Monday, March 14, 2011

More must be done to protect you

More must be done to protect you
March 13 2011 at 12:10pm
By Bruce Cameron


Noluntu Bam, the financial advice ombud, is issuing a slew of determinations against financial intermediaries who sold their clients property syndication investments that failed.

The people who were deprived of their savings are all too often pensioners – the people who least of all can afford such losses.

What is annoying about the ombud’s rulings is that none of the thousands of intermediaries who sold the dud products:

* Took note of the articles published by Personal Finance and other publications over the past 15 years that warn of the dangers and high risks of property syndication schemes. Bam points out in determination after determination that even when the media started directly to question the legality of some of the syndication schemes, the advisers merely relied on the word of the schemes’ promoters.

* Bothered to read their obligations in terms of the Financial Advisory and Intermediary Services (FAIS) Act and its code of conduct, which require intermediaries to conduct a due diligence investigation into an investment and have expertise in the products they sell. Bam points out this fact repeatedly in her determinations.

Bam states correctly: “When a financial services provider (FSP) is licensed, it conveys to members of the public that the regulating authority has satisfied itself that the FSP is qualified to render the necessary service.

“Once the FSP holds himself or herself out to the public as a qualified adviser, it then follows that members of the public may safely rely on the provider’s services.”

It is increasingly clear from the ombud’s determinations that there are sufficient gaps in the FAIS Act for miscreants and the badly skilled to slip through.

The Act needs to be overhauled. It is just too easily skirted, and not enough action is taken against delinquent advisers.

And the FAIS department at the Financial Services Board (FSB) must up its game if the FAIS Act is not to lose its credibility.

The issues – most of which have been raised in determinations issued by the Ombud for Financial Services Providers – that need to be addressed include:

* Why it is apparently so easy for property syndication companies to register as FSPs.

* Why it is that FSPs who are not authorised in terms of their own licences to sell products such as shares and debentures issued by property syndication companies are allowed to register as representatives of these companies, with the right to advise on and sell those very products. According to Bam, this happens even where the FSP representative has been refused an FSP licence to sell a particular product in his or her own name.

And to make matters worse, when a complaint is laid against FSP representatives who have been paid lucrative commissions by property syndicators, they argue that they merely rendered financial services on behalf of their principals (the FSP-licensed property syndicator) and that they, as representatives, cannot be held liable for the investors’ losses. Fortunately, Bam does not accept this argument. She points out that this attempt to side-step the FAIS Act was surely not intended by the legislation. It is surprising that the FSB did not pick this up and stop it at the time.

* Why any product provider is allowed to register as a FSP and then advertise this fact on its product promotional material. This in effect misleads investors into believing that the FSB has licensed the product. Note that no product is endorsed under the FAIS Act. A FAIS licence only entitles an FSP or its representatives to advise on and sell a product.

* Why it is seemingly easy, as Bam points out, for promoters of “toxic” investment products to bring their wares to market, often in the face of criticism, and yet it is not until the fall-out occurs that the regulators intervene.

* Why is it so easy for fronting structures to be established. There are people out there who have or are involved in financial services companies where the company and the FAIS registration are in someone else’s name (normally that of a relative), and they continue to operate even though their names do not appear on any documents. These people do not meet the fit and proper requirements of the FAIS Act.

* Why it is so difficult and expensive for complainants who have been awarded compensation by the ombud to recover their losses.

Once an award is made, it has the same effect as a High Court judgment. But if there is resistance from or ducking and diving by the offending intermediary, it becomes an expensive (and often unaffordable) process for the successful complainant to recover his or her money.

Legislation should be considered that if the offending intermediary does not pay the award within a very limited period, the ombud can issue an order for the intermediary’s possessions to be attached.

Generally, the FSB’s FAIS department needs to up its game with regards to inspections.

Bam points out that the failed BlueZone property syndication was operating without a licence to deal in debentures and securitised debt. Inspections in this high-risk area would have revealed this rapidly.

The FSB’s Appeal Board also needs to up its game and deal with appeals a lot more rapidly to ensure the prompt suspension of offenders’ licences.

The worst thing about the ombud’s determinations is that many FSPs and their representatives are not paying them heed.

High-risk property syndication investments continue to be sold, and sold to pensioners, often under the guise that they are something other than property syndications.

In a determination on a case involving a pensioner from Diep River in Cape Town and Kenilworth-based intermediary John Alexander Moore and his company, Johnsure Investments, Bam says the failed investment schemes in which unsuspecting South Africans have lost millions of rands include property syndications, bridging finance, foreign exchange, property development and various so-called Ponzi or pyramid schemes. And she points out that most people who sell these schemes are financial advisers registered with the FSB and FSPs or their representatives.

A most telling point made by Bam is that without the intermediaries, the promoters of all these “sham investment schemes” would not be viable.

The one good thing that the FSB is doing is to insist on a new set of basic examinations that, among other things, aim to ensure that the people who provide financial advice at least understand the requirements of the FAIS Act. It is clear from Bam’s determinations that many of them do not.

The squeal going up from a broad section of intermediaries about the examinations is quite astounding. I would have thought they would find the exams a cinch, considering that they should have the knowledge at their fingertips given that they are already advising you and me.

In the meantime, you must exercise extreme caution, particularly when an intermediary advises you:

* To invest in any “investment” that entails unlisted shares or debentures, particularly when you are told that the company is “about to list” on a securities exchange, such as the JSE, “within months”;

* To invest in any property, foreign exchange or bridging finance scheme, particularly one that is not listed on a securities exchange;

* To switch any investment, particularly into unlisted shares or debentures; and

* To invest in any scheme that is complex and that you do not understand, or where you are not allowed to take away the documents, or where you are put under pressure to sign quickly.

You should always:

* Be cautious of any guarantees offered or promises of exceptional returns;

* Insist that everything is put in writing; and

* Demand details of the intermediary’s FSP licence. Then check on the FSB website whether the person is not only licensed as an FSP but is licensed to sell the products on which you are being advised

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