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Is this an unhealthy obsession?

01 October 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The struggle between the Financial Services Board (FSB) and financial services provider Dynamic Wealth is chartering a familiar course. It seems once the regulator has a company in its sights it pursues the same relentlessly, regardless of the “cost” to f

Moneyweb.co.za reports the parties have been involved in a months-long legal battle with the FSB going to court as early as November 2009. The latest escalation in the battle occurred when the FSB withdrew the licenses of the two Dynamic Wealth businesses. The press release that flashed across my screen read: In terms of Section 9(2)(d) of the Financial Advisory and Intermediary Services (FAIS) Act, No 37 of 2002, the Registrar of Financial Services Providers hereby makes known that he has, with immediate effect, withdrawn the authorisations issued to the following companies: Dynamic Wealth Management (Pty) Ltd(FSP No 559) and Dynamic Wealth Stockbrokers (Pty) Ltd (FSP No 7652).

Fighting fire with fire

The FSB decision prompted immediate court action from Dynamic Wealth. When I chatted to one of the company directors, Prof. Chris Harmse, shortly after the suspension of the licenses (16 September 2010) he told me: “There’s an urgent court appeal [the Pretoria High Court] at 10 am,” he said, “and we expect judgement on the matter by 2pm, after which we’ll issue a press release.”

The North Gauteng High Court subsequently rejected the FSB’s application with costs. Acting Judge Hennie de Vos, read a technical judgement which didn’t touch on the merits of the case, nor the basis upon which the FSB had requested the action. The regulator failed to attach 200 pages of annexures to their 169-page inspection report, rendering the reports findings “hearsay”. Although the FSB’s Gerry Anderson couldn’t immediately indicate whether the regulator would appeal, they may have to in order to avoid similar “defences” in future. A day later, 27 September 2010, the high court ordered the FSB to reinstate Dynamic Wealth’s licenses.

The Honourable AJ Ismail has effectively interdicted the FSB from implementing their decision to withdraw the licences, leaving Dynamic Wealth in a “business as usual” position. Dynamic Wealth hasn’t wasted time in rubbing salt in the wounds. In their press release they write: “Above mentioned judgments mean that two separate High Court Judges in two separate cases ruled against the FSB (with full cost orders) in the favour of Dynamic Wealth. But they should know better. Dynamic Wealth’s management might want to study the history of a recent financial services battle before they declare the war won.

David versus Goliath, round two!

Although it’s early days, the FSB versus Dynamic Wealth saga has the potential to become a second David versus Goliath of South Africa’s financial services industry. We’ve written before about the battle between the regulator and the companies Fedbond Participation Mortgage Bond Managers and Fedbond Nominees. The FSB fired its first salvo back in August 2003 when it completed an inspection of the scheme. At the time there were approximately 11 000 participants with R75m invested in properties and a further R197m in various funds to protect scheme participants.

The second salvo followed in December 2003. The FSB launched a court application to place the Fedbond businesses under the control of a curator. The FSB says it initiated this action because it was unhappy with the mix of assets in the scheme (most of Fedbond’s assets were in properties in possession rather than bonds) and felt the scheme’s properties were worth slightly less than its liabilities to investors. A mentor was appointed to the business and new fund inflows were prohibited for the duration of the court proceedings. The final hearing was argued in October 2005. The court ruled in Fedbond’s favour in December of the same year. In July 2007 – four years after the initial investigation – the FSB finally stepped down.

Once the dust settled Fedbond was free to continue its activities, provided various FSB conditions were met. The only consequence for the FSB – it seems – was a brief entry in its 2008 Financial Report. Fedbond investors’ endured untold financial hardship while its management and employees’ reputations were shot to hell.

Editor’s thoughts: It’s early days in the FSB versus Dynamic Wealth battle and we won’t be surprised to see each of the two high court rulings (mentioned in today’s newsletter) taken up on appeal. Should the Financial Services Board be held accountable for loss of earnings and damage to reputation due to hasty enforcement activities? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Bidnis Man, 04 Oct 2010
So long as government regulates business you will get nonsense like this. I'll wager that there were palms greased within the FSB by a competitor of Dynamic's. Another thing, win or loose in court, the FSB can freeze the taking of new funds by Dynamic by using the powers of adminstrative decree (a dog in the manger tactic).
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