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Tribunal advises FAIS Ombud on how to reconsider Sharemax determination

The Financial Services Tribunal (FST) has sent yet another determination related to an investment in Sharemax back to the FAIS Ombud for reconsideration, with the tribunal saying the ombud needed to apply the legal tests for negligence and causation to the matter.

Read: FAIS Ombud did not act impartially in Sharemax matter, says tribunal

Read: NPA’s decision to drop Sharemax prosecution will impact investors and advisers

The FST said the ombud should consult a decision the tribunal made last year concerning another Sharemax determination for guidance when considering this and “similar matters”. In Frederik Hendrik Kotze v Abraham Henry Rothbart and Another, the tribunal held that the ombud “conflated negligence and causation and was consequently wrong in principle”.

The latest Sharemax case to come before the tribunal stemmed from the FAIS Ombud ordering Charles Botes, trading as Hamilton Solutions Kempton Park, to pay R800 000 (plus 7% interest from the date of the order) to the deceased estate of “CE”, who died in January 2012.

The ombud issued her determination in May 2021. The complaint was lodged with her office in November 2010.

According to the ombud’s determination, Botes did not comply with the General Code of Conduct and was negligent when he advised CE (who was 65 at the time) to invest 80% of his retirement savings in The Villa, a Sharemax property syndication scheme, in October 2009.

Botes told the ombud that although CE had a moderate risk profile, his client was prepared to take on more risk in order to earn a high monthly income.

The ombud concluded that Botes failed to explain the risks of the investment to CE, which would have enabled him to make an informed decision. She held that if Botes had disclosed risks set out in the scheme’s prospectus, the client would not have invested in The Villa.

Grounds for reconsideration

In his grounds for reconsideration, Botes submitted to the FST that he did not contravene section 2 of the General Code of Conduct, which requires that the FSP must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interest of clients.

He told the FST that at the time he advised CE he could not have foreseen that the South African Reserve Bank (SARB) would place Sharemax under statutory management in September 2010.

A further ground for reconsideration was that the ombud erred by not giving due regard to the submissions he made in respect of paragraph 8(4)(a) of the Code of Conduct.

In his response to the ombud, Botes said CE refused to provide him with the information required in terms of paragraph 8(1)(a) of the code. This precluded him from providing the analysis and identification of products referred to in paragraphs (b) and (c). As a result, he acted in accordance with paragraph 8(4)(a), which caters for instances where clients do not want to provide an FSP with the relevant information.

On Botes’s version, it was clear to the client that there might be limitations on the appropriateness of the advice, and he had to consider on his own whether the advice was appropriate.

The respondents in the reconsideration matter were CE’s daughter, who is the executor of his estate, and the FAIS Ombud.

Lack of expert evidence

The tribunal said although Botes raised several grounds for reconsideration, the facts of the matter turned on the requirements of negligence and causation.

In the case of Atwealth (Pty) Ltd and Others v Kernick and Others, the Supreme Court of Appeal held that the true criterion for determining negligence is whether, in the particular circumstances, the conduct complained of falls short of the standard of the reasonable person.

In deciding what is reasonable, the court, like the FST, will have regard to the general level of skill and diligence possessed and exercised at the time by the practitioner.

The failure to produce any expert evidence concerning what advice would reasonably have been given in 2009 concerning the Sharemax investment “makes it not possible” to find in favour of the client.

The SARB’s intervention

On the aspect of causation, the tribunal – as it has done many times with Sharemax determinations – referred to the High Court’s finding in Symons NO & Another v Rob Roy Investments CC t/a Assetsure.

In Symons, the High Court held:

  • The loss suffered by the clients did not seem to be linked sufficiently closely or directly to any failure by the FSP to explain the risks of the Sharemax investments. The risks had nothing to do with the intervention by the SARB, which the clients did not contend should have been foreseen by the FSP.
  • Even if the FSP failed in his duty to understand the scheme better and to explain the potential risks to the clients, any such breach was not causally connected to their loss.

The FST said the ombud should consider the aspect of causation and thereafter apply the facts of this case.

It said the record reflected that Botes maintained that when he rendered the limited advice to CE in October 2009, he could not have foreseen that the Reserve Bank would place The Villa under statutory management.

New evidence

In addition to remitting the determination to the ombud, the FST granted Botes’s application for the admission of new evidence that he submitted was critical to his case.

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5 Responses to Tribunal advises FAIS Ombud on how to reconsider Sharemax determination

  1. IR Tinsley 28 July 2022 at 1:39 pm #

    Why did the Reserve Bank “intervene” ?

    Was the level of fee paid upon the Investment commensurate with that which perhaps would have been paid upon other “more conservative” investments ?

    As a general golden rule the higher the “potential” return the greater the level of risk. Was this covered in the record of advice and was the Client accepting of this with 80% of his Investment ?

    • Mark Bechard 28 July 2022 at 1:47 pm #

      In short, the SARB intervened because it regarded Sharemax’s funding model as the unlawful taking of deposits from the public. It directed Sharemax to change its funding model. Sharemax was not able to do so and, as a result, it was unable to raise further money and the scheme collapsed.
      The commission on the Sharemax investment was 6%.
      The FSP’s submission to the ombud was that the client was aware that Sharemax was high risk but wanted the higher income.

  2. Ed 29 July 2022 at 7:45 am #

    Plagiarized story Mark.

    • Mark Bechard 29 July 2022 at 8:44 am #

      Please provide the story that was “plagiarized”.

  3. George 29 July 2022 at 11:33 am #

    The fact that it was 6% commission is not out of line because if one take in account the commission on other investments and take the upfront and trailer fees etc it will accumulate and it can be more than the 6% over time. On Sharemax it was 6% once Off.

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