The complainant is a pensioner who lost R125 000 in Realcor, a failed property syndication, based on the advice provided by her financial advisor. She contacted the FSP after hearing their marketing campaign on the radio. The investment was promoted as ‘safe’ and it guaranteed that there was minimal risk regarding loss of capital as the investment was in property such as the hotel. This was the complainant’s first ‘big investment’ and was reassured by the advisor that this was a suitable investment. However, Realcor was subsequently liquidated and investors lost all of their investment capital, accrued interest and/or their dividend payments.
The FSP was not the client’s long-standing advisor as she first contacted them based on their marketing campaign. The FSP therefore had no advice giving history with the client. The complainant stated that irrespective of this, the forms to invest her funds were signed instantaneously on the day of meeting with the advisors. One of the forms signed by the complainant was a form titled ‘Record of Advice in terms of section 8(4)’ which stated that the complainant did not want to give the necessary information required to determine her needs. The complainant however made it clear to the Ombud that this was not true as she was not unwilling to provide information. She also did not have the knowledge that an affordability and risk profile analysis should have been conducted before the sale was performed. Neither of the advisors involved in the sale provided the complainant with this information.
The Ombud sent the FSP notices requesting them to respond to the complaint in terms of the investigation. One of the Ombud’s requirements was for the respondent to provide copies of its file, and all other documents and correspondence which could demonstrate compliance with the FAIS Act and the Code.
The FSP responded that the investment information was discussed with the client and that it is not true that they did not do a needs analysis, as the client signed a document whereby she agreed that it was not necessary to do a needs analysis.
Ombud’s analysis on suitability of advice
The Ombud noted that the core of the FSP’s defence was that the client “signed the advice records in terms of section 8(4)(a) of the Code”. The Ombud highlighted that section 8(1) of the Code is prescriptive and lists the duties which a provider must perform prior to giving advice. Therefore, based on the FSP’s defence, in the Ombud’s view it seemed that the FSP was uninformed and blind to its legal responsibilities arising out of section 8(1) of the Code. The FSP is therefore mistaken in believing that a section 8(4) advice record signed by the complainant equates to it meeting its responsibilities. The FSP is also mistaken that by having the complainant’s signature on the record exempts it from complying with the requirements. This approach is incorrect and goes against the very reason the FAIS Act was brought into existence.
Correct interpretation of Section 8(4)(a)
The Ombud explained that section 8(4)(a) is applicable in instances where the advisor insists on collecting information from the client in order to conduct a needs analysis and risk profile (if applicable) to provide advice that is suitable to the client’s personal circumstances but, despite such efforts, the client refuses to provide that information. This section is also applicable in situations where, based on the circumstances of a specific matter, there is not sufficient time to conduct such analysis.
Section 8(4) therefore requires advisors, as a pre-requisite to providing advice, to evidence the extent to which it requested personal information from the client in order for the advisor to continue with the advice giving process. In this complaint, the advisors did not provide any evidence to demonstrate that circumstances were of such a nature that there was not reasonably sufficient time or information to conduct an analysis. Based on the documentation provided by the FSP, it appears that the advisors did not take any steps to seek information from the complainant. Therefore, the Ombud stated that the FSP’s defence that the complainant signed the advice record indicates their contempt for the FAIS Act and the General Code of Conduct.
The advisors could not demonstrate how and what steps they took to enable the complainant to understand the implications of not doing a needs analysis. Without any evidence to the contrary, it can only be concluded that in this case the advisors made no attempt to conduct an analysis rather than a case where the complainant prevented the advisors from doing so by withholding relevant and appropriate information and/or time to enable the advisors to conduct an analysis.
Suitability of advice
The Ombud reviewed the inherent risks in Realcor investments and found that it was clear that the advice rendered by the advisors did not match the complainant’s personal circumstances. The Ombud found it “inconceivable on what basis PIC and Sharemax (now also defunct property syndication scheme investments) were considered as suitable and comparable investments”.
The complainant believed that she was investing in a hotel, however the hotel was incomplete at the time her investments were made. It is not clear from the evidence whether any steps were taken to explain to the complainant how the promised returns would be achieved. The Ombud found that the respondent did therefore not conduct the necessary due diligence expected from an advisor in terms of section 2 of the Code and in doing so, did not act in the interest of the client.
The Ombud ruled that the Key Individual and the representatives of the FSP failed to comply with the FAIS Act and the Code when they rendered advice to the complainant. They were also found to be negligent in failing to elicit personal information from the complainant in order to show an understanding of the complainant’s needs prior to advising her. They furthermore failed to provide an explanation of why the investment was likely to satisfy the complainant’s needs and objectives as foreseen by section 9 of the Code.
The FSP, Key Individual and Representatives were ordered to pay the complainant, jointly and severally, the one paying the other to be absolved, the amount of R125 000 plus interest.
The Ombud clearly sets out the correct application of section 8(4)(a) and made it clear that the abuse of this section will not be tolerated. It is important for advisors to understand why they must perform a needs analysis, even before providing a client with advice. Advisors must be able to show that reasonable steps were taken to request and obtain relevant and appropriate information from a client. An advisor cannot decide ‘not’ to conduct an analysis as they are duty-bound to do so. It is only when the information and/or time needed for an analysis is not forthcoming from the client that section 8(4) can be applied. As the Ombud pointed out, advisors who fail to do this are negligent and will be in contempt of their legal responsibilities as set out in the FAIS Act and Code.
Advisors must have a documented process in place to record the effort to obtain information from a client prior to giving advice. There must be an up-to-date record of what steps were taken and why the actions of the client resulted in the application of section 8(4)(a).