The old saying that the wheels of justice grind slowly is certainly true when it comes to property syndication complaints addressed to the FAIS Ombud. With the demise of Sharemax in 2010, disgruntled investors who believed that their advisers were wrong had three years to lay a complaint from the day they became aware or ought reasonably to have become aware of such problems.
The FAIS Ombud is slowly but surely working through a backlog of property syndication complaints following two appeals which halted proceedings.
In November 2017, Business Day reported that there was still a backlog of about 1400 property syndication complaints at the office of the Ombud after 2000 complaints had to be shelved in 2015 pending a FSB Appeal Board decision.
The appeal that caused the major backlog related to a determination by the FAIS Ombud against Sharemax Investments and four of its former directors. In 2015 they successfully appealed against two determinations by the FAIS Ombud that held them jointly liable to repay two investors who had invested in a scheme promoted and marketed by Sharemax. Based on the appeal, a decision was taken by the Ombud to stop processing property syndication related complaints as it meant that the FAIS Ombud could only issue determinations against a broker or financial adviser and could not place liability at the door of the directors of the property syndication schemes.
About 40 000 people invested R4.5bn in the various schemes promoted and marketed by Sharemax alone. The company collapsed in 2010 after the registrar of banks found that its funding model contravened the Bank Act. One of the more recent cases where the Ombud ordered the adviser to repay the investor involved the following:
A complaint arose from a failed investment by a 74 year old retiree in 2009 when he sought advice from an advisor in respect of investing R500 000. The complainant, on the respondent’s advice, invested in Sharemax The Villa Retail Park Holdings Limited (The Villa Ltd).
The Ombud determined that the risks in the investment were not disclosed, in violation of Section 7 (1) of the General Code of Conduct which calls upon providers other than direct marketers to provide “a reasonable and appropriate general explanation of the nature and material terms of the relevant contract or transaction to a client, and generally make full and frank disclosure of any information that would reasonably be expected to enable the client to make an informed decision”.
The advisor further violated the Code in terms of section 8 (1) (a) to (c) and section 2 which relates inter alia to establishing the client’s needs.
The investment represented a significant portion of the complainant’s accumulated savings. Furthermore, the complainant was a 74 year old pensioner who had sustained substantial losses, and could ill afford any further loss of capital. Whilst the complainant may have required a higher income and appreciated that he may have to accept a little more risk than his conservative risk profile suggested, the recommendation to place the complainant in an investment as risky as that of Sharemax was blatantly inappropriate, according to the Ombud.
The advisor further failed to provide the complainant with a recommendation that was appropriate to his needs and circumstances and, despite the fact that complainant had sought a higher income, there is no indication that respondent had adhered to the provisions of section 8 (4) of the Code.
The representations made to complainant were incorrect and in violation of section 3 (1) (a) (vii) of the Code. In the view of the Ombud, there is no doubt that had the complainant been made aware of the risks involved in these investments, he would not have invested in the scheme.
The scary aspect of this determination is that the FSP stopped acting as a FSP in 2011 – 7 years ago. It is highly unlikely that he would have maintained his PI cover, which means he is on his own in this matter.
With a further 1 400 complaints still to be determined, there must a number of concerned advisers out there, including those who may have left the industry.
You may also want to read an article in Personal Finance on 6 March titled “Ombud orders advisers to pay back the money” and the Business Day article “Massive backlog of property syndication complaints”.