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The ABC of investment advice – There are no shortcuts to compliance

Although many might feel that the Sharemax debacle is old hat, and that FSPs could not have foreseen its implosion, it still serves the purpose of reminding us of the basics of compliance : A provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.

In a recent ruling, the FAIS Ombud ordered an adviser to repay an investor in Sharemax his total investment of R200 000.

Sharemax collapsed in 2010 after a Registrar of Banks investigation found that its funding model had contravened the Bank Act. Various reports over the years indicate that an estimated 40,000 people, mostly retirees, had invested in the property syndication company.

The Everhardus complaint

The complainant, an 87-year-old farmer, stated that, although he was not looking for investment opportunities, the respondent, an authorised FSP, nevertheless introduced him to Sharemax investments. The FSP’s license only authorised him to sell category 1 financial products, which means that he was not licensed to sell the Sharemax product.

In the Ombud’s notes the complainant’s own words are quoted to highlight their interaction: “Venter told me about Sharemax and although I was skeptical (sic) Venter assured me that Sharemax was a sound investment. He also advised that he is very confident in investing in Sharemax. He told me that Sharemax purchased properties, renovated it and ultimately rent it out. He advised me that if you invest in these properties the monthly interest will be paid to you.”

As a result, the complainant invested R100 000 in Sharemax, Zambezi Retail Park Holdings Ltd (Zambezi) on 27 November 2008 and a further R100 000 on 12 December 2009, in Sharemax, The Villa Retail Park Holdings Ltd (the Villa).

The complainant’s claim

The respondent never made full and frank disclosures about the Sharemax investments, depriving him of the opportunity to make an informed decision.
The respondent only presented Sharemax investments and no other suitable alternatives.
The respondent overemphasized the benefits of the investment and did not alert him about the risks in investing in property syndications.
The complainant claims that he was never given a prospectus regarding the two projects, and he doubts if the respondent carried out any independent verification into the projects.
The respondent had never informed him what commission he received from Sharemax.
After payments ended, the respondent created an illusion that “everything was fine”, and the complainant believes that the respondent failed to give him accurate feedback and failed to act in his best interests.

The respondent’s defence

The respondent disputed the complainant’s version regarding the circumstances around the investment. According to him the complainant made an informed decision. The respondent therefore believed that he had acted in the best interests of his client and that he carried out his work “absolutely correctly”. He states that no one could predict that Sharemax would implode.

The Ombud’s consideration

Did the respondent, in advising his client, act honestly, fairly with due skill, care and diligence and in the interests of the client and the integrity of the financial services industry;
Did the respondent actually comply with the provisions talking to the quality of the information and representations made to the client; the making of full and frank disclosure about the investment; the consideration of the client’s risk profile and financial needs and enabling the client to make an informed decision;
Did the respondent act in breach of his contract with the complainant; and
Did the complainant suffer loss and if so, what was the cause of the loss and the quantum thereof?

The findings

Some of the undisputed facts include:

The respondent was not licensed to sell the Sharemax product, nor is there any evidence on record that he acted as a representative in terms of section 13 of the Act.
The complainant trusted the respondent’s advice as he has advised him on previous investments.
The respondent did not provide the complainant with a prospectus in respect of both investments.
The respondent did not provide complainant with full information in plain language regarding the nature of the investments.
The respondent did not explain the risks in the investment to the complainant.
The respondent did not carry out a risk analysis nor did he carry out a needs analysis.
The respondent did not, on both occasions, offer complainant any other or alternative financial products.

The Ombud went into detail as to whether a reasonably competent FSP would have advised the complainant differently. The Ombud concluded that a reasonably competent FSP would have read and understood the prospectus and would not have advised a 79-year-old man to invest in a manifestly high-risk investment where there was a prospect of losing all his capital.

It will be interesting to note whether this finding will be taken on review to the Financial Sector Tribunal. The latter has recently ruled, in a number of instances, that the collapse of Sharemax could not reasonably have been foreseen by advisers. A second point worth noting is that, despite its mandate of addressing complaints in an expeditious manner, this case has taken 10 years to resolve, and there are plenty more, from what we heard before the sudden drought of publications of cases after the previous Ombud left, quite abruptly.

Click here to download the detailed Determination.

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