The FSB’s Appeal Board came to an interesting decision in the last case published in 2016.
This was an appeal against two previous decisions against a FSP by the FAIS Ombud in a case involving an investment in the ill-fated Edwafin Bond Debentures scheme.
It is important to note that the Appeal Board is obliged to make a decision on the written evidence, the factual information and documentation which was submitted to the Ombud in connection with this matter at the time when she had made her determination.
The Ombud’s finding was essentially based on the fact that the Appellant did not comply with the Code of Conduct in that he failed to act honestly, fairly and with due skill, care and diligence in the interest of his clients and the integrity of the Financial Services Industry.
“In her second determination the Ombud persisted with her finding that there was no proper due diligence done on the part of the Appellants when advising the client in respect of the product. The Appellants were aware that the product was high risk. Edwafin (the investment) was in financial trouble already and was defaulting on payments to investors at the time when the investment was recommended to the complainant. The Appellants could reasonably foresee that there was a real prospect that the investment proposed will fail.”
In this latter regard the Board notes:
“The Ombud’s finding that the investments had already been in danger and on its way downhill at the time of the recommendation and the investment was made is not supported by evidence. The only evidence before us are some newspaper clippings in 2010 which made reference to the demise of the entity.”
This fact played a major role in the final outcome of the case.
In the second determination, the Ombud raises nine points to substantiate her view on the failure to conduct a proper due diligence, including the following:
Moreover the “client advice record” was completed by the broker and not by the complainant and he merely signed the document.
The Board is very clear in its view that the appellants failed in their primary duty:
“In our view, we find that the Appellants had not acted reasonable as what would have been expected from a reasonable member in their specific profession. In the circumstances of this matter, they fell short of what a reasonable, prudent broker would have done. They were aware that the investment did not guarantee them their capital in the event of negative circumstances prevailing.”
“It is obvious that the complainant had no intention of losing his investment in total, and this was an inherent characteristic of the product in question. This factor should have been considered even if it was a single need investment.”
“However, there must further be a causal link recognised by law. This enquiry entails whether it was reasonably foreseeable that the Edwafin product was a fraudulent scam and that the entity was to be liquidated.”
“The Appellant’s version in this regard has credence. It is accepted that the Appellant had no knowledge of the fraudulent directors of the entity and was not aware that it was placed in liquidation. Cognisance is taken of the Appellant’s knowledge in respect of the research his interaction with Edwafin, as well as the types of products they were marketing. The panel further notes that the Appellants were also taken by surprise when they discovered that the investment failed to pay its investors and reported them to the SAPS.”
The Board then comments on the lack of evidence which the Ombud relied on to come to her decision, and refers to the 2010 newspaper clippings mentioned above.
It also states:
“The Appellants furnished evidence indicating that the complainant was au fait with the product and much was made of the fact that the Ombud based her findings on the probabilities and not evidence.”
“Cognisance is taken of the satisfaction of other investors, the payment of high returns to these happy investors. It is accepted that at some stage this was a high paying lucrative investment. Surely the failure of such an investment could not have been reasonably foreseeable, more so that it was operating fraudulently and was subjected to liquidation.”
The fact that the Board upheld the appeal, and the grounds on which it did, could have interesting implications for future Ombud determinations.
Click here to download the full decision.