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Taking a significant beating with legislative Act

19 May

Author: Myra Rego

Publications: FANEWS

Date Published: 19 May 2015

Intermediaries are governed by the Financial Advisory and Intermediary Services (FAIS) Act which governs their actions and regulates the way in which advice is given to a client. While this act has been a welcome addition to the industry, some intermediaries have been taking a significant beating by the Act.

This was yet again, the issue in the recent determination by the FAIS Ombudsman (FAIS Ombud). The case was between Daphne Auret Foster (hereafter referred to as the complainant), Vaidro Investments (hereafter referred to as the first respondent) and Andrea Moolman (hereafter referred to as the second respondent).

Facing stumbling blocks

In 2011, the complainant invested a combined total of R800 000 in a Relative Value Arbitrage Fund (RVAF). To make up R800 000, the first payment of R150 000 was made in February, followed by a payment of R550 000 in June and lastly, R100 000 in November.

The fund was managed and operated as a hedge fund – by one Herman Pretorius, (now deceased) – with no license of its own.

The investments were made in consequence of the recommendation and advice of the second respondent, who acted as the complainant’s financial adviser. The complainant states that the purpose of the investment was two-fold, namely capital growth for an imminent retirement, as well as the access to additional cash in the event of Mr Foster’s passing.

The complainant was advised that the RVAF would be less risky than investing in the JSE, in that the risks were better managed. In this regard, the complainant was advised that whilst the returns in good time would be less, conversely the returns during a downturn would not be as bad. In this respect, the complainant was advised and shown records indicating not only that the fund had shown good performance over a long period but that it even showed a positive return over the stock exchange crash of 2008.

Accordingly, the complainant, when asked by the Office what needs analysis was conducted by the respondent, replied that this was not necessary as the couple had other investments for their pension. Furthermore, the complainant advised that she was also offered another hedge fund; however, the respondent advised her that the RVAF was more secure and suitable to her requirements. The investment comprised all of complainant’s investable capital but constituted 15% of the couples total retirement savings.

The complainant blames the respondent for poor advice and the loss of her investment of R800 000. It was expected that the funds were to be invested and trade in the top 40 companies on the JSE and that certain measures would be in place to manage risk. Accordingly, the complainant states that the investment was misrepresented being in fact a Ponzi or fraudulent scheme and the complainant holds the respondents accountable.

A painted canvas

The FAIS Ombud invited the respondent to respond to the complaint. The respondent stated that the complainant’s husband wanted to invest in the RVAF, but wanted to do so in his wife’s name (the complainant) for tax purposes. The husband wished to meet with Herman Pretorius in order to ask several questions.

According to the respondent, the husband advised that he is well informed and knowledgeable regarding trading shares and that he himself in his own capacity trades Satrix top 402 and hence understood that the investment made use of a partnership agreement. No Financial Needs Analysis (FNA) was conducted as this was treated as a single need. The complainant required nothing more as he is already well invested for retirement.

The record of advice evidences that the complainant was warned by the respondent about the high risks of the product.

The respondent only provided factual information on hedge funds and did not provide advice. The respondent advised that Herman Pretorius explained the strategies and how the risk was managed. She stated that by having reasonable knowledge of Hedge Funds, she concluded that the strategy, as explained to her, was a suitable investment for the client. The respondent contended that she was satisfied that persons investing in the fund were fully appreciative and aware of the risks involved.

What is not in dispute, is that the complainant sought guidance from a licensed financial adviser; namely the respondent. In so doing, the respondent had a duty to ensure that the advice that was provided was correct and appropriate for the complainant’s circumstances. Other than taking an interest in his own financial affairs, there is no evidence that the complainant’s husband possessed any particular investment knowledge or experience. Had the complainant’s husband been the experienced investor the respondent makes him out to be, he would have certainly steered clear of RVAF.

Immeasurable accountability

The inescapable conclusion is that the respondent knew nothing about the fund or its underlying investment and was in no position to advise her clients to invest in it.

No sensible person having been given the correct material information or advice would have invested in RVAF. Nothing in the records explains why it was necessary to take such a risk with a substantial portion of the complainant’s capital.

The issue determined is that the respondent failed to act honestly, with care and diligence. The complaint is upheld and the respondents are ordered, jointly and severally, the one paying the other to be absolved, to pay to complainant the amount of R800 000.

Editor’s Thoughts:
We need to be honest and also admit that poor advice is also a major contributor in some of the FAIS determinations – it is such a pity that some “bad apples” give the industry a bad name and thus give professional advisers a harder time with selling and compliance with regulation. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts






Are industry regulators preserving the integrity of the industry?

