Financial advisers must accept that they could be held liable by the financial services regulator or the ombud for not acting with care if they “should have done more and known more” about a financial product or service that goes sour. This is the view of Caroline da Silva, the deputy registrar for financial advisory and intermediary services (FAIS) at the Financial Services Board (FSB), at the recent Morningstar investment conference.
However, there is no agreement in the financial services industry on who is responsible for performing a due diligence, or who should be held responsible for losses incurred by investors if the due diligence was not performed properly.
And some product providers, including well-known companies, are allegedly resisting attempts to subject themselves and their products to a proper due diligence. This claim was made by Derek Smorenburg, the chairman of the South African Independent Financial Advisers’ Association (Saifaa), at the launch of the organisation recently.
And there is concern about the implications of independent financial advisers turning increasingly to third parties, known as discretionary investment managers (dims), to manage their clients’ investments. Dims put together wrap funds that mainly consist of collective investments. Wrap funds are not registered in terms of the Collective Investment Schemes Control Act, which means investors are excluded from the consumer protection measures that apply to funds of funds.
However, in terms of the FAIS Act, dims have to register with the FSB as category-two financial services providers (FSPs), and they are subject to the same due diligence requirements as advisers, who must register as category-one FSPs.
A sales tactic of some dims is to tell advisers that they will take over their due diligence responsibilities.
Smorenburg says independent financial advisers have “traditionally based their trust in companies, and the people who represent these companies, by attending conferences and presentations of the companies. In most cases, the only due diligence call the advisers make is based on a long-term relationship.
“The vast majority of independent advisers do no due diligence at all, and most assume that, by placing their clients’ assets with well-known investment companies, they have fufilled their legal requirements and duties.”
When advisers invest your money using an administration platform, they assume that the administrator has done a comprehensive due diligence on all the funds on the platform, and that they do not have to conduct any due diligence, Smorenburg says.
Da Silva says the FAIS Act already requires advisers to perform a due diligence.
However, she says the FSB is moving to a new way of regulating the financial services industry, namely Treating Customers Fairly, which is based on the outcomes we, as consumers of financial products, can expect from those products and how they in fact perform. This means that, when it comes to a due diligence, advisers and product providers should not think that it will be sufficient if they simply adhere to the law.
She says even if an adviser has followed the legislation on how to conduct a due diligence, the adviser could still be held liable for bad advice that results in investor losses if he or she “should have done more and known more” about the product.
Da Silva says some advisers have been held liable by the Ombud for Financial Services Providers for advising investors to invest in an entity that subsequently collapsed.
She says the FSB will in future focus on the outcome the investor could reasonably have expected when deciding whether an adviser should be liable for investor losses.
Smorenburg says Saifaa has developed an advice process for its members that includes how to conduct due diligence tests on companies and their products.
“Saifaa has been meeting with product providers to assist in compiling the due diligence test questionnaires and asking the companies to submit themselves and their products to the due diligence tests. After initial resistance, most companies are now co-operating, but some major companies are refusing to participate.”
Smorenburg declined to name the companies, because discussions with them are continuing.
He says financial advisers will have to decide whether they should recommend the products of companies that will not submit themselves or their products to due diligence tests drawn up by advisers or organisations that represent advisers.