Hard selling runs foul of UK financial services law
Until today, few of you will have heard of a small UK-based financial services company called Square Mile Securities Limited. It is the latest operation to run foul of the Financial Services Authority (FSA), the body that regulates financial services in the United Kingdom. Square Mile Securities was fined 250 000 pounds for using high pressure selling tactics and providing misleading information to its clients. The company was flogging risky share investments to inexperienced and older investors without adequately informing them of the risk associated with the investments. The FSA performs a similar role to our very own Financial Services Board (FSB).
The South African financial services industry is well regulated to prevent similar incidents from occurring. As a professional involved in the local industry you will definitely be familiar with the FAIS Act and the many stipulations it makes regarding the provision of financial advice. The Act provides valuable definitions and direction for role players in the industry, including financial service providers (FSPs), their representatives and financial products.
Specific requirements contained in the Act include that FSPs have to be licensed in terms of the Act and must comply with certain prescribed fit and proper criteria. FSPs are responsible for their representatives who also have to comply with fit and proper requirements. The Act also defines standards for the market conduct of FSPs and their representatives. These provisions ensure that the consumer receives fair treatment and enjoys full disclosure.
The FAIS Act determines liability
Another important aspect of the Act is that it makes FSPs liable for the conduct of their representatives, defined either as employees of the FSP, or as having a mandate from the FSP. The FSP is obliged to notify the Financial Services Board of who its representatives are.
The question is whether a South African financial services provider acting similarly to Square Mile Securities would have run foul of the FSB. To answer this question we need to determine whether the product being sold (shares) is a regulated product. We don’t have to look too far, because the FAIS Act defines “financial product” as:
(a) Securities and instruments, including -
(i) Shares in a company other than a "share block company" as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980);
The next thing we need to know is how the seller of this particular financial product was obliged to interact with the client. The Act offers specific protection to the financial product consumer in that it requires providers to offer a reasonable and appropriate general explanation of the nature and material terms of the relevant contract or transaction. The provider must also make full and frank disclosure of any information that would reasonably be expected to enable the client to make an informed decision. In the case of selling shares, we believe a South African FSP trying to sell high risk equity investments would at least have to properly inform the client of the risk involved.
The Act also demands that, at the earliest reasonable opportunity, the FSP shares full and appropriate information about the product and its benefits. This should ensure that the client knows whether the “product is positioned as an investment or as having an investment component, the details of the manner in which the value of the investment is determined, including concise details of any underlying assets or other financial instruments.” In other words – provide enough information on the company behind the risky share investment. Most importantly the Act requires the FSP (or representative) to explain to the client “to what extent the product is readily realisable or the funds concerned accessible.” As anyone who has traded illiquid or over the counter shares knows, they can be extremely difficult to convert back to cash.
‘Unfair’ sales tactics
Returning to the Square Mile Securities case, Margaret Cole, FSA Director of Enforcement, said:
“High pressured sales practices are wholly unacceptable. Firms that use such sales tactics undermine the regulatory requirement to treat customers fairly. A firm's customers are entitled to rely on it to provide them with advice and information that is clear, accurate and not misleading.
“The FSA will not tolerate any regulated firm coercing customers into buying financial products or services they do not want or can't afford. We are currently reviewing how stock broking firms conduct their business and will not hesitate to take action against any that falls short of the standards we expect.”
We believe the FSB (in terms of provisions contained in the FAIS Act) would have little trouble coming to a similar verdict. And that should spell trouble for some of the companies peddling over the counter shares (and similar risky share investments) in South Africa.
Editor’s thoughts:
We are aware of a number of companies that sell ‘fantastic’ opportunities in unlisted start-up business ventures. Such transactions often occur over the counter (OTC) which means they don’t go through a recognised securities exchange. We would like to hear from you if you have recently been approached to buy shares in a business that sounds too good to be true. Send your story to [email protected]
