Sunday, August 5, 2012
Threat to out-of-pocket investors
August 5 2012 at 12:25pm
By Bruce Cameron
Illustration: Colin Daniel
An Olympic-sized legal punch-up in the Pretoria High Court this week focused on the rights of consumers, or, more narrowly, on your right to compensation if you do not receive appropriate financial advice.
At issue was an application to the High Court to force Noluntu Bam, Ombud for Financial Services Providers, to refer complaints about failing property syndication schemes to the High Court rather than make determinations herself.
If a constitutional challenge in the application made by Edenvale financial adviser Deeb Risk and his company, D Risk Insurance Consultants, is successful, victims of poor financial advice – not restricted to imploding property syndications – may no longer have access to the free services of the ombud, who can order compensation where investors received inappropriate advice.
You will then have to go the expensive, laborious and time-consuming route of suing through the High Court, where you will face companies with deep pockets.
Thousands of complaints from investors in property syndication schemes are awaiting consideration by the ombud.
To date, Bam has issued five determinations against Risk and his company, ordering him to repay a total of R3.08 million to pensioners aged 70 and older. Altogether, seven pensioners have brought complaints against Risk and D Risk Insurance Consultants.
Fighting in the corner of consumers are:
* Senior Counsel Vuyani Ngalwana, who during his tenure as Pension Funds Adjudicator took on the powerful life assurance industry over the penalties levied by life assurers when members of retirement annuity funds are unable to pay their contributions, even when it is through no fault of their own. His battle resulted in then finance minister Trevor Manuel intervening, getting the life industry to pay an effective admission of guilt fine of R3.5 billion, dramatically reducing the confiscatory penalties and reforming perverse commission structures. Ngalwana is representing the ombud.
* Highly respected Senior Counsel Jeremy Gauntlett, who is representing the Minister of Finance.
In the corner for Risk and his company is Senior Counsel Piet Louw. Risk’s legal team has been appointed and paid for by Santam, which provided Risk with professional indemnity insurance through its agency, Stalker, Hutchinson and Admiral.
If Bam orders financial advisers who sold failed property syndications to compensate investors for their losses, Santam faces potential claims of millions of rands from advisers who took out professional indemnity insurance with Santam.
The referee is Judge Selby Baqwa, who, as a former Public Protector, is no stranger to the workings of alternative dispute resolution structures such as the Ombud for Financial Services Providers.
The judge, after listening to almost two days of argument in extended court hours and being presented with copious bundles of papers, reserved his judgment on Tuesday afternoon.
Risk’s legal team has asked:
* Judge Baqwa to declare that Bam should refer all complaints involving property syndications to the High Court for trial, mainly because Louw claims that the ombud has denied Risk his constitutional right to a fair hearing.
* Failing this, that the judge refer the complaints against Risk back to Bam, ordering her to reconsider her decision not to allow Risk to take his case to the High Court. Bam should be ordered to “adopt a process that is procedurally fair” in reviewing her initial decision.
Louw claims her initial decision was based on a whim and not a formal process.
* If the judge fails to agree that Risk’s constitutional rights have been transgressed in terms of current legislation, that the Financial Advisory and Intermediary Services (FAIS) Act, which, among other things, established the office of the ombud, be declared unconstitutional, effectively disbanding the office of the ombud.
Despite Louw’s attack on the constitutionality of the legislation that established the office of the ombud, he told the court that Risk’s challenge is not intended to prevent the ombud from hearing all complaints about financial advice, but only those about property syndication schemes.
* That the court set aside Bam’s determinations made against Risk, mainly because the determinations were made after Risk had launched his court action in July 2011. Louw argued that if Judge Baqwa finds in favour of Risk, the determinations have to be “rooted out” as well.
The determinations, in terms of an agreement by both parties, will not be invoked by submitting them to the Registrar of the High Court until judgment is handed down by Judge Baqwa.
OMBUD DENIED RISK HIS RIGHT TO A FAIR HEARING, ADVOCATE CLAIMS
“Who rules – the (financial advice) ombud or the rule of law?” Senior Counsel Piet Louw asked in arguing the case for financial adviser Deeb Risk in the Pretoria High Court this week.
“The essential question is whether a determination by the ombud where there was no hearing, no legal representation, no knowledge of the particulars of the case that was eventually held against the applicants (Risk and his company), and that culminated in what is in effect a judgment of the High Court and can be executed as such, is an instance of the rule of law or an unconstitutional aberration,” he asked.
But Senior Counsel Jeremy Gauntlett, representing the Minister of Finance, dismissed the application and arguments as “case ramshackle”.
