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Jurisdiction of the FSB

Was it coincidence?

I was working on this article on Tuesday, and on Wednesday saw an article in Sake24 entitled: Finansiële waghond ‘aan die slaap’. According to this report, the members of parliament felt that there was a lack of oversight on the part of the FSB as far as pyramid and Ponzi schemes are concerned.

Very often, the hands of the Regulator are tied, because the products that cause the problem do not fall under its jurisdiction. The most notable recent example was the Herman Pretorius saga.

In a media release on 10 August, in response to other, similar allegations in the media, the FSB reacted as follows:

During May 2011 it was brought to the attention of the FSB that Pretorius was “selling shares in unlisted companies” and “promoting these ventures” by making representations to the community.

As the selling of unlisted shares may constitute a financial service as contemplated by the FAIS Act, the FSB followed up on the information which it subsequently received in order to establish whether or not Pretorius was acting in contravention of the FAIS Act, given also the fact that he was not licensed in terms of the FAIS Act.

The explanations provided to the FSB concerning the nature of the trusts as investment vehicles were such that it could not be established with certainty that their activities were subject to FSB regulation. Some of the ventures were designed for individuals who could properly be considered to be involved in a private domestic affair.

Following further complaints received by the FSB in May/June 2012 against Mr Pretorius, it was decided that a formal inspection should be conducted on the (sic) affairs of Pretorius and the various investment vehicles utilised in order to establish whether or not the activities of the investment vehicles were subject to FSB regulation. The inspection was underway at the time when Pretorius allegedly committed suicide.

The media statement also reads:

Certain investments may also not involve a “financial product” as contemplated by the Financial Advisory and Intermediary Services Act (FAIS Act).

One wonders, in hindsight, whether the following section, which appears in the definition of a financial product in the FAIS Act, could not be applied by the regulator in such scenarios?

(h) any other product similar in nature to any financial product referred to in paragraphs (a) to (g) inclusive, declared by the registrar, after consultation with the Advisory Committee, by notice in the Gazette, to be a financial product for the purposes of this Act.

In its media release, the FSB claims that the schemes offered by Pretorius were cleverly disguised to avoid its real nature.

The FSB is of the view that if there was any non-compliance by Pretorius, it was well-designed not to be subject to regulatory scrutiny. To the extent that investors were lured into any of his projects, such investors carried the risk and obligation to enquire into the merits before parting with their money, especially where above-average returns were being offered. The loss of so much money to so many investors is a sad state of affairs but one for which the regulator is not accountable.

Would advisors, who have to explain to the Ombud why they recommended this product, be able to use the above declaration by the regulator in their defence?

Similar questions can be asked about the ability of an advisor to detect flaws in products where the regulator was unable to.

While the Regulator may not be accountable, the fact remains that the first and foremost reason for its existence, is to protect the public.

With the proposed changes expected to be made in line with the “Safer Financial Sector” proposals, these schemes will hopefully come under closer scrutiny a lot earlier in future, but we are not sure when the changes will be implemented.

The wheels of justice do indeed grind slowly, but are we not living in a far more modern world than when that adage was first coined?

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