Secondary

Let the Master Beware

Is a bank liable when an employee gives misleading investment advice? A recent finding by the FSB’s Appeal Board indicates that this could in fact be the case.

Space does not allow us to provide extensive coverage of all the relevant facts, but we do urge readers to study the full document (click on link above) as the findings could have a very wide impact on the industry. It also covers a lot of other issues which financial intermediaries, and product providers, need to take cognisance of.

First National Bank (FNB), a division of Firstrand Bank Limited, appealed against a finding by the FAIS Ombud which held the bank vicariously liable for the loss suffered by a client as a result of advice received from a FNB representative.

The FNB representative, Naaym Mooi, handled a number of investments for the client, Fiona Newlove, over a period of three years:

15/06/2007 – RMB Investment of R300,000.00;
21/09/2007 – Delwray Investment of R50,000.00;
22/02/2008 – Retirement Annuity with Momentum;
04/06/2008 – Delwray Investment of R50,000.00;
31/08/2008 – Delwray Investment of R200,000.00;
15/06/2009 – Delwray Investment of R40,000.00.

The complaint to the Ombud concerned the Delwray investments, where the Ombud found for the complainant, and held FNB vicariously liable for the loss. In closing, the Ombud said:

“…on a preponderance of probabilities, complainant would not have invested if Mooi had told her that he was acting independently in selling a product that was not supported by FNB. Also FNB’s conduct in employing Mooi and providing him with the infrastructure to carry out his duties created the reasonable inference in the minds of the public that Mooi represented FNB and that the products he sold were authorised by FNB. Accordingly, FNB is liable for the conduct of Mooi.”

This was challenged by FNB on a number of legal grounds. I found the following ones, which concerns the role of the client in this matter, of particular interest:

6. The facts and circumstances essentially indicate that Newlove was aware of Mooi’s absence of authority, as it had specifically been brought to her attention.

7. The nature of the documents presented to her previously, namely the “Statutory Disclosure Notice” specified the products which FNB authorised.

8. Mooi had already dealt with her on the previous occasions with legitimate products, which were authorised by FNB in accordance with the “Statutory Disclosure Notices”.

9. Therefore when Mooi advised Newlove on the Delwray product, it should have raised some awareness. At that time, she should have enquired whether the Delwray product was an FNB authorised product.

10. Having regard to the previous occasion where she was made aware of the limitations as per the “Statutory Disclosure Notice”, she was made aware that Mooi’s mandate was limited to authorised financial products. Newlove had read the aforesaid notices and was aware of their contents.

11. An additional factor causing suspicion was the fact that the Delwray product had not endorsed FNB’s name on any of the documents she signed.

12. Newlove had through her previous dealings become aware of the extensive procedure and checks in place when investing in financial products with FNB.

13. Therefore the appellant by virtue of these procedures and checks had undertaken to inform investors and/or clients at all times of the nature of the financial products authorised. The appellant could do no more than it has done in making her aware of the limitations of the authority of Mr Mooi;

14. Thus when it came to FNB’s attention that Mooi was marketing a fraudulent product, they debarred Mooi and reported this matter to the Financial Services Board.

15. Since the Delwray product was not an authorised FNB product and was certainly not dealt with in accordance with the Financial Advisory and Intermediary Act, 37 of 2002 (FAIS Act), FNB was unable to find any records regarding the transaction with Newlove apart from debit and credit transactions appearing on her respective bank accounts.

Then follows a lengthy, but very interesting discussion of legal precedents which the Appeal Board consulted before coming to its eventual conclusion:

In our view, FNB created the “aura of authority” with which it enveloped Mooi as its financial planner. When having regard to the extensive authorities cited above and the “aura” of appearance created by FNB, ostensible authority has been established. The representations inter alia were:
75.1. When Mooi approached Newlove, he did so as a financial planner of FNB;
75.2. That Mooi was appointed as FNB’s financial advisor;
75.3. Mooi advised the respondent on three (3) separate investments, two (2) of which were authorised products of FNB;
75.4. The financial advice was provided by Mooi on FNB’s premises;
75.5. At no stage had Mooi informed Newlove that he dealt with the “Delwray product” in his personal capacity. Neither was any evidence forthcoming that the complainant was aware that “Delwray product” was not an FNB authorised product;
75.6. Mooi advised Newlove that the “Delwray product” records are with FNB.
76. In the same light, it is crucial for purposes of the enquiry whether FNB should reasonably have foreseen that outsiders might be misled. In our finding the following representations were made that we would have expected Newlove and the public to act upon the representation:
76.1. FNB certainly presented Mooi as their financial advisor to Newlove and to the public at large;
76.2. FNB was aware that members of the public were not aware of their internal rules and procedures and would thus not be protected by them should they be presented by a dishonest advisor.
77. Hence, on all the evidence before us, the preponderance of probabilities justifies the conclusion that throughout their negotiations, Mooi had been shown to have been an employee of FNB and in his course and scope of employment was “authorised” to deal with the “Delwray product”.

The issue of responsibility for the actions of representatives goes back a long way. I can remember when Masterbond collapsed, and many representatives of leading life offices were caught with their hands in the till. Somehow, big producers got away with it, while smaller representatives were fired as scapegoats.

I am of the opinion that this determination will have huge ramifications in the industry. We often see and hear of instances where the smaller broker appears to be a soft target. Could this decision by the appeal board be the end of this?

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