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Three 'fires' threaten ombud's protective powers

Personal Finance

The financial advice ombud plans to ask the High Court to review three cases that could prevent her from protecting you from bad advice, resulting in the potential for your money to be invested in the likes of hedge fund scams, the shares of bankrupt unlisted companies and high-risk property syndication schemes.

Late last year, the Appeal Board of the financial services regulator, the Financial Services Board (FSB), issued rulings against two of the ombud’s determinations, based on interpretations of the law that, she says, are at odds with the principles that underpin how the ombud’s office operates.

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Noluntu Bam, the Ombud for Financial Services Providers, has already launched an application in the Pretoria High Court for a review of an Appeal Board ruling on two earlier determinations in which she held Sharemax Investments and four former Sharemax directors liable for the losses incurred by two pensioners who invested in the property syndication.

Bam is now seeking legal advice on the board’s latest rulings. The first ruling upholds an appeal against a determination in which she held a broker liable for the R1 million lost by an investor in Herman Pretorius’s Relative Value Arbitrage Fund (RVAF), which posed as a hedge fund but was, in fact, a scam.

In the second determination, Bam held a broker liable for the R200 000 an investor lost by investing in unlisted Edwafin debentures the day after the investment was liquidated.

RVAF investment

Bam held Mark Alexander Eiserman, of Mark Alexander Investments, liable for Gail Sheel’s losses in RVAF after Sheel complained she had invested based on Eiserman’s advice that the investment was performing well and was safe.

Eiserman said Sheel had wanted an alternative (not a mainstream) investment and had chosen Pretorius’s so-called hedge fund after attending a presentation by Pretorius. He said he had conducted a due diligence on the investment by attending the presentations himself.

Bam found that Eiserman’s advice was inappropriate for Sheel and that he had failed to analyse the investment independently.

She said he had contravened the general code of conduct under the Financial Advisory and Intermediary Services (FAIS) Act, because he failed to exercise due skill, care and diligence in advising Sheel to invest in RVAF.

In his appeal to the FSB’s Appeal Board, Eiserman argued that the investment was not a financial product and he had not furnished “advice” to Sheel.

The Appeal Board, chaired by Advocate H Kooverjie, says in its ruling that the FAIS Act defines financial products as securities such as unit trusts, insurance policies, pension fund benefits, bank deposits, medical scheme benefits, shares, debentures, securitised debts, money market instruments and any other financial product of a similar nature that the Registrar of the FSB declares to be a financial product in terms of the Act.

The Appeal Board notes that, although unlisted shares are a financial product, the FSB had investigated Pretorius’s activities and found that he was involved in venture capital and private equity activities that were not subject to regulation by the FSB.

It had also considered that Pretorius marketed RVAF as a hedge fund at a time when hedge funds fell outside of the regulatory net. (Regulations issued in terms of the Collective Investment Schemes Control Act have since made hedge funds subject to the Act and the FSB’s regulation.)

The Appeal Board therefore concluded that RVAF was not a financial product and fell outside of the ambit of the FAIS Act.

The FAIS Ombud has issued a number of determinations against brokers who sold investments to the value of more than R20 million in RVAF. Most of these cases have been upheld by the Appeal Board. One broker who sold RVAF to many investors, Michal Calitz, has appealed the FAIS Ombud’s decision on review after his appeal was unsuccessful. The FAIS Ombud is opposing this application.

Bam says many consumers are waiting to hear from the FAIS Ombud about their complaints against brokers who advised them to invest in RVAF. She has advised these complainants that her office cannot, in the light of the latest ruling, continue investigating those complaints.

The Appeal Board’s November ruling suggests that Sheel should launch an application in the High Court to recover her investment.

The ombud’s office was set up specifically to provide an inexpensive and quick way for you, as a consumer of financial products, to obtain relief when the actions of financial services providers result in your losing money.

Edwafin debentures

The second case heard by the Appeal Board concerns a determination against Raj Chutterpaul, who advised Vinesh Mohanlal to withdraw his savings in a matured investment policy and invest in Edwafin debentures and the Sharemax property syndication. The Sharemax investment did not form part of the complaint.

In her determination, Bam said Chutterpaul had failed to conduct a proper due diligence on the suitability and viability of the Edwafin investment.

According to the Appeal Board, the ombud found no indication that Chutterpaul had sought to establish whether the Edwafin entities had issued any financial statements, and that his efforts to assess the product amounted to superficial enquiries rather than a due diligence.

Bam also said Chutterpaul was influenced by the six-percent commission he was due for steering Mohanlal into the investment.

The Appeal Board found that, although Mohanlal wanted to invest in an alternative investment pro-duct, “it is obvious that [Mohanlal] had no intention of losing his investment in total”.

