Secondary

FAIS Ombud Determinations to get worse?

Blue The FSB telematics broadcast on 28 August 2013 was intended for independent financial advisors and covered a wide range of topics, including one simply titled: FAIS Ombud Determinations.

The introduction states that the Ombud made some far reaching judgements against FSPs. It notes that some of these judgements were not in line with the wording of the FAIS legislation. It goes on to say that this creates challenge for FSPs, and that determinations may get worse with the introduction of TCF, which is outcomes, and not rules based.

It then discusses three prominent cases where the Ombud criticised FSPs for not conducting due diligence by failing to implement certain provisions of the General Code of Conduct. The summary below comes directly from the presentation notes published on the FSB website. It contains various examples of such transgressions.

We provide room for feedback at the end of this article to allow readers to share their views. It is important that there is absolute clarity on the role of all the parties involved, not only that of the financial advisor.

Edwafin

The FSP involved argued that they conducted verification by meeting various Edwafin reps, visited its offices, attended the product launch and contacted other clients to find out if they had been paid the promised returns. However, Ombud described these as superficial enquiries that did not amount to a proper due diligence with an independent and objective assessment of the Edwafin product.

The Ombud said that “…attending product launches is not enough”. It found that the FSP failed to conduct a proper due diligence investigation into a financial product before recommending it. It also found that FSP failed to ensure that the product is appropriate for the clients’ level of knowledge of investments. The finding also mentioned that there is no evidence that the FSP sought to establish whether Edwafin issued financial statements or not. The FSP also failed to enquire how it was possible for the scheme to pay an extravagant return of 20% as well as the promised commission of 6% and other costs and fees.

The FSP submitted that it used a questionnaire to ascertain the client’s risk profile. However, the Ombud contends that many of these questionnaires do not necessarily produce an accurate assessment of the client’s risk tolerance. “A prudent and diligent FSP will not slavishly rely on the results of a questionnaire, but takes into account the client’s personal profile and circumstances”.

One of the questions read: “How familiar are you with the investment market?” to which client responded: ”Not very familiar”. The Ombud felt that “this was enough to alert the  FSP that the client had no knowledge of the product in question”.

The Ombud ruled that the FSP failed to assess clients’ investments needs and risk exposure properly and ruled that the FSP recommend products which were inconsistent with clients’ risk profile. She also ruled that the FSP contravened the FAIS Act by failing to conduct a proper needs analysis and risk profile and sold the client a product which he himself didn’t understand and which was not appropriate for client’s level of knowledge.

According to the Ombud, there was no contract between FSP and Edwabond. Therefore he sold the client an illegal product.

Blue Pointer

FAIS Ombud found that the FSP’s conduct violated the provisions of the FAIS Act, especially the duty to act with due skill, care and diligence and in the interests of clients and integrity of the financial services industry.

According to Ombud, FSP failed to:

  • Ascertain financial viability of the underlying investment before presenting it to client.
  • Obtain relevant documents that would shed some light on the liquidity and general financial standing of the companies
  • Conduct even the most basic investigation on the company and its products.
  • Conduct independent and objective assessment – amounts to gross dereliction of duties
  • ·

Zambezi and The Villa

The FSP argued that it was not aware of the solvency and legality of the business model of the syndication schemes. The Ombud indicated that it is time for the Courts to determine what lengths FSPs must go to, to satisfy the due diligence requirements outlined in the FAIS Act.

The Ombud said: “Even institutions with massive resources such as FSB take months to thoroughly investigate product suppliers”.

This last sentence contains the crux of the matter. Who is liable to take preventative action when irregular schemes come to light? After such investigations by the FSB, legal requirements add further delays before action can be taken.

We have seen, in more recent cases that promoters of imploded schemes are held equally liable by the Ombud. Is this enough? The Ombud can only rule on complaints from individuals, which means that many other affected parties, who are not aware of this remedy, remain victims.

Please share your thoughts below.

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