One would hope that, being in the industry, that we all have PI cover and that we know exactly what we are covered for.
(In case you do not have PI cover, you are in breach of an obligation which you were supposed to comply with since 21 September 2010, or six weeks after approval of a new licence.)
The recent High Court case, where a broker appealed against rulings by the Ombud, brought the conditions of PI cover, and, more specifically, exclusions under such policies, to the fore.
In an article on the subject, FANews published exclusions applicable to Santam’s PI cover. One that caught my eye reads as follows:
Any third party claim arising directly or indirectly out of failure by the insured to meet the requirements, conditions, obligations and restrictions imposed upon the insured in terms of the insured’s FAIS license.
In her latest ruling in the Deeb Risk saga, the Ombud found, amongst others, that:
…respondent failed in his duty to disclose the material aspect of risk…
..no evidence that the complainants were informed of the exact nature of the investment.
Respondent failed to recommend a product commensurate with Complainants risk tolerance to address their needs
Respondent failed to act with due skill, care and diligence in the interest of his client and the integrity of the financial services industry as demanded by the Code.
If I understand the exclusion relating to contraventions of the FAIS Act correctly, then it is unlikely that the underwriter will be liable for the losses sustained by the insured as a result of the findings by the Ombud.
Which begs the question: Why would the Santam affiliate, Stalker, Hutchison, Admiral go to the lengths of of a High Court application if they are unlikely to suffer loss?
The answer probably lies in a condition in the policy which obligates the underwriter in terms of legal cost to:
… pay any expenses incurred by the Insured … in order to assist with the investigation defence or settlement of any claim made against the Insured and the costs of representation at any inquest, inquiry or other proceedings in respect of matters which have a direct relevance to any Claim made or which might be made against the Insured
Another interesting development that may arise from this case is the ruling by the Ombud on the loss suffered by the client. She determined as follows:
Complainants invested R300 000 in the Sharemax The Villa. Respondent contends that the claim is premature; yet it is now two years since the Respondent made this assertion and no money has been recovered and no building activity has taken place on any of the sites. Complainants have not received any income since August 2010. For all the reasons already elucidated I am compelled to accept complainants’ claim. An order therefore is to be made in the amount of R300 000.
This appears a little harsh, and could be grounds for appeal. It was indicated during the trial that Risk did not exhaust all the options available under the FAIS Act. He could have gone to the FSB’s Appeal Board before taking the case to the High Court.
The outcome of this case could have interesting consequences. While this centres around Sharemax investments, there are other schemes on which it could have a bearing as well.
The RVAF scheme of Herman Pretorius, for one, will prove interesting. As yet, there is only speculation about losses. The FSB indicated in their media release last week that “… it could not be established with certainty that their activities were subject to FSB regulation.”
An article in Moneyweb advises investors to approach the Ombud for assistance and states further: “Financial advisers who recommended Pretorius’s Relative Value Arbitrage Fund to investors will find it hard to justify their advice to the Fais Ombud. Pretorius was not FSB-licensed. His “fund” had no third-party verification of returns. It did not prepare financial statements and was not audited.”
As yet, the actual quantum of the loss is still to be determined. This, in itself, is quite a complicated issue, and only time will tell what will happen to investors and advisors, alike.
In the mean time, you would be well advised to read the fine print in your PI contract to make sure you know what you are covered for, and what not.