While most complaints to the office of the Ombud for Financial Services Providers relate to the dispensing of advice in the selling of short-term insurance, property syndications and problems with these “complex” products feature prominently in the ombud’s latest annual report.
Also known as the financial advice ombud and as the FAIS (Financial Advisory and Intermediary Services) ombud, Noluntu Bam has handed down numerous determinations in recent years in favour of consumers who have lost money investing in ill-fated property syndications.
Her report for the year ending March 31, 2014 was released this week. It features the case of pensioner Jacqueline Bekker, who was persuaded by financial adviser Edward Carter-Smith to invest in a property syndication promoted by Sharemax Investments.
Before making the investment, Bekker was promised that her funds would be kept in an attorney’s trust account and paid over only in the event of the transfer of the properties into the names of the property syndication companies.
However, prior to transfer and contrary to the syndication prospectus, the directors authorised the withdrawal of funds from the attorney’s trust account.
Bam ordered Carter-Smith and other respondents, including syndication promoter Sharemax and its directors, to compensate Bekker for her loss. The respondents are appealing the determination.
In her annual report, Bam says what stands out in the case is Carter-Smith’s “apparent lack of appreciation of the risk inherent in the product”.
Bam’s report highlights another complaint involving Sharemax – citing it as a case of inappropriate advice – which ended well for the consumer.
“During September 2006,” the report says, “the complainant, who was 63 years old at the time, invested R16 000 with Sharemax on the advice of the [adviser]. In May 2011, the interest payments on the investment ceased. The complainant’s unsuccessful attempt to recover her capital triggered a complaint to this office. The office duly notified the [adviser] of the complaint. A few weeks later, the complainant informed this office that an agreement had been reached: the [adviser] agreed to repurchase the Sharemax investment from her. The settlement amount was R16 000.”
When a complaint is settled it means it did not necessitate a ruling from the ombud’s office – some advisers settle rather than face a ruling from the ombud, which carries the weight of a High Court order and is made public.
Risky business
Bam’s previous annual report, for the year ending March 2013, made mention of cases concerning financial adviser Deeb Risk, who has had at least six rulings against him for advice relating to property syndications.
At the time, Risk had appealed against Bam’s rulings to the Appeal Board of the Financial Services Board (FSB). In her latest report, Bam says that Risk and his company have settled all but two of the cases directly with the complainants and abandoned the appeals relating to these cases. He is, however, still pursuing the appeals of the two matters with the Board of Appeal.
There are also review proceedings before the High Court in connection with these two matters.
South African investors have been badly stung by failed property syndications. The collapse of the Masterbond and Owen Wiggins Trust schemes in the early 1990s left thousands of investors destitute, many of them pensioners. And investors have again been hard hit by the more recent failure of Sharemax and Highveld Syndications, promoted by Pickvest. Investors in some Pickvest-promoted syndications, who will next week be asked to vote on a new proposed scheme of arrangement, have applied to the courts for permission to institute a class action against the scheme.
In the Bekker case and another determination, with far-reaching implications for investors, Bam held the masterminds of Sharemax liable for investors’ losses. Both cases have been taken on appeal to the FSB’s Appeal Board.
While Bam’s office continues to accept and investigate complaints relating to property syndication investments, it has decided not to issue any determinations pending the outcome of these two crucial cases, which will be heard in January next year.
Meanwhile, property syndications continue to be marketed to South Africans. The FSB has recently warned the public not to do business with a syndication, Discount Mart Cleaning Services CC, trading as DMC Holdings (DMC).
The FSB says DMC has claimed that the regulator instructed it to dispose of properties by way of auction or private sale to refund investors. The FSB denies the claim.
An Australian outfit called Flipping4Profit, which solicits deposits from investors in exchange for a share of the profits made from “flipping” properties for profit, is now marketing itself in South Africa as a property syndication – according to an SMS sent to prospective investors.
Investment costs
In her annual report, Bam says the costs investors pay on their investments is a growing source of complaints to her office. These complaints relate to undisclosed commissions on financial products, trail commissions (ongoing fees charged as a percentage of the investment) and penalties for terminating investment contracts early.
