Representatives also at Risk

In a recent Ombud Determination (JJ & GH Carstens and Paarl Financial Advisors CC & JA Bartman) dated 12th October 2016, the Ombud made reference to the Appeal Board determination in the first (2013) appeal in the matter between JA Moore and GE Black.

In that matter, the Appeal Board held that “The fact that the representative ‘acts on behalf of’ the provider also means that in law, the provider may be held accountable for the acts and omissions of his representative and thus should be regarded as a co-respondent in the event of negligence on the part of the representative.”

A close reading of Ombud decisions and subsequent Appeal Board determinations reveals that, in most instances, both the financial services provider and the representative, responsible for the complaint, are held jointly and severally liable to compensate the complainant.

That’s all very well if the FSP is still active and properly licensed. Board Notice 123 of 2009 makes it imperative for every FSP to hold Professional Indemnity insurance cover of at least R1 million – and claims of this nature are usually met by the insurer. It must be borne in mind then that the FSP is providing the compensation – not the representative. And that lets the representative off the hook.

But the bigger picture reveals a more hostile scenario.

In the Moore matter, Mr JA Moore was a representative under supervision of Blue Zone in January 2009 when the transaction that formed the basis of the complaint occurred. The complainant invested R100 000 in the Blue Zone scheme and, like all other investors, lost his investment.

Before all the proceedings began, the Registrar had, on the 17th September 2009, withdrawn the licence of Blue Zone.

A complaint was lodged with the Ombud who ruled in favour of the complainant on 7 March 2011. An appeal was filed, resulting in the matter being referred back to the Ombud for further investigation. This resulted in a second determination in favour of the complainant and a resulting second appeal.

The second and final appeal was concluded on the 12th November 2014. The appeal failed and Mr Moore was ordered to pay the complainant. (In fact, he was held jointly liable with a certain van Zyl, the original Key Individual of Blue Zone and Mr Moore’s “supervisor”).

It must be borne in mind that, in terms of S 28(5) of the FAIS Act, a determination by the Ombud or a final decision of the board of appeal, as the case may be, is regarded as a civil judgment of a Court.

The implications are that Mr Moore is personally liable to compensate the complainant as the FSP, Blue Zone, no longer exists – it had ceased to exist some five years previously.

This situation is not as rare as would be expected.

A brief reading of the list of Ombud decisions reveals, for example, that an FSP that operated under the name Huis Van Oranje Finansiële Dienste Bpk, has at least 8 determinations against it and one or more of its representatives. These decisions were all made by the Ombud between May and September 2016. The problem is that the licence of this FSP was withdrawn in August 2012. The total claims that must be paid exceed R2.8 million. The representatives of the former FSP have been held jointly and severally liable for these claims. It is doubtful that they, in their individual capacities have any form of Professional Indemnity cover and, in all likelihood, will be required to pay this from own assets.

A similar situation appears from the three recent (2016) Ombud determinations which found that a FSP that operated under the name Deo Volente Empowerment and Training CC together with certain of its representatives was liable to compensate former clients to the tune of R1.2 million plus interest on these amounts at 10.25% from April 2011. Interest alone amounts to approximately R619 000 (not compounded annually).

The problem is that the FSP had its license withdrawn by the Registrar in August 2012. That means the representatives alone are probably now liable for payment of the awards.

The message is clear – representatives must be cautious when rendering financial services, not only in respect of the various specific requirements of the General Code of Conduct but also in assessing and understanding the true worth and nature of products they are promoting and the professionalism of the FSP on whose behalf financial services are rendered. Their own assets and estates are at risk if they don’t.

“Those who do not learn history are doomed to repeat it.” George Santayana.

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