Louw argued that:
* The Financial Advisory and Intermediary Services (FAIS) Act states that the objective of the ombud’s office is “to consider and dispose of complaints in a procedurally fair, informal, economical and expeditious manner and by reference to what is equitable in all the circumstances, with due regard to the contractual arrangement or other legal relationship between the complainant and any other party to the complaint”.
But, Louw says, ombud Noluntu Bam denied Risk his constitutional right to a fair hearing, because:
– Bam has not properly applied her mind to Risk’s request for the complaints against him to be referred to the High Court. He argued that although Bam has the discretion to refer complaints to the High Court, Bam has taken the stance that she will not refer any matters to the High Court.
– Bam refuses to hold hearings or allow legal representation, further denying Risk his constitutional rights.
– Bam is not sufficiently qualified or experienced to deal with complaints about property syndications. This is apparent from Bam’s determinations against Risk, which, Louw claimed, are not supported by the facts.
Advocate Vuyani Ngalwana, representing the ombud, described Louw’s personal attack on Bam as unacceptable and vituperative.
* Bam’s determinations should be set aside, because they are faulty and were issued after Deeb had applied for the complaints against him to be heard by the High Court.
Gauntlett and Ngalwana rejected Louw’s claim that Risk’s constitutional right to a fair hearing has been denied by Bam’s refusal to refer the complaints against him to the High Court.
Gauntlett said Risk’s High Court application will not succeed on its constitutional arguments.
The application is based on a “dogged and dogmatic view of the law”, and on an “unnatural, stilted and unworkable view of the Constitution”, Gauntlett says.
The Constitution provides for the right to justice and not for an irredeemable right to trial by a court, he says. Even then, the right to justice is not an inalienable right; it can be limited by things such as time-barring (prescription) because action was not taken sooner.
The Constitution allows for disputes to be settled by statutory review bodies, such as the Ombud for Financial Services Providers and the Competition Commission, where expertise can be brought to bear and disputes can be disposed of speedily. If such statutory bodies were not allowed, the entire already overloaded court system would be placed under threat, Gauntlett says.
Ngalwana rejected Louw’s argument that Bam’s refusal to hold a hearing at which oral evidence could be presented, and her refusal to allow Risk to have legal representation at such a hearing, meant that Risk has been denied his constitutional rights.
Risk was afforded ample opportunity to respond to the complaints made against him in writing. Risk had failed to do this, mainly because he had not met the requirement, in terms of the FAIS Act, to provide the ombud with a written record of his advice, Ngalwana says.
CLASH OVER WHETHER COMPLAINTS SHOULD HAVE GONE TO THE HIGH COURT
Financial adviser Deeb Risk and his company, D Risk Insurance Consultants, should have exhausted their options with the Ombud for Financial Services Providers and the Appeal Board of the Financial Services Board (FSB) before making any application to the High Court.
This is the view of Advocate Jeremy Gauntlett, who represented the interests of the Minister of Finance in opposing the application made by Risk and his company for the Pretoria High Court to overturn the determinations that ombud Noluntu Bam issued against Risk and D Risk Insurance Consultants.
Risk’s advocate, Piet Louw, argued that because Risk had applied to have the complaints against him heard in the High Court, Bam should not have made the determinations until the outcome of his application.
Gauntlett says that, in making the High Court application, Risk failed to meet the requirements of the Promotion of Administrative Justice Act, which sets down procedures for statutory dispute resolution bodies such as the Ombud for Financial Services Providers.
In terms of the Act, Risk should first have exhausted the remedies offered by the Financial Advisory and Intermediary Services (FAIS) Act and the FSB Act, Gauntlett says.
Louw rejected the argument that the procedure Risk should have followed was to have allowed Bam to hear the complaints, and then, if he was dissatisfied with the outcome, to have taken Bam’s determination to the FSB’s Appeal Board.
Louw claimed the Appeal Board would not be able to deal with anything but the merits of the case and would not be able to raise new evidence or the request for the matter to be heard by the High Court.
Neither Vuyani Ngalwana, who appeared for the ombud, nor Gauntlett, agreed.
Risk could have taken his objection to the ombud’s refusal to refer the complaints against him to the High Court on review to the Appeal Board, which is headed by a retired judge, even before the determinations were issued.
In terms of the FAIS Act’s code of conduct, Risk was obliged to furnish advice that was suitable and appropriate, based on his client’s financial situation, experience of financial products and objectives; and to identify financial products that were appropriate for the client’s risk profile and financial needs.
Risk was also obliged to keep a record of advice that contained, among other things, a summary of the information and material on which his advice was based, the products that had been considered and an explanation of why the products will satisfy his client’s needs.
Louw argued that Risk had met these obligations, and that one of the reasons he wanted Bam to grant him an oral hearing was so he could point out the discrepancies in the claims against him and explain how he had met the requirements of the FAIS Act.