The matter started when clients of a financial advisor invested into the purchase and sale of sugar in Brazil, alledgedly on the advice of their financial advisor. Despite the advisor assuring them that the investment carried no risk, the clients lost all their money. They lodged a complaint with the FAIS Ombud, but this was dismissed because it was older than 3 years and therefore had prescribed.
Thereafter, Mr Client approached the Registrar of the FSB, with the essence of the complaint being that the advisor advised him of the sugar deal as an ‘investment opportunity’. Then, based on that ‘advice’, he withdrew his funds from his Momentum-Investment in order to fund the investment in the sugar deal. Further, Mr Client stated that his advisor failed him as she ‘apparently’ had not performed the necessary due diligence for the proposed investment.
Based on the complaint, the Registrar withdrew the authorisation of the FSP and debarred the advisor who is the sole key individual, shareholder and representative of the FSP. The basis for debarring the advisor for 5 years was that she no longer met the fit and proper qualities of honesty and integrity. The Registrar also found that she failed to comply with provisions of the General Code of Conduct (the Code). The advisor appealed against this decision and the Appeal Board issued a judgment as follows:
The first issue which the Appeal Board had to decide on was whether the advisor in fact gave ‘advice’ to the client in relation to (1) the sugar investment and (2) withdrawing money from an existing financial product (viz. a Momentum investment) without having complied with the provisions of the Code. The Registrar later conceded that the sugar deal was not a ‘financial product’ as defined in the Act.
The Appeal Board found that the actual issue to be considered is whether the advisor had in fact given ‘advice’ within the meaning of the Act with regards to the withdrawal of the Momentum investment, as found by the Registrar. The Appeal Board noted that the client did not allege that the advisor had given him advice in relation to the Momentum withdrawal. The Registrar looked at emails as background to its finding.
A first email deals with the ‘investment opportunity’ offered by the sugar transaction and mentions the particulars of the amount required, investment period, the rate of return and ended with a statement by the advisor that she felt it would be a good (investment) opportunity. The advisor said nothing more to the client. A second email provided ‘the full details of the sugar trade’, containing the statement that there was no risk in the transaction and that it was a great opportunity and she had invested her own funds. In both of the emails, the advisor did not refer to the method of financing or the existing investment of the client or its liquidation to finance the deal. According to the advisor, the client had asked her to look at his portfolio and suggest which investment could be used to provide the funding for the sugar investment. In response she prepared an update of his insurance portfolio, and mentioned 2 policies and provided calculations. The client subsequently chose to withdraw funds from his Momentum investment.
The Appeal Board highlighted the following points:
- a decision around advice in respect of the sugar transactions should not be fused together with advice in respect of financing it – a distinction which the Registrar omitted;
- the Registrar’s view was that the advisor had ‘guided’ the client to terminate his Momentum Investment;
- the approach by the Registrar ignored the express qualification of the definition, namely that it is subject to the provisions of s1(3)(a), which provides that “ ‘advice’ does not include ‘factual advice’ given merely in the form of ‘objective information’ about a particular financial product or an analysis or report on a financial product….”
The effect of the two provisions read together is that ‘advice’ falling under s1(3)(a), cannot amount to advice under the definition in S1(1) of the Act. If factual advice given in the form of objective information about a particular financial product would guide a client to, say, purchase or terminate an investment, then it is not ‘advice’. The email from the advisor to the client described the facts concerning two financial products. It did not express any opinion or preference or recommendation by the advisor. It was left entirely to the client to make an election, should he so wish. Therefore, the advisor gave no ‘guidance’ (contrary to what the Registrar found) and the facts provided to the client do not amount to ‘advice’ which required compliance with the Code. The Appeal Board ruled that the advisor had not given advice and was therefore not in conflict with the provisions of the Code.
The second issue which the Appeal Board had to determine was whether the advisor no longer met the character qualities of honesty and integrity. The Registrar’s main ground for debarment was that the advisor attempted to mislead the Registrar by stating that she had never been the financial advisor of the clients when in fact she had been their advisor and intermediary. The Appeal Board found that this argument was based on an assumption that the advisor had not properly given ‘advice’ in respect of the Momentum withdrawal. Since the Appeal Board found that she didn’t give “advice”, she could not have been dishonest about giving advice.
The Registrar also argued that the advisor lacked integrity and honesty because:
- there was a conflict of interest between her and the client,
- she did not prove that she too had lost her money,
- she misrepresented her own involvement,
- and she stated that the investment was risk free.
The Appeal Board found that these matters were never raised by the Registrar before the debarment decision and fairness demanded that a provider must be alerted prior to the decision of the material facts on which the decision may be based. It said the Registrar cannot choose which issues to deal after the fact and also the Registrar did not call the advisor to deal with them.
The Appeal Board upheld the appeal and set aside the decision of the Registrar to debar the advisor.
Who is the Appeal Board?
The Appeal Board is governed by sections 26A and 26B of the Financial Services Board Act (the FSB Act). The Appeal Board is an independent tribunal consisting of members who are neither employees of the FSB nor active participants in the financial services industry. Any person who is not satisfied with the finding of the Executive Officer, Registrar or the FAIS Ombud, may approach the appeal board and lodge an appeal against the decision made by such party.
Advice vs Factual Advice
This case illustrated the fine line between advisors giving ‘advice’ compared to providing clients with factual information. The FSB Appeal Board so eloquently used the following metaphor to illustrate this fine line:
“… the client was metaphorically at a fork in the road. Ms Teixeira [the advisor] described the two routes in factual terms [to the client]. She did not give any assistance as to the route that should be taken. She did not express any predilection but left it to the client to pick one of the roads. In other words, she gave no ‘guidance’ – to ‘guide’ means to show the way.”
The Appeal Board indicates with this metaphor, that when an advisor provides a client with facts about respective options, those options do not automatically turn into ‘guidance’ or ‘advice’ where the client on their own accord makes a decision as to which option to choose.
Record-keeping of correspondence with clients
Based on the documents and evidence of communication the advisor was able to provide, the Appeal Board found her to be transparent with the Registrar at all times. This again highlights why it is important for advisors to keep records of all correspondence with clients – it protects their reputation and their licence.
This Appeal Board ruling does create a sense of comfort in that advisors voices are heard and they have recourse where they feel an incorrect decision was taken. While penalties and debarments are appropriate for those who act improperly, this case shows that advisors enjoy protection under the regulations.