“Many complaints point to trail fees, and complainants ask why they are paying such fees when, in some instances, they last heard from the adviser on the day they purchased the investment. Almost all of these complainants claim they were not aware they were paying these costs. Some complain that they discovered they were paying trail commission only when they called the product provider, only to learn that the financial adviser left years ago.”
Consumers complain at having to pay termination costs. These are levied when you want to withdraw from, stop or reduce payments on a contractual savings investment, such as a retirement annuity (RA). This may happen when your circumstances suddenly change. The penalties are usually substantial.
Replacement policies
Bam’s annual report suggests that replacement policies – when your adviser replaces one financial product with a new one – are a bone of contention between her office and financial services providers (FSPs).
“We argue with FSPs every day about this. The argument is that the complainant knew what the cost implications were [of replacing one policy with another]. When we ask the FSP to demonstrate that the replacement is in the client’s interest, the matter gets settled.”
Bam says that when her office obtains proof of the disclosure of the cost implications of replacing the policy, it often finds there isn’t full disclosure of all the costs.
Complaints about a life policy being cancelled before a new policy has been approved are also common.
Retirement products
Retirement products also attract numerous complaints.
“It is not unusual to see complaints from people who had committed to pay premiums of R15 000 and more a month for more than 20 years on an RA.”
One consumer was invested in an endowment policy and was committed to a monthly premium of R25 000 for 15 years.
“When we asked the provider why a compulsory savings [product was recommended to the consumer], as opposed to a flexible one with no penalties, no rational answer was provided,” Bam says.
Consumers also complain about fraudulent and improper conduct. Bam’s report notes that it is a breach of the FAIS Act for you to be asked to sign incomplete documentation or for documents to be altered after you have signed them.
It is also fraudulent or improper for an adviser to entice you to sign documents under false pretences. Some advisers do this to surrender your policy and earn commission on another, or sign you up for a policy you had no intention of purchasing.
“There are still large numbers of people who have no knowledge that they are paying premiums for life policies with the beneficiaries unknown to them.”
Other problems
Assistance business – typically funeral policies – is fraught with problems, mostly fraud, Bam says.
Hedge funds and similar arrangements are proving to be a problem, too, she says.
Bam says disability and dread disease policies remain complex, “especially because the insured event may arise years after the product was purchased”. She notes in her report that:
* There is often lack of clarity about what is covered;
* Definitions are complex, making it impossible for the provider to understand which product is suitable and for what circumstances;
* Complainants complain that they paid premiums for many years and later realised that the product they bought was useless to them.
“We believe that unless there is legislative intervention, the problems in this area are unlikely to be solved,” Bam’s report says.
100 YEARS OF FAIS OMBUD
This year marks the 10th anniversary of the financial advice ombud’s office. In her annual report, ombud Noluntu Bam reflects on how much has changed over the past decade. The report lists the following benefits flowing from the establishment of her office:
* The Financial Advice and Intermediary Services (FAIS) Ombud provides an informal, cost-effective, independent and impartial forum to which you, as a consumer of financial services, can lodge your disputes;
* Determinations by the ombud can be challenged through an open, transparent and cost-effective process;
* Whether you are a sophisticated or a vulnerable consumer, you require no legal representation to lodge a complaint;
* You can be assisted without having to worry about how well your story is told; and
* As shown by the substantial number of settlements, providers of financial services have embraced the FAIS Act.
STATISTICS
* Total number of new complaints: 9 439, of which 3 191 fell under the FAIS ombud’s jurisdiction
* Dismissed: 2 117
* Referred to other bodies, including ombuds and regulators: 4 932
* Settled: 538
* Carried over: 1 852
* Of the complaints resolved (referred, settled or dismissed), 789 were settled and 2 740 dismissed.
Most complaints to the ombud relate to advice dispensed in the selling of short-term insurance. The next biggest category of complaints concerns advice about long-term insurance products, followed by non-FAIS products, investment products, retirement products and health products.