot allow the FAIS Ombud to steamroller advisers with scant regard for due processes of law. Can you imagine the chaos if the Court finds the FAIS Ombud ruling and process unconstitutional? Please add your comment below, or send it to gareth@fanews.co.za