Appeal Board of the FSB decision Case No. FAB4/2016 – Mark Alexander Investments CC and Mark Alexander Eiserman vs Gail Colleen Sheel
Client complaint to the FAIS Ombud
During February 2016, the FAIS Ombud ruled in favour of the complainant in a matter relating to a failed investment in the Relative Value Arbitrage Fund (RVAF) which was promoted by the fund manager, Herman Pretorius (Pretorius). The fund promoted as a hedge fund on the basis that it carried little or no risk, was unique and was not affected by financial market movements. The complainant invested R1 million into the fund which later collapsed owing to the fraud committed by Pretorius. The complainant, who is now the respondent, instituted her complaint against her financial advisor, on whose advice she relied when investing into the fund.
FAIS Ombud’s decision
The FAIS Ombud found the advisor to have rendered inappropriate advice and therefore failed to act with the necessary due care, skill and diligence as required by the General Code of Conduct.
Advisor takes decision to the FSB Appeal Board
The advisor took the Ombud’s determination to the FSB Appeal Board where the crux of the Appellant’s (Advisor’s) argument was based on the notion that the investment in issue did not constitute a “financial product” and further that he did not furnish “advice” as defined in the FAIS Act. The type of advice which the Appellant rendered constituted factual objective information which is expressly excluded as “advice” in the FAIS Act.
FSB Appeal Board’s findings
The appeal was upheld as the Board was of the opinion that such a matter falls outside of the jurisdiction of the FSB, the FAIS Ombud and hence the FSB Appeal Board. They advised that the matter should instead be heard by the High Court to deal with the appropriate legal issues.
The decision of the FSB Appeal Board is significant as it raises a point to consider: “What type of complaints fall within the jurisdiction of the Ombud?”
The Ombud will only have jurisdiction over complaints in which “advice” was rendered in respect of a “financial product” (as defined by the FAIS Act).
The FSB Appeal Board in their analysis of “advice” stated that there must be some recommendation, guidance or proposal made to a client. Where “recommendation” meant an idea or suggestion put forward to a client with approval as being suitable for a particular purpose. “Guidance” was explained to have been given where the aim is to resolve a problem or difficulty. While “proposal” was described as suggestions or ideas put forward for consideration.
Reference was made to the FSB press release dated 10 August, 2012 in which it emphasized that members of the public who invest their savings may not always be subject to FSB regulation as it depends on the nature and structure of the particular investment. The FSB had followed up on information regarding Pretorius’ business affairs and found that his business activities did not require a FAIS license at the time, nor did it constitute an activity which was subject to FSB regulation. The FSB Appeal Board stated that Pretorius had done everything in his power to circumvent the FSB by tailoring the product in such a manner that it fell outside the FSB regulatory rules.
Since the FSB considered this hedge fund product to fall outside of its regulatory net – the product therefore did not fit the description of a “financial product” as defined by the FAIS Act. Hence the FSB Appeal Board and the Ombud did not have jurisdiction to consider this matter and accordingly the appeal was upheld on 22 November 2016.
Flowing from this case, financial advisors are encouraged to ensure that products on which they render advice are in fact financial products which are regulated. Further, to prevent their clients from being victims of fraudulent activities, advisors should conduct their own due diligence process before rendering any form of advice. Advisors are also reminded that it is their duty to act within their client’s best interest irrespective of whether financial advice or factual advice is rendered.