FSPs must strive to maintain and adopt the highest ethical standards and values in their business activities and practices. This includes avoiding, eliminating or mitigating conflict of interest.
A recent FAIS Ombud determination in the case of K.R. Morulane v Silver Seed Capital (Pty) Ltd and 2 others reveals why it is crucial to declare to clients any conflict or potential conflict of interest that exists or could exist with a product provider. The case highlights the importance of making such disclosures to clients before they purchase a product so they can make an informed decision.
The facts of the matter
In the abovementioned case, the client invested in UG2 Platinum Ltd shares, based on the representative’s recommendation. The representative assured the client the investment was for a 12-month period with a tax-free return of 12% on maturity.
The client requested a withdrawal of her capital on maturity, but the FSP failed to respond to her request. After several unsuccessful attempts to contact the FSP, the client laid a formal complaint with the FAIS Ombud. The FSP did not respond to the complaint despite being given several opportunities to do so. The FSP’s failure to respond to the complaint resulted in the matter being determined without the FSP’s response.
After other investigations into the FSP following complaints by different complainants, the Ombud’s office found the FSP was conflicted in the matter and had concealed such information from the client. Failure to disclose this material conflict resulted in the FSP breaching section 3(1)(b) of the Code of Conduct and prejudicing the client from making an informed decision about the product.
In investigating the FSP, it appeared the director of the FSP was also the company secretary of the product supplier, UG2 Platinum Ltd. It is evident from the FSP’s involvement with UG2 Platinum Ltd that the purpose was to entice selected investors with extravagant returns. It seems the FSP persuaded the client to purchase this specific product for the FSP’s gain instead of in the client’s interest.
The FSP’s mistakes
The FSP made several mistakes. The representative failed to fulfil his duties as a provider and his actions may be imputed to the FSP. The FSP failed to provide the client with adequate and appropriate information in recommending the product to the client.
The representative did not disclose to the client that a conflict of interest existed between the FSP and the product supplier. Failure by the representative to disclose this relevant information resulted in the client being unfairly prejudiced from making an informed decision.
There was no evidence that the FSP did a needs analysis and the FSP did not consider the client’s financial position and why the investment suited the client risk profile.
The FSP failed to render advice honestly, fairly, with due skill, care and diligence and in the interests of the client. A conclusion can be drawn from the complainant’s version that the FSP acted dishonestly in recommending the investment to the client and fraudulently concealed its involvement with the product supplier.
How to avoid such complaints
Conflict of interest is a significant issue and should not be taken lightly by FSPs, as first and foremost it forms part of the ethical standards of any business. It is also embedded in the FAIS General Code of Conduct to ensure fair treatment to the client.
An FSP and representative must avoid conflict of interest. Where this is not possible, the FSP must at least try to mitigate such conflict. FSPs must declare and disclose in writing at the earliest opportunity to the client any conflict of interest which exists or may exist.
The client should also be made aware of the FSP’s conflict of interest management policy and procedures maintained to mitigate the identified conflict. An FSP must act with honesty, integrity and in the best interests of the client.
FSPs must provide clients with reasons why the recommended products suit the clients’ financial need. Record such discussions in writing, so you have evidence of having done so if a complaint arises.
In a situation like this case, an FSP should consider and recommend a variety of products and allow clients to make an informed and impartial decision, taking into consideration all the relevant disclosures.
FSPs that fail to declare and disclose conflict of interest could subject the business to administrative penalties and legal action if it is found the FSP acted fraudulently.
By abiding by high ethical standards, you can protect yourself and your business from potential complaints and you will be treating your clients fairly.