The greatest deception in the financial advice space

A number of our readers have responded to our newsletters on the topic of intermediary liability. In Financial Consumers KO Advisors, Does Treating the Advisor Fairly extend to the FAIS Ombud, and Can Independent Advisors Underwrite the Entire Financial S

What follows is largely based on a detailed response from one reader. Mr X – who prefers not to be named – observed that the Financial Consumers KO Advisors articleprovided much needed balance in the reporting on the High Court ruling in the matter of D Risk Insurance Consultants et al versus the FAIS Ombud and others. The Judge gave a technical ruling to the effect that the complainant (Deeb Risk assisted by his PI insurer) should exhaust the dispute resolution processes at the FAIS Ombud (and FSB) before approaching the Court. But the bulk of the financial press reported this ruling as a fantastic victory for consumers who would no longer have to seek Court assistance to resolve complaints against their brokers. (This dispute resolution process existed prior to the ruling).

Aggrieved consumers have long availed of the FAIS Ombud to tackle advisors around issues of advice. And after extensive coverage in Rapport, Personal Finance and Moneyweb, local consumers should be well informed as to how to lodge such complaints. The bitterness among sections of the advice community stems from the tone of the mainstream media reports, which seem to encourage readers to approach the FAIS Ombud if they have the slightest doubt about the advice received leading up to a financial loss. The newspapers suggest that laying a complaint against the financial advisor is “the right thing to do” and the FAIS Ombud is held up as a ‘silver bullet’ to ‘win’ their money back. Of greater concern is that Average Joe now believes the broker will not be harmed by his complaint, because the advisor’s PI cover will pay-up.

Nothing could be further from the truth

“I do not know of any PI cover that has paid out losses due to ‘improper’ advice in Sharemax-linked complaints – nor can I think of any that will,” says Mr X. Will brokers be indemnified for losses suffered in investments in FSB-approved products but not for riskier products such as property syndication? The answer lies in PI policy wordings which typically do NOT indemnify the insured for third party claims arising out of the depreciation in the value of the investment, nor against a guarantee or warranty provided by the insured with respect to anticipated performance.

So in most cases the PI will not cover claims against the broker for investment losses, whether in FSB-approved products or not. Another obvious stumbling block for PI to step in is the common insurance principal that an insurer will not pay-out if the quantum of loss cannot be established. And a third point to ponder is who receives the shares or debentures in the property syndication in the event a Sharemax complaint is resolved and settled in favour of the client. Do they remain with the client – transfer to the advisor – or to the insurer? Another question is what would happen if the Section 311 Schemes (implemented for certain of the failed syndications) turns out to be successful and the clients get their money back after three years? It is a common principle in insurance that you should not be in a better position after a loss than you were before.

The practical consequences of Ombud determinations

Has anyone considered what happens when the FAIS Ombud awards damages running to hundreds of thousands of rand? The consumer may not have had to go to court initially, but if PI does no pay-out they will end up in Court to apply for the broker’s sequestration. Assuming the broker’s house and vehicle belong to the bank – and his other assets only fetch a few thousand – then what? “Advisors do not earn the millions of rand in commissions that the likes of Bruce Cameron claim,” says Mr X. Mr X dos no believe that the outcome would have been any different had Sharemax paid 2.5% or 3% commission. In fact it would have put most brokers even more at ease with the product, which may have led to increased sales! “If you bought a house in a bad area and you now struggle to get your original purchase price back after the recession, it is not the fault of the estate agent who earned commission on the sale of the house to you,” he says. “Likewise advisors are not to blame for the SARB intervention that led to Sharemax’s collapse”.

Assuming a broker goes to the wall the banks and liquidators will have to be paid first, after which the aggrieved consumer can fight for the scraps. The bottom line is that after one or two settlements an offending broker will be left without assets and without a job, as he or she will no longer be fit and proper. The rest of the broker’s Sharemax clients will find that the FAIS Ombud determination is not worth the paper it is printed on. “Rule against all the Sharemax brokers and it is unlikely that more than handful of clients will benefit,” concludes Mr X. “And thousands of investors will be left without any broker representation”.

A call for reporting sans agendas

More alarming than the deceptions perpetuated in the mainstream media is the lack of consequence for the myriad parties involved in the business of Sharemax Investments. “What happens to the FSB who issued Sharemax with a license?” asks Mr X. “The FSB may claim that they don’t regulate unlisted securities but they do have a guide to investing in unlisted securities, which the Sharemax prospectuses complied with very well. Can the FSB really claim that they did not know what business Sharemax was involved in? The product structure was negotiated with them after Sharemax was found to be in breach of the new law on Collective Investment Schemes in 2003 and Sharemax became a Licensed FSP soon thereafter”.

The list is endless. “What about CIPRO who approved the prospectuses? What about the DTI under whose auspices these products fell? What about Weavind & Weavind who looked after the company’s legal affairs – or ACT Audit solutions? Surely the SARB has a case to answer for its opinion that the product contravened the Banks Act… Do the former directors and consultants of Sharemax, who carry on with their lives as before, have nothing to answer for? What about the attorneys and accountants who advice on investments daily without any risk? And last but not least: The Clients who claim that they have no free will and were bullied into the investment when they specifically asked for better returns”.

Ignoring the perpetrators of massive fraud

Mr X concludes: “In Can Independent Advisors Underwrite the Entire Financial Services Universeyou stated that you might be accused of driving an agenda. But the Personal Finances, Moneywebs and Rapports of this world have an agenda that is entirely pro consumer against the broker”. And while the broker wilts under relentless scrutiny the other parties to the Sharemax debacle – even the de facto perpetrators of the fraud – are carrying on like nothing happened.

“Everyone is turning to the broker – even those who should be held liable alongside brokers – to recover consumers’ losses from the collapsed scheme,” he says. “This is the greatest deception in the financial services space. The solution to this crisis is for all parties concerned, advisors, clients, the new directors and all the former parties to Sharemax investments to work together to make sure that the Section 311 schemes turns out a success. In the end that is the only way clients will get their money back. Fighting each other in the courts is not going to solve anything”.

Editor’s thoughts: This article is not an attempt to brush aside the financial advice ‘crimes’ committed against consumers by advisers in the run up to the Sharemax collapse. Instead it is a plea to industry stakeholders to acknowledge that the rot goes way deeper than the occasional broker that was lured into selling high commission (but otherwise convincing) investment products. Do you think the real perpetrators of the Sharemax syndication will be brought to book – or do you fall into the camp that still holds the ‘what collapse’ view? Please add your comment below, or send it to [email protected]

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