Financial consumer KOs advisers in round one of this epic courtroom tussle
After a lengthy delay the North Gauteng High Court finally handed down judgement in D Risk Insurance Consultants (and its key individual Deeb Raymond Risk) versus the FAIS Ombud and the Minister of Finance. Risk, bankrolled by his professional indemnity i
Since 2 November 2011 Risk and his company were subject to five FAIS Ombud determinations wherein the brokerage was ordered to compensate clients to the tune of just more than R3 million, a sum of money that would cripple many of the country’s smaller financial services practices. Risk petitioned the Court to rule on six issues including that he be allowed to bypass the complaint resolution process in favour of Court proceedings and that the FAIS Ombud’s unfettered discretion not to allow hearings, legal representation and trial be declared unconstitutional.
Consumer watchdog supremacy confirmed
Put another way: Risk was asking the Judge to order that complaints involving property syndications be referred to the High Court for trial based on the premise that the FAIS Ombud complaint process denied the accused’s constitutional right to a fair hearing. He implied that Noluntu Bam was not “procedurally fair” in coming to her initial determinations, while his counsel even suggested that the Ombud’s rulings were “based on a whim and not a formal process” of law. Risk wanted the eight complaints and subsequent determinations to be set aside.
The decision handed down by Judge Selby Baqwa last Friday (7 September 2012) was awarded against the financial adviser with costs. “The claim was rejected because, inter alia, the applicants had not provided adequate proof that the section in question was unconstitutional,” writes Adri van Zyl on Fin24. “Baqwa said that Risk should have first exercised his right to lodge an appeal against the Ombud’s decision with the appeal board of the Financial Services Board before approaching the Court”. This action remains available to Risk if he so chooses.
What are the next steps in this saga? When approached for comment Santam Limited (which owns 100% of SHA) said that SHA’s attorneys would study the ruling before deciding on the appropriate course of action. It seems unlikely that the private indemnity insurer will back away from the fight after investing so much in the matter. “I do not think they would not have gone this far if they were not prepared to go all the way,” says Anton Swanepoel, FAIS Specialist and Director of Cutting Edge Business Solutions. “I will be very surprised if they do not take this ruling on appeal, irrespective of whether it is to the Appeal Board or the Court of Appeal”.
The Financial media have already had a field day with the ruling. Van Zyl observed: “The high court has paved the way for clients who have lost billions in dubious property schemes to claim the money back from their financial advisers without having to lodge their claims in the high court”. But the court case was never about denying the financial services consumer’s right to a fair and cost-effective remedy for non-compliant financial advice. Rather, it was about concerns that the Ombud’s determinations were deviating too far from the financial services industry legislation that it should be bound by.
“We have always been supportive of the FAIS Ombud and believe this form of complaint resolution offers major cost benefits to both financial consumers and advisers,” says Justus van Pletzen, Chief Executive of the Financial Intermediaries Association SA. “Our only requirement is that the process be objective and fair – that each new complaint is heard free of prejudice – and that each docket be assessed on its own merits”. There are concerns that an adviser’s transgressions in one case might influence the determination in another, especially where multiple complaints are received for a single investment opportunity.
Swanepoel says that this case should highlight the importance to financial services providers of complying fully with the process, disclosures and paperwork as stipulated in the FAIS Act and to seek council before responding to a client complaint. “It is possible to comply with FAIS and the General Code of Conduct. Advisers will have to learn from this, take a serious look at their current processes and quality of records, and ensure that it will be acceptable to the FAIS Ombud, if a client should complain”.
Determining damages in a collapsing property syndication
Another concern among industry stakeholders is whether it is fair to award damages before the quantum of loss is determined. The FAIS Ombud has been fairly unequivocal in this regard. “The issue is not whether some monies will be recovered by the complainant at some future unknown date,” she said. “What is important is whether the advice, given the complainant’s circumstances, was appropriate”.
But Van Pletzen believes her decision to finalise damages in the Sharemax matter was premature. “If the facts confirm that the broker was negligent in providing financial advice then the principles of fairness and equity would surely require that an interim award (if any) be made until such time as clarity around the loss emerges,” he says. Swanepoel agrees: “It is unclear how the Ombud was able to quantify the loss before its permanence was established”.
Whether SHA supports D Risk Insurance in further Court action remains to be seen. Until such decision is taken the FAIS Ombud retains full authority to order advisers to compensate clients in the event they contravene the provisions of the FAIS Act. (The Ombud is limited by the legislation to hear matters totalling R800000 or less).
Editor’s thoughts: If you were hoping for clarity on the D Risk and Sharemax saga then you will be disappointed. It looks almost certain this matter will escalate to a higher court – meaning it could be years before the issue is finally put to bed. The only certainty is that advisers will be paying much more for professional indemnity insurance going forward. Have you negotiated your PI premium recently – and has it escalated significantly? Please add your comment below, or send it to [email protected]
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