The board’s ruling says Chutterpaul was aware that there was a risk that Mohanlal could lose all his capital in the Edwafin investment and should therefore have steered Mohanlal away from it.

However, the Appeal Board says there must be a link between the loss Mohanlal suffered and Chutterpaul’s actions for the adviser to be held liable, and that “enquiry entails whether it was reasonably foreseeable that the Edwafin product was a fraudulent scam and that the entity was to be liquidated”.

The board found in favour of Chutterpaul’s version that he had no knowledge that the entity had fraudulent directors, nor was he aware that Edwafin was about to be put into liquidation.

The Appeal Board notes that, according to Bam, the Edwafin investment was already in danger and was on its way down when Chutterpaul recommended Mohanlal invest. But the board says the only evidence of this were some newspaper reports that Edwafin had defaulted on its repayments.

The board says it was not reasonable to expect Chutterpaul to foresee that the investment was operating fraudulently, or was subject to liquidation. It therefore upheld his appeal against Bam’s ruling.

The ombud has long held advisers liable for recommending pro-ducts on which they have not done a thorough due diligence. This has been the basis for many of her determinations in the past.


'OMBUD MUST UPHOLD EQUITY JURISDICTION'

If the financial advice ombud were to turn a blind eye to the true nature of a complaint and any issues unearthed during the investigation of a complaint, it would “offend” the principles of fairness and equity, the ombud says in a High Court application to overturn an appeal by former property syndication promoter Sharemax.

Noluntu Bam, the Ombud for Financial Services Providers, has launched the application for the Pretoria High Court to review the decision by the Financial Services Board’s Appeal Board to uphold an appeal brought by Sharemax and its former directors against two of her determinations (see above).

The ombud held both parties liable, together with two advisers who recommended the failed property syndication investment to two pensioners, who lost their money.

The Appeal Board ruled that she should have confined her determination to the advisers against whom the pensioners had lodged complaints, and she should not have included Sharemax and its former directors as respondents in the case.

Gerbrecht Siegrist and Jacqueline Bekker laid complaints against their respective advisers, Cornelius Botha and Edward Carter-Smith, for the losses they incurred after investing R580 000 and R490 000 respectively in Sharemax Zambezi Holdings. They did not complain about Sharemax Investments, which promoted the syndication, or its former directors.

After investigating the complaints, Bam included Sharemax Investments and the former directors as respondents in her determinations, ruling that they contributed to the pensioners’ losses, because Sharemax was “a Ponzi scheme”.

Sharemax Investments and the former directors, Gerhardus Goosen, Johannes Botha, Dominique Haese and Andre Brand, challenged the determination. The Appeal Board, chaired by Judge Louis Harms, upheld their appeal, stating that the ombud has the authority to rule only against the parties about whom consumers of financial products have complained.

In her application to the High Court, Bam says the judge has misconstrued the provisions of the Financial Advisory and Intermediary Services (FAIS) Act that address the powers and functions of the ombud. In particular, she says the FAIS Act expressly confers on the ombud an equity jurisdiction and investigative and inquisitorial powers. An equity jurisdiction means the ombud is able to go beyond the common law and make decisions that are reasonable and fair.

Bam argues that the Act does give her the power to identify the true nature of a complaint and the real respondents as information emerges from an investigation into a matter brought to her office.

She also points out that complaints lodged at her office are often couched in lay terms and do not always contain readily identifiable issues. The case is due to be heard in mid-February.


NEW LAW WILL REGULATE MORE PRODUCTS

The Financial Sector Regulation Bill, which was passed by the National Assembly late last year and is now before the National Council of Provinces, will introduce an expanded and more flexible set of definitions of financial products and services and bring them under the new authority for market conduct in the financial sector.

The bill grants the Minister of Finance the power to designate certain products as financial products or services for the purpose of making them subject to regulation, Leanne Jackson, the market conduct adviser at the Financial Services Board (FSB), says. This may result in better protection for you, despite a decision by the FSB Appeal Board about the Ombud for Financial Services Providers’ authority to hear complaints about products that do not fall under the Financial Advisory and Intermediary Services (FAIS) Act.

The FSB Appeal Board recently found that a broker, Mark Eiserman, was not liable for the losses incurred by an investor who invested in Herman Pretorius’s Relative Value Arbitrage Fund, because it was not a financial product as defined by the FAIS Act.

In future, the Conduct of Financial Institutions Act is expected to replace and consolidate existing legislation and regulations, including the FAIS Act, that govern how financial services providers must conduct themselves, she says.

The Financial Sector Regulation Bill also gives the soon-to-be-established Ombud Council the power to designate one or more ombud schemes to deal with complaints about financial products or services in cases where a recognised industry ombud scheme, or a statutory ombud scheme, does not deal with complaints about those products or services, Jackson says.

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