The requirements of section 8(4)(a) of the FAIS General Code of Conduct (the Code) apply when addressing a client’s specific need, however, an Ombud determination highlights the implied duties that are also required of you.
You can only avoid doing a full financial needs analysis if a client does not provide adequate information or if there is insufficient time. In these circumstances, you need to inform the client and ensure he or she understands a full financial needs analysis could not be conducted, so the appropriateness of the advice may be limited. The client must also be warned to consider if the advice is appropriate, considering his or her objectives, financial situation and particular needs.
Given the above and the common practice of ‘single need’ sales or advice, how should you act? The Financial Services Tribunal ruling in respect of PC Cronje Makelaars v CJ van Zyl and Another highlights how to address a single need requirement.
First and second respondents Carel and Hester van Zyl lodged a claim with the Ombud for Financial Services Providers against PC Makelaars, based on investment advice linked to Sharemax Investments and Propspec Investments.
Carel van Zyl initially approached PC Makelaars for a discussion, as he was dissatisfied with his current investment earnings and wanted higher returns. PC Makelaars assured the respondents that the investments they were proposing were safe and after attending a presentation by Sharemax and Propspec, the respondents invested in Sharemax and Propspec investments.
However, when Sharemax ceased to operate during the second half of 2010 and Propspec’s investment collapsed, the respondents’ investment capital was lost.
The Ombud upheld the complaints of inappropriate advice and found a sufficient link between inappropriate advice and the respondents’ loss. PC Makelaars was ordered to pay R337 000 to the first respondent and R412 000 to the second respondent.
The crux of the Ombud’s determination was based inter alia on the following:
- PC Makelaars did not appreciate the risk inherent in these investments;
- PC Makelaars admitted the respondents were lending their money to a company that did not own property yet and, further, the money was lent to the developer to build the property. Based on the advice records, this was not explained to the respondents;
- An investor’s signature does not equate to the investor understanding the investment risk and being in a position to make an informed decision;
- PC Makelaars did not understand the intricacies of the products, as the prospectuses contained warnings. PC Makelaars’ advice was thus negligent and in violation of its duty as set out in section 2 of the Code;
- PC Makelaars failed to take reasonable steps to seek appropriate and available information regarding the respondents’ financial situation, financial product experience and objectives to enable it to conduct an analysis to give the respondents appropriate advice;
- The respondents wanted investments that would render a higher return. The documentation provided to the Ombud did not suggest the respondents’ needs could not be satisfied with other products.
After the initial determination, PC Makelaars referred back to the Ombud to reconsider the determination in terms of section 230 of the Financial Sector Regulation Act, and was granted leave to appeal. Some of the grounds on which its application was made included that the Ombud erred in:
- Adopting a blanket, standardised approach to determine matters of this nature, as opposed to investigating each matter;
- Making factual findings that were not supported by acceptable evidence contained in the record of decision;
- Accepting the respondents’ version over that of PC Makelaars without legal and/or justifiable reasons, particularly where documents signed by the respondents supported PC Makelaars’ version;
- Concluding that PC Makelaars did not explain the risk associated with the investments to the respondents, even though the risk was clearly set out in the prospectus;
- lgnoring that these were single need investments and that PC Makelaars complied with the provisions of section 8(4) of the Code, with the respondents waiving full investigation and a needs analysis of their circumstances; and
- Concluding that the prospectus/Sale of Business Agreement illustrated that the interest payments promised by Sharemax were not achievable.
The tribunal had to decide whether PC Makelaars had conducted itself negligently in providing the financial advice and was therefore in breach of the Code. The test used to determine whether an FSP/advisor acted negligently in rendering advice is based on a subjective matrix. Applying this, the tribunal observed:
- Investments carry risk and investors bear that risk. Some investments carry a higher risk than others and the FSP’s function is to disclose the reasonably foreseeable investment risks to the client. ln this case, the parties signed next to each insertion or cancellation in the Advice and Intermediary Services Agreement (mandate) with PC Makelaars and the tribunal found it probable that the respondents substantially understood the nature of the investments.
- The respondents acknowledged they received prospectuses regarding the investments, in addition to attending meetings and workshops hosted by Sharemax and Propspec.
- In terms of the mandate, the following clauses were pertinent:
– Cancellation of conducting financial analysis;
– Acceptance of the advice by the first respondent;
– lncome and/or capital growth for retirement;
– Cancellation of the part referring to investment capital guaranteed over the investment term.
- ln respect of the due diligence, PC Makelaars submitted that, amongst other things, it contacted and relied on responses obtained from attorneys and auditors who worked on the Sharemax investment documents. Further, PC Makelaars relied on Sharemax’s 10-year failure-free investment record.
- Carel van Zyl was a registered intermediary in terms of the FAIS Act when he made the investments. He would therefore probably have understood the importance of the information provided in respect of the investments and the essence of signing the documents.
The tribunal ruled that the respondents were aware of and understood the high-risk nature of the investments and that the respondents’ needs, namely a higher return, were met as they repeatedly invested more into Sharemax.
It was found that PC Makelaars had not acted negligently. The Ombud’s determination was set aside and referred back for further reconsideration.
The abovementioned case highlights advisors’ responsibilities to render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry at all times. This responsibility is envisaged in section 2 of the Code, and an FSP may not dispense with this duty even when addressing a client’s single need.
Even where a client agrees to dispense with a full financial needs analysis being conducted, and elects to receive limited information or advice, you will need to demonstrate that due skill, care and diligence was applied when entering into a mandate with the client. You may need to prove the due diligence measures taken for a recommended product and your steps taken to ensure all risks associated with the product were brought to the client’s attention.
You are also expected to take reasonable steps to seek appropriate and available information regarding clients’ financial situations, financial product experience and objectives, even where the requirements of section 8(4)(a) are met. This will enable you to conduct an analysis to provide clients with appropriate advice and alert them of any risk. You also need to advise clients to take particular care to consider if any product selected is appropriate to their needs, objectives and circumstance.
By acting with clients’ interests in mind at all times and keeping a record of all your interactions with your clients, you will be able to respond confidently in the event of a dispute with a client.
To read the full determination, click here.