The complainant agreed to invest an amount of R50 000 in shares based on the advice of the respondents who informed the complainant that they “… were in the business of ‘buying and selling JSE shares under high gearing securities (CFDs and Currencies) to make profit in a short period’”. The investment agreement indicated that a 100% profit pay out would be made within 75 working days. The complainant paid the amount of R50 000 into a bank account which was controlled by the respondents. The complainant was also requested to add a further R50 000 to the initial amount but he could not afford this.
The Ombud found that the investment contracts provided to the complainant were filled with jargon, most of which made no sense. It was clear that the complainant did not understand the risks inherent with such financial activities or the products.
The Ombud ruled that the respondents contravened the FAIS Act in the following ways:
- They claimed that they were a licensed FSP (FSP No 44542) but the FSB’s records indicate that the respondents had never been granted a licence in terms of the FAIS Act. The Ombud concludes that this was deliberately done to mislead unsuspecting members of the public to believe they were dealing with an authorised FSP.
- The advice of the respondents led the complainant to invest his money in this platform.
- The evidence indicates that the complainant did not lose his money through normal market activity. There is no evidence to show that the respondents operated their business in a true economic sense. The complainant’s money was therefore stolen by fraudulent means.
The Ombud also criticises the terms of the supposed investment contract:
- The contract contained a long and complicated clause as an attempt to contract themselves out of any negligence. A party cannot contract out of liability for deliberate dishonest acts.
- The contract also deals with due compliance with relevant requirements of the Collective Investment Schemes Controls Act which did not seem to have much relevance to the operations of the respondents.
- The contract stated that upon the complainant receiving his cash returns in their trading account that 60% commission is to be paid to them.
- The clause relating to fees stipulates that the complainant is required to pay a 60% retainer on a monthly basis until the end of the term of the contract.
The Ombud concluded that the conduct of the respondents can only be described as criminal. The fees could not be justified and the Ombud failed to see how the complainant would have agreed to pay more than half of his investment returns in fees to the respondents.
The complainant made the investment on the advice offered by the respondent and that advice was in violation of the FAIS Act. The Ombud makes it clear that the conduct of the respondent was to entice the complainant in a scheme which had the signs of a pyramid scheme.
The respondents were ordered to pay the complainant the amount of his investment which was lost, amounting to R50 000 plus interest of 10.5% pa.
The respondents in this case were not licensed and acted, it would seem, with criminal intent. It is therefore necessary to consider the following interesting points:
- Section 7(1) of the FAIS Act is very clear that “a person may not act or offer to act as a financial services provider, unless such person has been issued with a licence.”
- Even though the respondents were not licensed, the Rules on Proceedings of the Office of the Ombud for FSPs allows the Ombud to entertain a complaint relating to a financial service rendered by a person who is not authorised to do so.
- All FSPs are required to disclose information about the FSP to clients which must include that they are authorised so that clients know who they are dealing with. The FSB also warns the public through Media Releases to be careful when doing business with any person who purports to have a licence to provide a financial service and encourages the public to first check this on the FSB’s website.
- From Ombud Determinations such as this and FSB media releases, it is evident that there are ‘rogue advisors’ who prey on unsuspecting clients and bring the industry into disrepute. Financial advisors who are appropriately licensed and who uphold the integrity of the industry need to make sure:
- Clients understand the value that they offer;
- Clients are educated so that they understand when something is “too good to be true”;
- They keep in touch with clients and conduct regular reviews of their portfolios. This will go a long way to building trust and ensuring that clients call you first before making any decision which could impact on their ability to achieve their financial goals.
Read the subsequent Ombud determination made against the same respondents, whereby the Ombud indicated that the matter has been referred to the South African Police Department (SAPD) for the criminal conduct presented by the respondents for further investigation. The matter has also been referred to the South African Reserve Bank (SARB), as the Ombud was of the view that the respondents’ scheme had all of the signs of a pyramid scheme. Click here to read