An Ombud determination highlights the importance of adhering to the General Code of Conduct when rendering financial services and making adequate product disclosures when advising the client.
In the case of Dr R.A.Georges De Meulenaere v S. E Coetzer t/a Downstream Trading, the financial service provider (FSP) advised his client in 2011 to invest in Unimin African Resources (Pty) Ltd, as Unimin would yield greater returns than the client’s existing investment in Netcare. The client then sold his shares in Netcare and used the proceeds to purchase listed preference shares in Unimin. The FSP informed the client that the shares could be exchanged for shares in Global Precious Commodities (GPC) after 12 months.
When the client requested the return of his funds in 2014, he discovered irregularities had been detected with Unimin’s capital structure. Certain preference shares issued, including the client’s shares, had been declared invalid, and the client incurred losses due to the FSP’s recommendation. The FSP claimed it played no material role in the client’s decision to purchase Unimin shares, however, the ‘Information Page and Offer to Purchase’, which included the FSP’s licence number, was signed by both the client and FSP.
The FSP’s mistakes
- The FSP did not understand the client’s risk appetite or risk tolerance. The FSP recommended that the client invest in a high-risk product without having conducted a risk analysis. Had it done an analysis, it would have realised the client was a moderate risk investor who required a guarantee on his capital.
- The FSP did not provide the client with adequate information about the investment. The FSP failed to disclose the true nature of the investment, so the client was unaware of the associated risks. There was no evidence that indicated the client was informed of the consequences of replacing the Netcare shares with the shares in Unimin.
- The FSP did not conduct any due diligence. The FSP’s lack of understanding of Unimin and the fact that no due diligence was conducted on the product resulted in the replacement of the client’s Netcare shares with the purchase of the Unimin shares.
How to avoid the same pitfalls
In light of this determination, it is imperative to follow the requirements set out in the General Code of Conduct to render suitable advice. Understand the product and your client, and adequately disclose to the client all information and risks associated with the product. Also, be fair to clients by providing information in a format they can easily understand.
In the event of a dispute, the Ombud will look for evidence to back up any statements in defence of a complaint. For this reason, gather information about clients’ personal circumstances, needs, concerns and objectives and set out the rationale/reasons why a particular investment is suitable for the client. Keep proper records of the information/discussion and be able to show that you gave it to the client. Be cautious about using standardised templates without first considering if they are appropriate for the circumstances. Where a product is being replaced, ensure the client fully understands the associated consequences and risks.
By following the requirements set out in the General Code of Conduct and keeping a record of your advice, you are not only being fair to clients, but covering yourself in the event of a client dispute.
To read the full Ombud Determination, click here.