Secondary

Debarment Overturned

Debarment overturned by Board of Appeal

The Board was recently tasked with reviewing a decision by the Registrar to debar Ms LA Teixeira for 5 years and to withdraw the authorisation of her business.

The grounds for the Registrar’s decision were that:

  1. Ms Teixeira no longer met the character qualities of honesty and integrity contemplated in terms of section 8 of the Act; and
  2. Ms Teixeira failed to comply with paragraphs 2, 8 and 9 of the General Code issued under the Act.

The complaint was initially laid with the FAIS Ombud, but as it was time-barred, it was dismissed. The client then approached the FSB.

The essence of the complaint was that:

  • Teixeira had advised the client of a sugar deal as an investment opportunity;
  • that the client had withdrawn funds from his “Momentum” investment to invest in the sugar deal;
  • that the deal went sour and that he lost his investment; and
  • that she, as his financial adviser, had failed him as she “apparently” had not performed the necessary due diligence for the proposed sugar investment.

The information below is taken directly from the decision published by the Board of Appeal on 29 June 2016.

This led to a lengthy debate between the Registrar and Ms Teixeira based on the accusation that she had provided advice in connection with the sugar investment without having complied with the mentioned provisions of the Code.

When the Registrar realised that the sugar deal was not a “financial product” as defined in the Act and that the complaint was in that regard misconceived the Registrar shifted her focus to an email of 5 October 2010 which, according to the Registrar, amounted to “advice” to Mr Heckroodt to withdraw the sum of R525 000 from an existing financial product (i.e. the Momentum investment) in order to invest it in the sugar transaction.

It was all along not an issue that Ms Teixeira had not taken steps to determine the suitability of her “advice” (section 8 of the General Code) and obviously did not have any record of advice (section 9 of the General Code) for either the sugar transaction or the Momentum withdrawal. The issue then is whether she had given “advice” within the meaning of the Act in respect of the withdrawal of the Momentum investment.

It is not without significance that Heckroodt did not allege that she had given him advice in relation to the Momentum withdrawal, and that she insisted throughout that she had not. As said, the Registrar wishes to draw a contrary conclusion from the email of 5 October read against its background, namely, the preceding emails of 22 and 28 September.

The email of 22 September deals with the “investment opportunity” offered by the sugar transaction. It mentioned that it was a structured finance deal and it gave particulars of the amount required, the investment period, the rate of return, and ended with a statement that she thought that it would be a good (investment) opportunity. Nothing more was said.

The Registrar relied on the definition of the term “advice”, which, in terms of sec 1(1) means “subject to subsection (3) (a), any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients — (d) on the variation of any term or condition applying to a financial product, on the replacement of any such product, or on the termination of any purchase of or investment in any such product.” (Paras (a) to (c) do not arise on the facts of the case.)

Since it was apparent that the emails, singularly or jointly, did not contain any recommendation or proposal, the Registrar was driven to submit that Ms Teixeira had “guided” Heckroodt to terminate his Momentum investment.

This argument failed to have regard to the express qualification of the definition, namely that it is subject to the provisions of sec 1(3)(a), which provides (to the extent relevant) that “for the purposes of” the Act, “advice” does not include “factual advice” given merely in the form of “objective information” about a particular financial product; or an analysis or report on a financial product without any express or implied recommendation, guidance or proposal that any particular transaction in respect of the product is appropriate to the particular investment objectives, financial situation or particular needs of a client.

The effect of the two provisions read together is that “advice” falling under (3)(a) cannot amount to advice under the definition in ss (1). In other words, if factual advice given in the form of objective information about a particular financial product would guide a client to say purchase or terminate an investment, it is not “advice” as defined in ss (1).

Also, an analysis on a financial product “without any express or implied recommendation, guidance or proposal” that any particular transaction in respect of the product is appropriate to the particular investment objectives, financial situation or particular needs of a client is not covered. The email of 5 October described the facts concerning two financial products. It did not express any opinion or preference and it left it entirely to the client to make an election, if he so chose. In other words, the client was metaphorically at a fork in the road. Ms Teixeira describes the two routes in factual terms. She did not give any assistance as to the route that should be taken. She did not express any predilection but left it to the client to pick one of the roads. In other words, she gave no “guidance” — to “guide” means to show the way.

We accordingly find on the facts of the case that the emails read together did not amount to advice which required compliance with the Code. We therefore conclude that the Registrar had erred in finding that Ms Teixeira had given advice to Heckroodt in conflict with the provisions of the Code.

The Board’s decision also includes an enlightening discussion of the Registrar’s interpretation of “honesty and integrity”. This will be discussed in Thursday’s Moonstone Monitor.

Please click here to download the Board of Appeal decision.

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