Illustration: Colin Daniel

Some good news. Santam, as a provider of professional indemnity (PI) insurance to financial advisers, will no longer be financing advisers who wish to force consumers to take their complaints to the High Court, blocking access to the low-cost, accelerated process provided by the Financial Advisory and Intermediary Services (FAIS) Ombud.

This follows a decision by Santam not to finance an appeal against a recent Pretoria High Court judgment stating that the FAIS Ombud, Noluntu Bam, could not be forced to refer a complaint to the High Court.

Gauteng financial adviser Deeb Risk and his company, D Risk Insurance, have now applied to the Financial Services Board (FSB) Appeal Board to allow them a late appeal against Bam’s original determinations. Bam ordered Risk and his company to repay a total of R3.08 million to five pensioners aged 70-plus, whom he advised to invest in imploding property syndication schemes.

If Risk, with the backing of Santam, had been successful, the pensioners could have done nothing to recover their losses because they had, in the main, lost their life savings and had no money left to finance any expensive High Court action. In effect, it would have wrecked the very institution set up to give consumers quick and cheap access to justice when inappropriately advised.

Ian Kirk, chief executive of Santam, says the judgment has made it quite clear that financial advisers must subject themselves to the authority of the FAIS Ombud, and that if they disagree with the determination of the ombud, they must take the determination on appeal to the FSB Appeal Board.

Unfortunately, this is not the end of this sorry story. What Santam has done is paid Risk and his company an undisclosed final amount of money by way of PI insurance, most of which is likely to be absorbed in the extensive legal costs he has incurred in taking his fight, essentially against consumers, to the High Court.

This would seem to mean that he will have little or nothing left from the PI insurance settlement to actually pay the ordered compensation.

Risk, hopefully, will have other resources to pay the compensation –- that is, if he loses his appeal against the determinations.

The problem is that the legislation does not state exactly what PI insurance a financial adviser must have or how much.

There is a list of what should be covered, but this does not mean the insurance will cover everything, particularly 100 percent of any compensation ordered by the FAIS Ombud.

Gerry Anderson, the FSB’s deputy registrar: financial service providers, says the FSB requires authorised financial services providers to hold PI cover to safeguard their businesses against losses resulting from reimbursement claims to clients and legal costs. This is to ensure the services provider remains a going concern in the case of such claims and can continue to service clients.

Anderson says your financial adviser must tell you whether he or she holds PI insurance.

However, he says the FSB is aware that some PI policies have exclusions, and it is now contemplating making it compulsory that any exclusions are declared to you. This will enable you to decide whether you want to accept advice from someone who may not be properly insured if the advice you receive is inappropriate.

Kirk says that if financial advisers are to be fully covered against potential determinations and orders for compensation from the FAIS Ombud, the cost of the insurance will have to be significantly increased.

Currently, the insurance costs between R1 000 and R3 000 a month, with a cover limit ranging from R1 million to R5 million. Each application is individually assessed.

So right now the onus is on you to demand details of the PI cover your adviser has, particularly to cover any potential compensation payable to you.

The FAIS department of the FSB finally seems to be very slowly getting its act together. Until now, the department seems to have been mainly concerned about licensing financial advisers, as opposed to using the legislation to keep the bad eggs out of the industry and taking tough action against those who err.

The situation reached a level of absurdity recently when the FSB, in effect, claimed that it could not be blamed for not taking action earlier against the Relative Value Arbitrage Fund – a Ponzi scheme masquerading as a hedge fund in which investors may lose R1.8 billion – because the fund, managed by the late Herman Pretorius, did not fall under the FSB.

In other words, a scamster can say to the FSB: “I am running a crooked investment scheme, so it does not fall under your authority, so get lost.” Rather strange, to say the least.

Anyway, this week the FSB announced that it had used its powers to take action against a financial adviser who had not, according to the FSB, been giving appropriate financial advice.

The consequence was that adviser Pieter Labuschagne was fined R150 000 for contravening the FAIS General Code of Conduct. The financial services provider licence of Labuschagne, who provided advice in the name of his company, Pieter Labuschagne Pisces Projects, lapsed in August last year, so it is no longer able to provide advice.

The FSB says that in early 2010 Labuschagne failed to render financial services fairly, with due skill, care and diligence, and in the interests of his clients and the financial services industry. The FSB says Labuschagne, in advising two clients “negligently”, failed to discharge the following duties:

* Obtain and analyse sufficient information relating to the clients’ financial position and experience in respect of the financial products he recommended;

* The advice given was not adequately recorded;

* The insurance policy application forms submitted to the product supplier were not signed by Labuschagne; and

* In respect of one client, whose business Labuschagne received through a referral, he negligently failed to render financial services directly to the client, but merely used his broker code to secure the business.

This is all very well – a good step forward – but the question must be asked why similar action and fines have not been handed down against the many financial advisers who have had adverse findings against them from the FAIS Ombud.

The FSB cannot even provide a list of financial services providers against whom determinations have been made, let alone what action, if any, it has taken in following up whether these advisers are still giving bad advice or whether the advisers have compensated their clients according to the determinations.

I suspect very little action has been taken; and it is only the determinations made regularly by the ombud that are increasingly restraining the potential excesses of errant financial advisers.

Financial advisers who do step out of line should not only be ordered to pay compensation but should face penalties, such as the fine handed out to Labuschagne, or the suspension of their licences.

That will quickly put a stop to this ongoing commission-driven advice – ranging from people being sold the wrong type of pension to being advised to invest all their money in faulty property syndications – which all too often leads to the impoverishment of people in retirement.