9 Jul

Author: Jonathan Faurie

Publications: FANews

Date Published: 9 Jul 2014

Are we as an industry being protected by the regulator? We often receive determinations sent to us by the office of the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud), and there is a common thread in most of the determinations. There are certain advisers in the industry who seemingly have a blatant disregard for the Financial Advisory and Intermediary Services (FAIS) Act and they think that they can get away with defrauding clients.

Predictably they do not always get away, as the Ombud have an open door policy for the public to raise any concerns that they have regarding an adviser. The Ombud then investigates the claim and if it is found that the adviser is guilty a fine will be imposed. But is this enough? This is the question we are left with to reflect on after reading a recent determination handed down by the FAIS Ombud.

Negotiating a normal client interaction

Dr Craig Inch (complainant), a dental practitioner, was seeking an investment plan that would best suit his needs and help grow his savings. After recommendation by a college, the complainant arranged a meeting with Michal Calitz (respondent) to discuss the possible investments which would be best for the complainant.

During the original discussion, a number of unit trusts were discussed and it was recommended that the complainant look into these unit trusts. A follow-up meeting was arranged and the respondent made mention of a hedge fund that the complainant’s college, who was a client of the respondent, had spoken of. The fund was doing well and the complainant asked the respondent if he knew of any other funds which operated in a similar manner. The respondent recommended the Relative Value Arbitrage Fund (RVAF).

The complainant was hesitant to invest in a high risk fund as he was thinking of investing his whole life savings into this fund and could not afford to lose it. In the complainants version to the Ombud, he said that he made this very clear to the respondent. He asked the respondent to explain the RVAF in more detail to which the respondent explained that the fund took long positions in stocks which were expected to increase in value and short positions on stocks which were expected to decrease in value.

The complainant then asked about the performance of the fund to which the respondent assured him that the fund’s performance was in the region of twenty percent per annum.

The plot thickens

The respondent apparently told the complainant that a hedge fund was not regulated in the same way as a unit trust portfolio. The respondent then assured the complainant that the RVAF fund did have all of the correct paperwork and documentation. During the investigation of the Ombud, it was clear that this was not the case.

With regards to the fee structure, the complainant was told (as he remembers it) that he did not have to pay a fee and instead that twenty percent of the profits generated from the fund would be used as a fee.

The complainant obviously felt uneasy about the investment because he once again mentioned his reluctance to invest in a high risk vehicle as he would be investing his whole life savings of R600 000. He asked the respondent how much he should invest and the respondent recommended the complainant invest R500 000. The complainant was assured about the stability of the fund and that it was not influenced by market fluctuations. The respondent reiterated that many of his clients invested in the fund and that he was also an investor in the fund.

When the complainant wanted to withdraw R600 000 from the fund, he emailed a letter of intent to the fund, to which he was informed of the death of Herman Pretorius who was a fund manager and a trustee of the fund.

Opening a can of worms

Unlike many other recent determinations, the respondent did respond to the allegations made to the Ombud.

In his defence, the respondent said that the complainant asked about the RVAF and not the other way around. In the record of advice there was also no indication that the respondent mentioned to the complainant that hedge funds are not regulated in the same way as unit trust funds.

Two articles on a prominent media site unsettled the respondent and prompted him to withdraw all of his client’s savings out of the RVAF. However, he did not mention what particular aspects of the articles made him withdraw the funds.

The respondent further adds that he cannot accept responsibility for what seems to be one person’s deliberate intention to defraud investors.

Unearthing a long list of infringements

The list of aspects of the FAIS Act which the respondent infringed on in this case was very extensive and took up twenty pages in the Ombud’s determination, which can be read here.

One of the most important aspects of the FAIS Act which the respondent contravened was the poor selection of the vehicle in which the funds were invested. During the Ombud’s investigation it was found that there was no financial needs analysis done. The respondent did not present a range of options which could have been invested in other than the RVAF and the complainant never received any documentation that the RVAF was the fund that his capital was invested in. There was also a significant grey area on who the respondent was representing.

Was justice served?

Upon the death of Herman Pretorius, the RVAF went into liquidation and all of the capital invested in the fund was lost. However, the complaint was upheld by the Ombud as it ruled that the capital should never have been invested in this fund in the first place. The respondent was instructed to pay the complainant R500 000 and interest at a rate of fifteen point five percent per year.

What is the role of the Financial Services Board (FSB) in this debacle? Despite the fact that Calitz should have been dealt with by the regulator long before this determination took place, the issue is what will happen to Calitz now? The ruling of the Ombud can hardly be described as a slap on the wrist, but if he is allowed to continue practicing, is justice being served? In all fairness, the FSB should suspend Calitz and never allow him to practice again.

Editor’s Thoughts:
The financial services industry operates on public perception. If the public thinks that one adviser is fraudulent, they may paint a lot of other advisers in the industry with the same brush. The FSB has a duty to fight for the reputation of the industry. Is it fulfilling its role? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts