Ombud side-steps bid to halt syndication rulings
Ombud for Financial Services Providers Noluntu Bam is pressing ahead with determinations arising from complaints about financial advisers who placed their clients – many of whom were pensioners who could ill-afford the losses – in property syndications, despite an attempt by Santam to stop Bam in her tracks.
Bam is facing a court application – financed by, and with legal backing from, Santam – to prevent her from issuing determinations on complaints made against a Gauteng-based financial adviser, Deeb Risk, who advised at least seven clients, mainly pensioners, to put their money into imploding Sharemax property syndications.
Bam has issued a further two determinations, ordering financial advisers to compensate their clients for the losses they suffered.
A date has not yet been set down for the High Court to hear the urgent application by Risk.
Santam-owned insurance agency Stalker, Hutchison and Admiral (SHA), which provided Risk and his company with professional indemnity insurance, is paying for Risk’s attempt to stop Bam in her tracks and from protecting consumers.
Risk, with the support of Santam, lodged an application last year to stop Bam from issuing determinations against him, arguing that the matters should be referred to the High Court.
At the time, Bam said that if the Santam/Risk challenge is successful, it will nullify the advantages of her office for consumers, who will generally be unable to afford to take on insurance companies, which have extensive cash and legal resources, in the High Court.
She said many of the complainants were pensioners who had lost a large portion of their assets.
The urgent application was made when Bam continued to issue determinations against Risk, despite a non-urgent application to stop her in her tracks and, in effect, nullify the office of the ombud.
The ombud’s office was established in terms of the Financial Advisory and Intermediary Services Act to provide consumers with cheap and easy access to seek compensation when they are ill-advised on their investments.
By the time the urgent application was launched, Bam had issued two determinations against Risk and his company, D Risk Insurance Consultants, ordering them to repay R1.2 million plus interest to a 72-year-old widowed pensioner, Elise Barnes.
Bam then issued a third determination against Risk and his company, ordering them to repay R780 000 to an 82-year-old pensioner, Margery Salmond, whom Risk advised to place her savings in a Sharemax property syndication.
ADVISER ‘THREW WIDOW’S SAVINGS INTO A DARK HOLE’
Pretoria-based financial adviser Cornelia Snyman and her company, Multi-Professional Services (trading as ACS Financial Management), have been ordered by financial advice ombud Noluntu Bam to pay widowed pensioner Paulina Susanna Coetzee R530 000 plus interest of 15.5 percent a year calculated from November 2009 to the date on which payment is made.
In ordering the compensation, Bam found that Snyman failed to:
* Conduct a due diligence investigation into BlueZone Investments, the property syndication company in which Snyman advised Coetzee to invest the money she had saved in a Sanlam interest-earning product;
* Determine Coetzee’s risk profile in order to ascertain her risk tolerance and, in the light of this, the suitability of BlueZone as an investment;
* Keep proper records of advice as required by the Financial Advisory and Intermediary Services (FAIS) Act and its code of conduct;
* Comply with various provisions of the code of conduct when she rendered advice to Coetzee; and
* Establish whether BlueZone complied with regulations pertaining to property syndications issued by the Department of Trade and Industry.
As a result of Snyman’s failures, a few months after she had invested in BlueZone, Coetzee stopped receiving the income she was told her investment would earn.
Snyman had told Coetzee that she would receive an income of R4 257 on the seventh day of every month, with projected increases indicated up to the 10th year. After late and intermittent payments from 2005, Coetzee received her last, reduced payment in November 2009.
Coetzee first heard that BlueZone Investments was experiencing financial difficulties in 2009, when Snyman told her that the company was under judicial management.
But Snyman assured Coetzee that she should not be concerned, because a new investment group, Bonatla, would be purchasing BlueZone. However, Coetzee did not receive any further payments.
Snyman failed to comply with Bam’s demand to provide: a record of advice; proof that she had conducted a risk analysis; and any other documentation that showed that she had complied with the FAIS Act.
Instead, Snyman told the ombud: “The signed documentation you are referring to was, in Mrs Coetzee’s instance, somewhat not utilised. It is therefore not possible to furnish you with the signed versions to points one to three as requested. As a result, we therefore sustain with the response given and documentation provided.”
In response to a question from the ombud about what due diligence investigation she had conducted into BlueZone, Snyman admitted that BlueZone did not issue a prospectus when selling its investments, “because these were private offerings with a minimum investment amount of R100 000, and, for that reason, the products were not registered with the registrar of companies”.
