Property syndication decision… target practice?
The Financial Services Tribunal (FST), which replaced the Financial Services Board (FSB) Appeals Board from 1 April 2018, is taking a no-nonsense approach when reconsidering ‘decisions by financial services decisionmakers’, as illustrated by recent appeals against property syndication related determinations. In a recent application for the reconsideration of a determination made by the Financial Advisory and Intermediary Services (FAIS) Ombud, the FST lambasted the Ombud for “not only failing to interrogate the first respondent’s version, [but also] championing the first respondent’s cause, instead of being an impartial adjudicator”.
Justice denied, for decades
The first respondent in this appeal, is the complainant in the original FAIS Ombud case, FAIS 08848/10-11/FS1, which followed from the widely publicised collapse of the Sharemax property syndication scheme. The FAIS Ombud stands as the second respondent in the appeal, with the affected Financial Services Provider (FSP) being the applicant. It took the FAIS Ombud more than a decade to reach a decision in the matter, a failing that the FST was quick to point out. “It bears mentioning that it has taken more than 10-years to reach this point, which the Tribunal finds unacceptable,” they wrote.
Some background is required before discussing the FST case in more detail. Firstly, readers should note that the FST was established in terms of section 219 of the Financial Sector Regulation (FSR) Act. The FST, or Tribunal as it is also known, is tasked with reconsidering decisions taken by the various financial decision makers identified in section 218 of the FSR Act. The FST also “…performs [a range of] other functions as conferred on it by the FSR Act and specific financial sector laws”. Ministerial regulations published in Government Gazette 42359 require the Financial Sector Conduct Authority (FSCA) to provide administrative, financial and secretarial support to the Tribunal.
Appeal season is open
After a slow start, with just 11 orders in 2018, the Tribunal issued 98, 208 and 211 orders in 2019, 2020 and 2021 respectively. The Tribunal is, however, limited insofar as its remedial actions, per section 234 of the FSR Act. Section 234(1) allows it to set a decision aside and remit the matter to the [original] decision maker for further consideration or (b) in the case of a decision of [a certain kind], also make an order setting aside the decision and substituting the decision of the Tribunal. Section 234(2) allows the Tribunal “…to make an order that a party to proceedings on an application for reconsideration of a decision pay some or all of the costs reasonably and properly incurred by the other party in connection with the proceedings,” but only in exceptional circumstances. And finally, the Tribunal may, by order, “summarily dismiss an application … if the application is frivolous, vexatious, or trivial”.
Armed with some financial services decision-making theory, one can return to the matter at hand. The initial complaint was made on 7 February 2011, and the FAIS Ombud handed down the original determination on 19 March 2021, including granting leave to appeal in terms of section 28(5)(b)(i) of the FAIS Act, read with section 230 of the FSR Act. It ordered the respondent in that matter (the FSP) to pay an amount of R255 000 to the complainant, plus interest on that amount.
Considering matters ‘afresh’
The respondent in the FAIS Ombud case duly availed of its right to appeal, which turned out to be a sensible decision. An important observation is that the Tribunal “…considers applications before it afresh, and that the FAIS Ombud’s decisions do not restrict it”. In other words, the Tribunal has the power to conduct a complete re-hearing and reconsideration of the matter before it. Thus, a three-member panel of the FST set about reconsidering the facts presented in the original complaint, which dealt with the advice given by the applicant to the first respondent, who had invested 3.6% of her estate in a Sharemax scheme and subsequently lost the investment.
The first respondent claims that the applicant advised her “…she could not lose any money, and that the investment was risk-free, for all intents and purposes enjoying a capital guarantee”. This allegation, according to the FST, was made “…despite the first respondent having signed documentation to the contrary”. The applicant, meanwhile, restated that it had met all of the requirements set out in section 8(4) of the Code of Conduct. If there was one word in the FST order that struck a chord with this writer, it was the word ‘opined’. Because the FST, when describing the conclusion reached by the FAIS Ombud wrote “…the FAIS Ombud opined that the investment was inappropriate and there was a breach of the Code”.
Important information overlooked
According to the FST, the FAIS Ombud ignored or overlooked a number of key facts. They pointed out that the first respondent had received, read and understood the prospectus; knew the risks associated with the investment; knew that the capital and interest were not guaranteed; and had attended multiple meetings with the applicant during the advice process. As such, the FST asked, “how, in the face of mutually destructive versions, did the FAIS Ombud make a decision? … The FAIS Ombud not only failed to interrogate the first respondent’s version, but championed the first respondent’s cause, instead of being an impartial adjudicator”.
The attorney for the applicant picked holes in the original determination, questioning whether a breach of contract (negligence) or the cause of the first respondent’s loss (causation) had been clearly established. He also shared a handful of judgements to illustrate matters that were decided “on the facts peculiar to a matter in question [versus] those decided on legal principle”. This article will not delve into the legal arguments, except to observe that the FST seemed swayed by them. “The FAIS Ombud’s decision was not based on the documents in the record of decision and there was no basis for the applicant’s version to have been rejected,” they wrote. “We are satisfied that material disputes of fact exist, [and that] neither the Ombud nor this Tribunal can decide the matter unless and until the disputes of fact have been resolved”. The latter could not be achieved without viva voce (oral) evidence.
Very, very stern words
The FST had some very stern words for the financial sector decision maker, “It beggars belief that in the face of expert evidence presented by the applicant, and in the absence of expert evidence presented by the first respondent, the FAIS Ombud accepted the first respondent’s version, [and] it is unfathomable how in the absence of expert evidence rebutting the expert evidence presented by the applicant, the Ombud could conclude that the applicant had conducted herself unreasonably in this matter”. They reminded the FAIS Ombud that it was meant to be “an independent arbiter” which required, among other functions, seeking independent expert evidence as contemplated in Section 24(e) of the FAIS Act, specifically by invoking Section 27(3)(b).
Unfortunately, the FST was unable to rescind the FAIS Ombud’s decision, stating that it could not decide the matter on the facts currently before it. All they could do was kick the 10-year-old matter back to the starting line, saying, “The decision of the FAIS Ombud is set aside, and the matter is referred back to them for further consideration”. This writer hopes that the second attempt at resolving the matter proceeds without further delay and delivers a more balanced outcome. It would, after all, be quite shocking for FSPs to be held up to different standards than the founders of the various property syndications, given the National Prosecuting Authority’s recent decision not to prosecute any individuals in connection with the collapse of the Sharemax property syndication.
