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FAIS Ombud determination puts emphasis on financial advice 101







On the 15th of August 2018, Naresh Tulsie, the Ombud for Financial Services Providers, ruled in favour of a complainant and ordered the respondent to pay the complainant a combined amount of R310 000. This follows an original recommendation made in terms of section 27 (5) (c) of the Act on 7 November 2017.

The Ombud found that:

  • The respondent, in providing financial advice, failed to provide his client with information that was factually correct.
  • He failed to provide information about the product that was adequate and appropriate.
  • The respondent failed to provide full and frank disclosure of information to the complainant to enable her to make an informed decision.
  • He failed to ensure that his client invested in a product that was appropriate for her needs and consistent with her tolerance for risk; and
  • The respondent failed to take reasonable steps to ensure that the complainant understood the advice and was in a position to make an informed decision.

The latest determination is one of many property syndication complaints addressed to the FAIS Ombud. About 40 000 people originally invested R4.5bn in the various schemes promoted and marketed by Sharemax alone. The company collapsed in 2010 after the registrar of banks found that its funding model contravened the Bank Act.

The latest case where the Ombud ordered the adviser to repay the investor involved the following:

The complainant, a client of the respondent since July 2001, invested in two Sharemax property syndication schemes, Zambezi Ltd and Berg en Dal Ltd, following advice provided by the respondent. The investments were effected in July 2008 following assurances by the respondent that her investments would be safe.

After effecting the investments, the complainant received interest payments as agreed until August 2010 when the payments suddenly stopped. The complainant claimed that her efforts to resolve the matter with the respondent were in vain. She considered her capital lost and blamed the respondent for the loss.

About the investment:

The complainant originally contacted the respondent as she wanted to invest the money she had received as part of her divorce settlement. The aim of the investments, according to the complainant and also shared with the respondent, was to provide for her child’s education and grow the funds in order to utilise them as a deposit for immovable property.

Although the complainant was sceptical of the investment proposal she invested an amount of R255 000 in Sharemax Zambezi Ltd and a further R50 000 in Berg en Dal Ltd following advice received from the respondent and later confirmed by another party.

The complainant initially received her monthly interest until August 2010, when it suddenly stopped. She stated that she was unaware that Sharemax had been hit by financial problems and actually read a newspaper article that carried the story about Sharemax and its financial troubles. She claimed that the respondent had never mentioned to her that there were risks involved in her investments.

The respondent’s version:

According to the respondent he met with the client to discuss investment options. He stated that he explained the associated risks, the costs and the investment terms and further presented the complainant with the two prospectuses. He claimed that he also carried out an extensive due diligence study.

The original recommendation:

Based on all the evidence, the recommendation of the Ombud was in favour of the complainant as the risks in the investment were not disclosed by the adviser. He also committed a breach of contract in that he failed to provide suitable advice.

The respondent’s view:

The respondent did not accept the Ombud’s recommendation. However, instead of dealing with the actual dispute he raised unsubstantiated points of bias, lack of fair process and an infringement of constitutional rights via his attorney.

In his argument the respondent claimed that the complainant was a “highly intelligent graduate professional with a senior managerial employment position”. The Ombud however pointed out that “the fact that the complainant is a graduate professional does not make her proficient in the financial sector”.

The respondent further relied on the fact that the complainant received a prospectus, and signed documentation which confirms that the risks were explained to her. In the view of the Ombud, a signature by a client does not equate to an understanding of the risks in the investment.

The respondent’s attorney also quoted “expert” opinions and attempted to discredit the Ombud’s office’s analysis of the Sharemax model.

The findings:

The complainant repeatedly stated that she had reservations about the Sharemax investments and therefore it is unlikely that the complainant would have agreed to invest if the risks were disclosed to her. The respondent further tried to absolve himself from responsibility by claiming that the ultimate decision to invest was a result of the intervention of a third party.

The outcome of this and many other determinations are that financial advisers need to comply with the basic requirements for rendering financial advice as prescribed in the General Code of Conduct when rendering advice to a client.

Click on the links to download the initial
recommendation and the final determination

Source: Moonstone Compliance (Pty) Ltd
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