A recent decision of the High Court in Bloemfontein where an FSP was found to have been negligent in advising a client to invest in the Sharemax scheme, is a “must read” for all FSPs. Clear and explicit, the judgement sets out unequivocally just what the duties and responsibilities of a financial advisor comprise.
There is an interesting twist to the matter, too, but first, the background.
The Plaintiff, Mrs Oosthuizen was, at the time the advice was given, a widow with a two and a half year old boy. Her husband had passed away in tragic circumstances some four months earlier. She had no experience of financial products or the financial market. She had received the proceeds of an insurance policy and wanted to make a safe investment as the money was earmarked for her son’s upbringing. Mr Castro, the defendant, had been her deceased husband’s broker and she trusted him fully to advise her in respect of the investment of the sum of R2m.
Mr Castro suggested the Sharemax investment and said it was an investment “in property” and “property cannot disappear”. He made it clear that he did not even want to suggest any other investments as the proposed investment was “baie veilig”.
This assurance was given despite earlier articles to the contrary that had been written by several prominent writers on financial matters, including the award winning journalist, the late Mr Deon Basson, Mr Jacques Pauw and Ms Anna-Maria Lombard. A number of negative articles had also been published in Moneyweb, Noseweek and in Finweek.
Mr Castro referred Mrs Oosthuizen to a bad copy of a newspaper article containing negative comments about Sharemax investments, but informed her that she had nothing to be concerned of as “hulle is jaloers – they are jealous.”
Mrs Oosthuizen accepted Mr Castro’s assurance immediately without even reading the article.
After argument by Counsel, the judge, JP Daffue J, found that the FSP, Mr Castro, was negligent, and even dishonest, when he advised Mrs Oosthuizen, by placing no credence on the negative articles in the press and failing to objectively investigate the criticism. The defendant, said the judge, had failed to exercise the degree of skill, care and diligence which one is entitled to expect from a FSP.
There is an interesting twist to this matter.
Mr Castro had entered into a professional indemnity insurance contract with Centriq Insurance Company Ltd, one of the insured events being professional indemnity to the limit of liability of R2.5m per claim. The policy is known as the “Professional Indemnity Insurance for Members of the Financial Intermediaries Association”.
Mr Castro claimed indemnity from Centriq in terms of the contract.
Centriq was a party to the court proceedings and denied that it was liable to indemnify Mr Castro on the grounds that the claim fell within the parameters of an exclusion clause contained in the insurance contract.
The clause relied upon by Centriq excluded any claim arising from “any third party claim arising from or contributed to by depreciation (or failure to appreciate) in value of any investments…” Other more complex arguments were also made in vigorous support of Centiq’s denial of liability.
Mrs Oosthuizen’s counsel argued that her claim did not arise from any depreciation or a failure to appreciate in value of the Sharemax investment and that it would be to stretch the words “arising from or contributed to by depreciation” far beyond their intended meaning. Such an interpretation would rob the cover of all meaning. He emphasised that “plaintiff’s claim on the pleadings and in evidence is that defendant owed her proper advice, that what she required was a relatively safe and low-risk investment, and that the Sharemax investment was anything but that.”
After careful and very clear deliberation, the court held that the exclusion clause was to be interpreted restrictively so that it made business sense, i.e. in the eyes of both insurer and insured.
“It cannot be applicable where the insured advised a client to invest in a scheme that was a hopeless “investment” from the onset, contrary to legislation and probably a fraudulent and unlawful Ponzi scheme. . . The FSP must be entitled to indemnification, bearing in mind that the ultimate beneficiary is the client who got wrong advice . . . Defendant breached all principles upon which a skilled and honest FSP is supposed to conduct himself. It is not a case of depreciation of an investment as the “investment” was worthless from beginning to end.”
On the 18th September 2017, the court ordered Mr Castro to pay Mrs Oosthuizen the capital amount of R2 million plus interest in the amount of R718 600. The court also ordered Centriq to indemnify Mr Castro against his liability to Mrs Oosthuizen.
On the 10th October 2017, Centriq applied for leave to appeal the decision of the High Court. Several complex grounds have been submitted in support of the application.
This is a most important matter as it will have a very far-reaching impact on the extent of Professional Indemnity cover going forward.
Watch this space for developments.