The FAIS Act defines a complaint as a specific complaint relating to a financial service an FSP or its representative has rendered to a client, where it is alleged that the provider or representative:
- has contravened or failed to comply with a provision of the Act. As a result, the client has suffered or is likely to suffer financial prejudice or damage;
- through wilful or negligent rendering of a financial service has caused prejudice or damage to the client, or which is likely to result in such prejudice or damage;
- or has treated the client unfairly.
When determining the quantum of a client’s claim, both the actual loss and the likelihood of or potential loss incurred is considered. This was demonstrated in a reconsidered FAIS Ombud decision during 2022, in which a client received compensation for her likely loss.
In 2013, the Office of the FAIS Ombud investigated a complaint. The advisor allegedly advised the complainant (the client) to sell her Netcare shares in 2011 and buy unlisted shares that she could later sell for a profit.
In exchange for her assistance, the advisor charged a high commission. The client alleged she had not agreed to the commission. When she questioned the commission, the advisor gave the client shares in Platfields worth R150 000 as a ‘payback’.
In 2012, the client asked the advisor to help her sell her shares in Unimin and Platfields. She then learned they had been converted to ordinary shares, which could not be sold at the time. Further, the Platfields shares were worth only R3 000.
The client referred the matter to the Office of the Ombud. It was found the advisor had rendered financial advice in respect of selling the Netcare shares and purchasing the Unimin shares.
However, the Ombud found that the advisor had not complied with section 7(1) of the FAIS Act. This requires that a client be given a reasonable and appropriate general explanation. The nature of transactions should also be explained, and a full and frank disclosure of the investment should be made.
The advisor had also not complied with section 8(1)(d) of the General Code of Conduct. She had not fully disclosed the potential consequences and implications of replacing a financial product. The advisor was ordered to pay the client an amount equivalent to the value of the Unimin and Platfields shares for the loss suffered.
Application for reconsideration
In 2019 the Financial Services Tribunal (FST) granted the advisor an application for reconsideration, which was upheld in 2020. The tribunal found that the office of the Ombud had not addressed the advisor’s explanations regarding the quantum aspect, which related to Unimin.
In 2016, the High Court in Pretoria had ordered Unimin to repay all the subscriptions to its shareholders. Although the Ombud had been aware of the High Court’s decision before issuing the determination, it did not seem to have established whether the client had pursued a claim in accordance with the court’s order.
The tribunal found that the Ombud had failed to address the advisor’s contentions before making an award. This was namely to first offset the current value of the Platfields and Unimin shares against the investments made by the client. Further, it was found that the Ombud did not adequately consider the extent of the client’s losses in respect of the transactions the client concluded on the advisor’s advice. The matter was remitted to the Office of the Ombud for reconsideration.
FAIS Ombud’s revised determination
In its reconsideration, the Ombud noted that the High Court’s order in the Unimin case did not automatically deny the client her right to seek redress for the losses suffered due to the advice she received from the advisor. (Read the revised determination here.)
Further, it was noted that the Ombud does not have jurisdiction only where a client has suffered financial prejudice or damage. Rather, the Ombud’s jurisdiction also extends to where clients are likely to suffer financial prejudice or damage and where a provider or representative has acted in a way that is likely to result in prejudice or damage.
The Ombud further noted that Unimin had made no attempt to repay shareholders in terms of the High Court’s order. He said it was unlikely that the client would have been successful in terms of that process.
The previously ordered compensation in respect of the Platfields shares was rescinded. The reasoning was that if the advisor had not offered the client shares in Platfields as a ‘discount’, the client would still have paid the commission as agreed.
The Ombud ordered the advisor to pay the client R600 000 in respect of the Unimin investment, plus interest of 7.25% a year, from 4 April 2019 to the date of final payment. The client was also ordered to transfer to the advisor any amount received from Unimin as a result of the High Court’s order.
In resolving client complaints, the Office of the FAIS Ombud not only considers the actual financial prejudice incurred by clients, but also the potential damage they are likely to suffer where an FSP has acted in a way that is likely to cause prejudice or damage.
Considering the proposed amendments to increase the FAIS Ombud’s compensation limit, FSPs may soon be exposed to FAIS Ombud complaints with a value of up to R3 500 000.00. It is as important as ever to consider the level of risk or exposure your clients are prepared to take when making investment decisions and advise them appropriately.