The Financial Sector Tribunal has given the FAIS Ombud a dressing down for failing to apply her mind to an application by an FSP and its representative to have a complaint brought against them to be heard by a court.
The appeal, and the original determination that led to it, are the latest episodes in what seems to be the never-ending fall-out from the collapse of Sharemax’s The Villa property syndication scheme.
The complainant, on the representative’s advice, invested R500 000 in The Villa in March 2009. He received a monthly income from April 2009 to August 2010, and then the income stopped.
He complained to the FAIS Ombud in February 2011.
The adviser responded to the ombud in April 2011 (first response) and submitted a supplementary response in October 2016 in answer to a notice from the ombud’s office.
In a determination in August last year, the ombud ordered the FSP and the representative to repay the capital invested, plus interest. The ombud found that the representative’s conduct constituted a breach of contract.
But in its judgment handed down at the end of last month, the tribunal set aside the determination and ordered the ombud to consider the appellants’ application for the matter to be heard by a court.
The tribunal’s judgment highlighted a number of problems with the determination.
Application for a court hearing
The appellants’ first response to the ombud’s office (in April 2011) included an application in terms of section 27(3)(c) of the FAIS Act. This section gives the ombud the discretion to decide whether or not to accept a complaint. It states:
“The ombud may on reasonable grounds determine that it is more appropriate that the complaint be dealt with by a court or through any other available dispute resolution process, and decline to entertain the complaint.”
The tribunal stated that although section 27(3)(c) does not suggest that a party to a complaint “has a right to apply for a determination of the sort contemplated therein, such an application has been found to be competent by the Supreme Court of Appeal”.
In their response to the ombud, the appellants argued that a complaint aimed at compensation would more appropriately be dealt with in a court. They put forward several reasons for this, including:
- Unless a claim against an FSP is established by a court, the insurer indemnifying an FSP against loss will not indemnify him or her.
- The ombud is not bound by the principles of the law of evidence.
- The FSP is not privy to the information that the ombud secured in the investigation process; the FSP does not know what information was available to the ombud, nor what information was accepted by the ombud and what information was rejected.
- Although the ombud’s investigations have “the flavour” of criminal proceedings, “the safeguards and transparency that are required in such proceedings are not available to a party facing a complaint in terms of the FAIS Act.”
Despite this, the recommendation on which the determination was based included a sentence – which the tribunal highlighted – stating that the appellants had not provided any reasons for their section 27(3)(c) application.
The tribunal said this was not only wrong, but it also demonstrated that the ombud had not considered the application, and therefore that she had not applied to her mind to it.
“The latter is supported by, firstly, the failure to make a finding on the application and, secondly, the failure to not only not give reasons, but to give clear reasons.”
Facts in dispute
One of the reasons given by the appellants for their 27(3)(c) application was that the facts related to the complaint were not common cause; the complainant’s and the second appellants’ version of events differed, and the credibility of the versions must be tested.
The tribunal said it was “puzzling” that recommendation had stated that the respondents had not substantiated their claim that the facts of the matter were in dispute. It pointed out that the appellants had set out the material disputes of fact in their first and second responses to the ombud. These disputes centred on whether the representative had advised the complainant of the risks of investing in Sharemax.
The tribunal said there were “some troubling features” of the ombud’s determination.
“We do not intend to list all of them, but confine ourselves to drawing attention to some. We must caution though that in doing this we should not be understood to have made a finding concerning them.”
These troubling features included:
- The finding that “[h]ad the second appellant complied with the code and sought investments that were in line with the complainant’s circumstances, there would have been no investments in Sharemax”. The tribunal said the facts on which this finding was based do not appear in the recommendation.
- The ombud had concluded that the appellants were the cause of the loss suffered by the complainant, presumably because the second appellant breached the Code of Conduct. The tribunal said the reasons for arriving at this conclusion did not appear in the recommendation or the determination.
- It was not evident how the ombud concluded that the capital value of the complainant’s investment constituted the type of loss “that naturally flows from a breach by the appellants of a contract between them and the complainant”.
- The ombud, in assessing the complainant’s loss, was “curiously silent” on the monthly income of R4 791.67 from April 2009 to August 2010 received by the complainant. The tribunal said this income would impact on the quantum of the complainant’s loss.
And there’s more
The applicants raised an in limine point: the recommendation on which the determination was based should have been drafted by the ombud or deputy ombud.
A recommendation by any other person would not constitute a recommendation contemplated in section 27(5)(c) of the FAIS Act.
The tribunal said the ombud should be given an opportunity to address whether it was competent for the team resolution manager to make the recommendation or for the ombud to rely thereon. “This especially considering that section 24(f) confers upon the ombud the right to ‘in general, to do anything which is necessary or expedient for the achievement of the objective of the ombud’.”
According to the tribunal, “in the circumstances, it is premature for us to decide the point in limine”.