Bam says Snyman’s “response is untenable. At the time that Snyman made the decision to invest, BlueZone was an unknown entity with no trading track record. To compound matters further, BlueZone had not issued any prospectus. It is therefore difficult to understand on what basis Snyman decided on BlueZone as the appropriate financial product. When advice was rendered, Snyman could not have had any objective criteria by which to judge the financial viability of BlueZone.”
There is nothing to indicate that Snyman explained to Coetzee the risks of property syndications.
Snyman in effect threw Coetzee’s savings “into a dark hole”, because Snyman herself did not understand the risks, Bam says. Snyman sold what was “simply her favourite of the month”, Bam says.
SHAREMAX ‘GUARANTEED’ INCOME DRIES UP: PENSIONER MUST BE REFUNDED
Financial advice ombud Noluntu Bam has ordered George-based financial adviser Martin Cornelius Holtzhausen and his company to repay R190 000 to a retiree who was receiving a “meagre” military pension of R1 099 a month.
In February 2010, Holtzhausen advised Maria Elizabeth Kapp to invest her only asset, which was in an RMB money market account, in a Sharemax property syndication, telling Kapp the income stream was “guaranteed”.
The “guaranteed” income stream dried up six months later, and Kapp was unable to access her capital in the wake of the implosion of the Sharemax syndications. Holtzhausen went to ground and did not respond to Kapp’s inquiries. Kapp complained to Bam.
The money Kapp invested was the proceeds of a life policy paid on the death of her son in 2007. According to Kapp, this was the only money she had to live on, apart from her pension.
She told Bam in her complaint that if Holtzhausen had disclosed the risk inherent in the Sharemax investment, she would have never invested in it.
Holtzhausen claimed to Bam that he had performed a proper risk analysis and a product comparison. But when the ombud checked his claims, she found they were incorrect.
Holtzhausen was also unable to substantiate his claim that the “income was guaranteed, but there was a risk to capital”.
Holtzhausen claimed he provided Kapp with a proposal that compared seven different investments and their respective income and risk levels. Kapp disputed this claim. Holtzhausen claimed he provided details of the income flows of two property syndication companies and five life assurance products. The information on the life assurance products was, Holtzhausen claimed, from the website of a company called Moonstone.
However, when Bam checked, she found that Holtzhausen had gathered the information at the time of Kapp’s complaint, and it did not reflect the information provided by Moonstone when Holtzhausen had advised Kapp.
Sanlam told Bam that Holtzhausen had inquired into its rates on January 28, 2011, almost a year after the advice and just before Holtzhausen responded to Kapp’s complaint.
The Sanlam quote was for a gross income of R938.46 and an effective rate of return of 6.01 percent, which was the amount Holtzhausen filled in on the comparison table he supposedly drew up on February 16, 2010. Moonstone provided Bam with a table of Sanlam rates for the week of February 15 to 19, 2010 – the week in which the Sharemax investment was made. These rates would have generated an income of R1 158.70, and not the R938.46 as reflected on the comparison table.
“This, on its own, was sufficient to establish that the document supposedly used to compare income and risk was a fabrication,” Bam says.
Similar inconsistencies applied to the other life assurance products.
The ombud also found that Holtzhausen did not, as required by the Financial Advisory and Intermediary Services Act:
* Explain the extent of the investment risk to Kapp.
* Take into account Kapp’s lack of understanding of property investments and the complicated structure of the Sharemax investment, which involved shares and a linked loan account with an “unsecured floating rate claim”.
Bam says: “Even to an experienced investor, this would likely take some time to digest, never mind someone like the complainant.”
* Properly assess Kapp’s investment risk. Bam says Kapp needed maximum income and capital, “but this must be placed in the context of her precarious position and requirement that the capital be preserved”.
Holtzhausen, who admitted that he knew there was a risk to the capital, should have been aware that the Sharemax investment “might not be appropriate”, Bam says.
* Warn Kapp that she should rather consider safer investments with Sanlam or Liberty Life.
* Complete a product replacement assessment, which requires full disclosure to the investor of “the actual and potential financial implications, costs and consequences”.
* Consider any other products that would have addressed Kapp’s needs more appropriately.
Bam says Holtzhausen failed to act with integrity when dealing with Kapp’s complaint, compounding his initial failure to render financial services with due skill, care and diligence, and in Kapp’s interests.