A number of advisers have expressed concern that they may be held liable for unsatisfactory investment returns.
This is understandable, given the wide interpretation that can be attached to the “due care and diligence” sabre which is so often applied in slashing fashion in findings against them.
The recently published Lombard case provides some guidance in this regard.
The complainant agreed to have investments with Sanlam, MCubed and Investec transferred to a 5-year endowment policy with insurers African Harvest/Scottish Life in the amount of €132 545. The underlying investment consisted of two “Unregulated Collective Investment Schemes” (UCIS) in the UK, Brandeaux and Glanmore. This amount consisted of complainant’s entire life savings. The Respondent is alleged to have assured complainant that investing in property in the United Kingdom is tantamount to “having cash in the bank”.
This was done, despite the fact that the risk analysis clearly indicated that the client was risk averse.
Brandeaux operated as a dual asset fund which was domiciled offshore and structured as an UCIS, with its assets allocated between student accommodation and ground rent properties. Brandeaux’s objectives, as noted in its fact sheet, were to provide long term positive returns and capital appreciation.
The Glanmore Property Fund, (Glanmore), also a UCIS, invested in commercial property. Glanmore had a significant level of borrowing with a view to enhance investors’ returns. The truth, which is always down-played about gearing, is that it tends to magnify investors’ losses, in the event asset values decline and continue to do so for an extended period.
Now why does that sound familiar?
The investment commenced on 16 July 2007. The complainant regularly received detailed statements which unfortunately showed that the investment value depreciated substantially over time. At the time of lodging the complaint in July 2013, the value was less than 50% of the initial investment. By 27 February 2015, the value of the investment had diminished by 84.2% of the initial capital.
Charges, which the complainant stated were not disclosed, included a portfolio administration fee, initial service fee, annual management fee and an annual advice fee.
The Complainant’s case against respondent is that the latter gave him advice that was inappropriate, given respondent’s knowledge of his personal circumstances. His mandate to respondent was to minimize risk whilst striving for capital growth and a high after tax return.
Of particular interest for purposes of this article is the Respondent’s view that a FSP is not responsible for investment performance, which, in his view, is the basis of the complaint. He blamed the economic downturn and lower property valuations in the UK as the reason for the failure of the client’s investment.
Record of advice and risk profile assessment
According to the Ombud, these two documents are central to this inquiry.
The record of advice is a four paged document. Upon perusal, it immediately becomes clear that the document lacked vital information such as, complainant’s assets and liabilities, income and expenditure and other relevant personal information that would have enabled respondent to better appreciate complainant’s capacity and tolerance for risk.
Notwithstanding the information gathered by means of this risk profiling assessment, respondent still went and invested complainant’s retirement savings in an investment he knew nothing about, while persuading complainant that the investments were in fact low risk.
Concerning the demise of the two funds, the Ombud states:
I accept that respondent could not have foreseen that the funds were going to fail or be closed down by the UK FCA. However, it was sufficient that respondent had not perused even publicly available information regarding the unregulated nature of the funds, the levels of gearing, and the implications for complainant. On the question of lack of regulatory oversight, respondent up to this point has still not provided a single piece of information that shows he satisfied himself on any other governance arrangements that he took into account, which were aimed at protecting investors against director misconduct, blatant violations of the law and possibly, fraud. He further does not provide any evidence that he advised complainant about the implications of lack of regulatory oversight.
The Ombud then points to the matter of ACS Financial Management CC and another v PS Coetzee in which the Appeal Board pointed out the following:
“The question is whether the advice was bad and negligently given, and whether the collapse of the scheme and any concomitant financial loss were causatively connected to that negligence……..An issue of material importance is whether Bluezone’s collapse was caused by supervening fraud after the respondent invested, as alleged by the appellant’s attorney, or whether the collapse was due to a reasonably foreseeable weakness in the scheme which should have dissuaded Ms Snyman from recommending the investment.”
Not surprisingly, the Ombud found that “…the respondent failed to render financial service honestly, fairly with due skill, care and diligence and in the interest of client and integrity of the financial services industry, thereby contravening Section 2 of Part II of the General Code of Conduct.”