In the space of the last eight weeks we saw seven determinations against one FSP, and it is likely that there is more to come.
The total in fines meted out by the FAIS Ombud comes to just over R3.5 million. An article in Die Burger quotes a figure of roughly R86 million placed by this FSP in the imploded Relative Value Arbitrage Fund (RVAF).
It is unlikely that all investors who worked through this advisor will lay charges, and it is also possible that some withdrew their investments before the collapse, but the potential for “claims” in this regard remains enormous.
Will investors get relief?
The intervention by the Ombud is aimed at restitution of the losses suffered by clients as a result of an advisor transgressing the FAIS regulations. We pointed out recently that the liquidators of the RVAF requested the advisor to pay back the commission he received. The amounts quoted in this respect varies between R6 million and R15 million.
It is unlikely that all of these demands can be met by the advisor, which means that the clients may receive justice, but very little, if any, compensation.
What about other imploded investments?
Investments placed via advisors in property syndications are the obvious ones which spring to mind.
Many of these are still unresolved as a result of tangible assets in the form of existing properties, for instance. Where the so-called underlying assets were non-existent, the advisors were obliged to refund the losses incurred by the investors.
Where determinations were made, the Ombud indicated that the reason for finding against the advisor was that he “…failed in his duty to disclose the material aspect of risk inherent…” in the recommended product. This is also the basis for the RVAF findings.
It also appears that some investors were cautioned against laying complaints with the Ombud, as this could mean that they would risk losing more, or all of their money.
In the meantime, the costs incurred by liquidators are eating into the available funds. Figures published recently make for horrifying reading. Moneyweb reported on one such case and quoted the following figures:
Krion’s liquidators were able to recover R99.5m. But the costs of recovery amounted to more than 80%. These costs took the form of legal and collection costs of R74m and liquidators’ fees of R10m.
This happened over the space of 11 years.
We boast of having the best constitution in the world, which caters for the rights of all citizens. This is something to be proud of, and should be cherished, nurtured and protected at all costs.
An unfortunate spin-off is that, very often, the rights afforded to alleged transgressors means that those who were disadvantaged become the victims, and this they remain because restitution is not forthcoming.
While the authorities are contemplating the fair treatment of clients, they ought to include this in their planning.
It is likely that the scale of losses incurred in the examples mentioned above was not foreseen at the time the FAIS Act was drawn up.
One practical solution may be the establishment of a fund to cater for such eventualities. The legal and building professions have established pools to cater for losses by clients as a result of transgressions by its members.
This need not be a further financial drain on the industry. To the best of my knowledge, any excesses on levies currently payable by registered entities are refundable. Merely transferring this to a restitution fund may be a good start.
The fact that so many of the victims are often left destitute adds a moral compulsion to this argument.