Moonstone: When it's raining and pouring...

A broker in KZN has been in the spotlight of the FAIS Ombud for quite some time now, and we are not sure if the end is in sight yet as mention was made of a number of complaints about the same scheme which are still pending.

What are the implications in cases where multiple complaints are laid against a broker?

Board Notice 81 of 2003 sets out the powers and jurisdiction of the FAIS Ombud, stipulating a maximum monetary award in favour of the complainant of R800 000, unless the respondent agrees to pay more, or where the complainant has agreed to waive the amount in excess of this maximum.

This would apply where one complainant is concerned, but what happens in the event of multiple complaints from different clients against the same advisor?

If one bears in mind that the FAIS Act is there to protect the consumer then it appears as if the respondent is in a precarious situation, to say the least. The limit mentioned above applies to each complaint. This is defined as follows:

A complainant may seek any relief relating to the subject matter of the complaint, but a complaint constituting a claim for monetary award, must relate to the redress of financial prejudice or damage suffered or likely to be suffered by the complainant.

The Board Notice very specifically excludes investment performance “…unless such performance was guaranteed expressly or implicitly or such performance appears to the Ombud to be so deficient as to raise a prima facie presumption of misrepresentation, negligence or maladministration…”.

Interestingly, it is stipulated that the Ombud may also address a complaint relating to a financial service “…rendered by a person not authorized as a financial services provider or by a person acting on behalf of such a person.”

In the case mentioned above, unlisted shares were sold with all kinds of undertakings which never materialized, according to the Ombud.

It would appear then that the maximum amount per claim may not exceed R800 000, but the there is no maximum to the total that the broker may be forced to repay clients.

A further issue concerns PI cover.

I came across the following definitions on the Southern Cross Underwriting Managers website:

A broadform Professional Indemnity Insurance cover with Fidelity Guarantee which covers any claim arising from breach of duty, negligent act , error or omission, loss of money or property belonging to the insured as a result of dishonest or fraudulent act committed by an employee during the period of insurance.

A narrow form Professional Indemnity Insurance cover with no Fidelity Guarantee cover which excludes cover for loss of money or property due to fraudulent or dishonest conduct by employees.

In a recent response to a client, our legal department loosely defined PI cover as “…insurance cover that the broker can avail himself of should he be found liable for a client’s losses because of bad advice, negligence etc.” This etcetera would include having been found guilty by the Ombud of neglecting to do proper due diligence on where you placed client funds.

The minimum PI cover a sole proprietor has to have in place by 21 September is R1 million. While the broker referred to above may have been able to cover his losses up to this amount, provided he had the cover in place, if the claims exceed this, he would have to fork out the balance from his own pocket.

Repeated claims of this nature could very well lead to the termination of his PI cover, which is a condition of his FSB licence. Failure to comply with such requirement would in turn lead to the suspension of his licence.

Eish! Not a rosy picture, is it?