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Adviser must pay R530 000 to investor, despite appeals

Personal Finance

The Appeal Board of the Financial Services Board (FSB) has upheld a ruling by the financial advice ombud ordering a financial adviser to compensate a pensioner for the R530 000 she was advised to invest in failed property syndication scheme BlueZone.

Describing the property syndication contract as full of “holes through which a bus could drive” and “had ‘fraud’ written all over it”, Judge Louis Harms, on behalf of the Appeal Board panel, said in his recent judgment that the ombud was correct in finding that the adviser had caused the pensioner’s loss.

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Cornelia Snyman of ACS Financial Management advised a widow, Paulina Coetzee, to withdraw R530 000 from a matured Sanlam investment and invest it in a BlueZone syndication in 2005. The company was later liquidated.

Coetzee complained to Noluntu Bam, the Ombud for Financial Services Providers, in 2010, and Bam ordered Snyman to repay Coetzee in 2012.

Snyman appealed against the ruling, and Bam was ordered to investigate further, but she issued a second determination in favour of Coetzee.

Snyman then took the matter to the Appeal Board, arguing that the ombud had concluded that her advice to Coetzee was bad, because it had emerged that BlueZone was a Ponzi scheme.

Judge Harms says Snyman did not dispute that Coetzee was risk-averse.

According to the judgment, Snyman argued that the promoters of BlueZone described the investment as “moderately conservative”. She believed that, because the investment was in property and the monthly income was secured by a lease, the only risks were that the tenants would not pay their rent and an overall economic downturn.

But Judge Harms says an analysis of the contract shows that most of the investment was not in property, but in the shares of the holding company of a so-called property company that merely intended to buy a property using Coetzee’s and other investors’ money.

The judge says the property company had not even entered a binding contract to purchase the property.

Of the R530 000 Coetzee invested, R100 000 was paid to the sellers of the shares in the holding company.

According to the judgment, Snyman, like many other advisers who have come before the ombud, argued that she should not be held liable for Coetzee’s loss, because she could not have reasonably foreseen that the investment was fraudulent. But Judge Harms says the BlueZone contract had “holes a bus could drive through” and “‘fraud’ written all over it”. This made “the loss of the investment not only foreseeable but highly probable, if not inevitable”

Coetzee complained to the ombud that Snyman had not explained the risks of the investment to her.

Judge Harms says Snyman could not explain the risks, because she did not understand the investment. “She was out of her depth,” he says.

Judge Harms dismissed the appeal, leaving Snyman to compensate Coetzee and pay the costs of the appeal.

According to the judgment, Snyman believed the investment had been approved by the FSB. But Judge Harms says the regulator does not approve products; it only authorises advisers and financial services companies to sell certain types of products.

Snyman also argued in her appeal that the process followed by the ombud was unconstitutional and fundamentally flawed. She said the ombud should inform advisers of all factual allegations against them and should cross-examine them during a hearing.

But Judge Harms says this flies in the face of the Financial Advisory and Intermediary Services (FAIS) Act, which established the ombud’s office to deal with complaints about financial advice in a fair, economical, expeditious and equitable manner.

The judge notes that Snyman failed to keep a record of the advice that she gave Coetzee, as required by the FAIS Act. However, he says this is a supervisory issue for the FSB and not grounds for the ombud to hold an adviser responsible for an investor’s loss.

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