Why the FAIS Ombud is closing its files on property syndication complaints

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The Office of the FAIS Ombud has decided it cannot successfully resolve historic complaints about property syndication schemes, and it has advised the complainants to take their cases to court.

Advocate John Simpson, the FAIS Ombud, told Moonstone the decision was not because the Office lacked the capacity to address the large number of property syndication complaints. “If there was a reasonable prospect of resolving the matters, the Office would do the necessary to ensure it was done,” he said.

He said the decision was a result of a unique combination of factors that rendered the cases unsuitable for the FAIS Ombud scheme to adjudicate. These factors included the huge volume of complaints received, the FSPs engaging attorneys who defended all the cases on the same basis, and, in particular, the judgments by the Financial Services Tribunal (FST) that repeatedly drew attention to the complex material disputes of fact between the parties and the issue of legal causation.

The decision applies to historic property syndication complaints – essentially those received between 2009 and 2014. It should not be interpreted as a “general rejection” of new complaints relating to property syndications or other investment schemes where such cases involve material disputes of fact, Simpson said.

Invariably, complaints involve disputes of fact, even material ones, but, in most cases, the Office can make a finding based on the evidence or information provided, he said.

A letter the Office has been sending to complainants states the Ombud is uncertain how to deal with property syndication matters after the FST and the High Court set aside its determinations.

“In some cases, the Ombud drafted and issued a new reconsidered determination but with the same order. These new reconsidered determinations were once again set aside by the Tribunal and referred back to the Ombud for reconsideration,” the letter says.

In December last year, Moonstone reported that the FST had set aside and remitted the Ombud’s third determination on the same property syndication complaint, which was lodged with the Ombud in 2012. The first determination on the complaint was issued in 2016.

The letter goes on to state that the appointment of a new permanent Ombud (that is, Simpson) on 1 November 2022 “required a reconsideration of the Tribunal judgments and a review of the Ombud’s approach to all these long-outstanding matters”.

The letter concludes by informing complainants that the decision to close the file can be taken to the FST for reconsideration.

The Tribunal has already dismissed at least one such reconsideration application after finding there was no basis for it to interfere with the Ombud’s decision.

The Ombud exercised his discretion in terms of section 27(3)(c) of the FAIS Act and motivated his decision fully, the FST said in a brief ruling.

How many complaints are affected?

The Ombud’s decision to close its files follows the Office’s confirming in December 2022 that it had placed a moratorium on all its outstanding property syndication complaints.

The moratorium was implemented to give it an opportunity to consider the decisions issued by the FST and High Court judgments on whether the South African Reserve Bank was the legal cause of the losses allegedly suffered by the complainants.

Simpson said the Office received about 3 500 complaints related to property syndication investments between 2009 and 2014. Most of the cases were closed over the years for various reasons, such as prescription.

He said the Office has 1 004 active complaints. “We are now closing these remaining matters, as they require hearings, which is more appropriate for a court of law.”

The decision to close the files on property syndication cases also applies to the determinations that the FST has sent back to the Ombud for reconsideration, Simpson said.

The Office issued 110 determinations on property syndication matters from 2010 to 2022.

“It is unknown how many of the orders were complied with by the respondents (if any). The opposition by the respondents to the determinations escalated at various stages, but the most recent Tribunal judgments expressed clear views on whether the Ombud should be dealing with these cases,” Simpson said.

Disputes of fact and legal causation

The Ombud’s decision ends what was becoming a “merry-go-round” of the Office issuing a determination on a property syndication complaint, the Tribunal remitting the determination to the Ombud, the Ombud issuing a new determination, and so on.

In terms of the Financial Sector Regulation Act, if the Tribunal sets aside a decision by the FAIS Ombud, it must refer the matter back to the Ombud for reconsideration.

Moonstone’s reporting of the FST’s decisions over the past two years highlighted the main reasons the Tribunal set aside the determinations. It did not believe the Ombud had adequately addressed the material disputes of fact, nor had legal causation been established.

As the Ombud’s letter to the complainants states: “The Tribunal’s judgments carefully considered the various disputes of fact raised and whether a finding could be made. Even if a finding could be made on the disputes of fact (that the investment should not have been recommended), it could not find a basis for legal causation (that the respondent’s possible negligence in recommending the investment was sufficiently linked to the loss suffered).”

The substantial factual or legal questions raised by the FST’s judgments required the Ombud to decide whether it was more appropriate for a court to deal with the matter.

“The Tribunal’s judgments also refer to the Supreme Court of Appeal and High Court judgments applicable to these matters, and the conflicting decisions in this regard. What is clear from the judgments and the case law is that there are numerous factors which led to the eventual failure of the property syndication investments.

“The Tribunal consistently found that the evidence was insufficient to prove that the adviser should have foreseen the risk. Making a finding on the factors related to legal causation requires expert evidence and a hearing. Only a court of law is appropriate for hearings of this nature. An ombud is not the appropriate forum for complex cases involving disputes of fact and legal causation requiring evidence to be led,” the letter states.

Moonstone asked Simpson why his Office could not hold (in-person or virtual) hearings at which the different versions could be interrogated, and the parties cross-examined to settle the disputes of fact.

Simpson said that in practice hearings cannot be conducted informally and quickly.

“Hearings require very rigid and clear rules to ensure the audi alteram principle is complied with. If one had to consider the many rules which are applicable to courts and tribunals, it is clear that the process is very distinct from an ombud process. Legal representatives would require a similar set of clear rules and processes and would dispute any attempt to make them simpler or circumvent them,” he said.

Legal liability

The property syndication determinations issued by Simpson’s predecessors indicated they were of the view that the FAIS Act created “a new form” of legal liability, whereby if an adviser was found to have breached the General Code of Conduct, it followed that he or she could be held directly liable for a client’s financial losses.

Counsel for the FSPs challenged this in their submissions to the Tribunal, which instructed the Ombud to determine liability strictly according to established legal principles, whether the claim was based on delict or breach of contract.

Asked for his view on the grounds for legal liability under the FAIS Act, Simpson said he preferred not to express a specific view on strict liability at this stage, adding that each case would be evaluated on its facts and merits.

“In very broad general terms, a transgression of the Code may result in an award in favour of the complainant, but it may only represent a form of solatium [compensation for injured feelings or emotional pain and suffering] for the complainant and punishment for the transgression. The award will not necessarily be tied to the loss allegedly suffered, unless there is evidence of legal causation,” he said.

Tribunal’s setting aside of decisions

The FAIS Act gives the Ombud the authority to decide that it is not the appropriate forum for adjudicating a complaint.

Section 27(3)(c) 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.”

Asked why the Office had come to this conclusion now, whereas previous ombuds decided to adjudicate the complaints, Simpson said the FST set aside most of the recent determinations issued by his Office.

“We had to re-evaluate whether there was any reasonable prospect of the Office being able to resolve these disputes. After considering numerous possibilities and options, it was concluded that there was no reasonable prospect of resolving these matters successfully. Further, in numerous instances, the complainants had passed away, and the FSPs were no longer registered. Disputes of fact would be difficult to resolve, and even if an order was made, it appeared unlikely that it could be enforced.”

Prescription is no longer suspended

The Ombud’s letter informs complainants that closing the case file means the running of prescription on the complaint is no longer suspended.

In terms of section 27(2) of the FAIS Act, official receipt of a complaint by the Ombud suspends the running of prescription in terms of the Prescription Act for the period after receipt of the complaint until the complaint has been withdrawn or determined by the Ombud or the FST.

The letter said complainants should obtain legal advice on how the Prescription Act applied to their complaints now that prescription was no longer suspended.