Tribunal upholds debarment for providing unauthorised advice on Ecsponent preference shares

The Financial Services Tribunal (FST) has upheld Discovery Life’s decision to debar a financial adviser who advised clients to invest in Ecsponent preference shares although he was not authorised or licensed to advise on this class of product.

Martin Lourens contended that he did not advise the clients but provided them with “factual advice” or information about the Ecsponent product.

The tribunal’s decision sheds light on how it interprets “advice”, as defined in section 1 of the FAIS Act, and the qualifications to the term in sub-section 3(a).

Discovery dismissed Lourens in March 2021 and subsequently debarred him for breaching the General Code of Conduct, the FAIS Act, and the Fit and Proper Requirements.

In addition to advising on a product for which he was not licensed, Discovery said Lourens had not entered into a referral agreement with Ecsponent or ZWAC Zurcher (who was referred to as “Storm”) of the S&I Group, who also did not have a Category 1.8 licence, although he was apparently acting under the supervision of someone who did.

Storm, assisted by Lourens, completed the paperwork for the investments.

Lourens did not disclose to the clients that Ecsponent paid him commission, 25% of which was shared with Zurcher.

The FST said three of the four clients were existing Discovery clients whom Lourens had serviced for many years. They sought his advice on their retirement plans and investments. The fourth was referred to Lourens by one of the others for advice on his pension pay-out.

According to the chairman of Discovery’s disciplinary committee, the clients “lost substantial amounts of their investments and suffered extreme prejudice” as a result of investing in Ecsponent.

“The total exposure is not limited to the four clients that the employee was charged with but affected 18 Discovery clients with an estimated investment value of around R36 million.”

Discovery said Lourens had told the clients – whose risk profiles required minimal risk – that their investments were “entirely safe and guaranteed”. However, Ecsponent’s website stated that the product was high risk and without guarantees.

When ‘factual information’ becomes ‘advice’

The tribunal addressed the meaning of “advice” and how the term is qualified, with particular reference to sub-paragraph (3)(a)(ii).

In terms of sub-paragraph (ii), “advice” does not include “an analysis or report on a financial product without any express or implied recommendation, guidance or proposal that any particular transaction in respect of the product is appropriate to the particular investment objectives, financial situation or particular needs of a client”.

The FST said the sub-paragraph is formulated in the negative. “Stated in the positive, it says that an analysis or report on a financial product with any express or implied recommendation, guidance or proposal that any particular transaction in respect of the product is appropriate to the particular investment objectives, financial situation or particular needs of a client amounts to ‘advice’.

In other words, “once there is any express or implied recommendation, guidance or proposal, the ‘advice’ is not ‘merely’ factual” (own emphasis).

The tribunal said the “issue may be refined to pose the question whether the applicant ‘merely’ (which means ‘only as described and nothing more’) gave factual advice relating to procedure, description or objective information about the Ecsponent product, or whether he (at least impliedly) recommended, guided (showed the way) or proposed that the product was appropriate to the particular investment objectives, financial situation or particular needs of each complainant”.

The FST said the answer to the above question could be found in the common-cause facts and the documentation. It said the applicant had not addressed the particular facts in his arguments.

‘Facts morphed into advice’

The FST’s decision set out the facts in respect of one of the complainants, a “Mr R”, saying the facts pertaining to the other three complainants were not much different.

Mr R and his wife, who had been Discovery’s and Lourens’s clients for many years, reached retirement age. Lourens prepared separate retirement plans for them. It was realised that Discovery’s products could not satisfy their full income need.

Lourens had done “research” on the Ecsponent product, which he had bought. He could not sell the product, because he did not have the requisite licence.

Lourens had an informal agreement or understanding with Storm that he could “refer” clients to him.

To do an income calculation that would satisfy Mr R’s requirements, Lourens obtained a quotation from Storm for the Ecsponent product. For this, he provided Storm with Mr R’s financial and personal information.

Lourens prepared a plan explaining how the required income could be attained. This could only happen (because Discovery did not have an appropriate product) if the “guaranteed income investment” was made in the Ecsponent product, which would provide a return of 11.5%.

Lourens prepared the withdrawal forms, which Mr R signed, and arranged an appointment with Storm.

At the meeting, Storm did the paperwork, “which was not much more than a box-tick exercise”, with Lourens’s assistance.

The FST said this was corroborated by the form that Storm completed in Lourens’s presence, and which Mr R signed. It stated that Storm was “only doing this investment on advice of their Discovery adviser”.

The FST quoted from the chairman of the disciplinary committee: “This became particularly clear during Storm’s testimony, when he clearly and in no uncertain terms indicated that the clients referred to him by the employee were not his clients. In his opinion, he merely facilitated the transaction to procure the investment.”

Mr R, at the request of Lourens and Storm, transferred the funds to Ecsponent, and Lourens asked Mr R to send him proof of payment.

The FST said this request could be explained only if it was accepted that Lourens had a material interest in the outcome of the investment.

It was disputed whether Lourens had informed Mr R of any fee. Lourens said he told Mr R that he would earn a referral fee. However, he did not say that it would be 75% of the commission and it was not in writing.

According to the FST, neither Lourens nor Storm could give a rational explanation for the split.

“The fee he earned could not by any stretch of imagination be considered a referral fee. The apparent answer is that the diversion of Mr R from Discovery was the more valuable part of the business. The role of Storm was peripheral, and if he gave advice (and not just answered questions from persons who have already decided to invest), his advice was additional and confirmational.”

The FST said it was telling that when Ecsponent collapsed, Mr R turned to Lourens for an explanation and assistance and not to Storm.

It said the only reasonable conclusion was that Lourens did not “merely” provide Mr R with factual information. “He went much further; he guided him from the beginning to end, past the fork in the road to Ecsponent, holding his hand lest he should waver. Facts morphed into advice.”

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