Earlier this year the Ombud for Financial Services Providers handed down a far-reaching determination by holding that Momentum was vicariously liable for its representative advising the complainant to invest in a property syndication scheme offered by Sharemax Investments (Pty) Ltd (Sharemax), which subsequently went bankrupt. The Ombud ordered the respondents to jointly pay the complainant the investment he lost in the investment scheme.
To summarise the facts of the complaint, the complainant, Bruce Wallace, during September 2009 consulted his broker, Ian Marais (third respondent) who was employed by Momentum (fourth respondent), with a view to invest his mother's money. The third respondent advised the complainant to invest in Sharemax as part of the complainant's investment portfolio, which included investments in a Momentum approved product.
Since the third respondent was not authorised to sell the Sharemax product by Momentum, he then proceeded to introduce the complainant to Emile Storm (second respondent). The second respondent was employed by CS Makelaars BK (first respondent) as a financial services provider. Pursuant to several meetings between the complainant, second and third respondents, the former was convinced to invest an amount of ZAR730 000 into Sharemax. About a year after the investment, Sharemax stopped making payments of the promised returns on this investment.
In response to the complaint and in their submissions, in the main, the respondents argued that, firstly, there was no contravention of the Financial Advisory and Intermediary Services Act 37 of 2002 (the Act) and its Code of Conduct for Financial Services Providers (the Code), secondly, it was the complainant's choice to invest in Sharemax and lastly, the second respondent argued that there were material dispute of facts that were irreconcilable on the papers, hence the need for oral evidence to be led at court.
After evaluating the submission of the parties and supporting documentation, the Ombud was of the view that there is no material dispute of facts and the version of the complainant was probable in that regard. With regard to the second and third respondents' actions, the Ombud ruled as follows:
- Marais and Storm gave Wallace advice to invest in Sharemax.
- At all material times, Marais and Storm were aware of the nature of property syndication and that it was regarded as high risk.
- At all material times, Marais and Storm knew that Wallace was a conservative investor with no tolerance for risk.
- Notwithstanding the above, and in contravention of the Act and Code, continued to advise Wallace to invest in Sharemax.
- This was done by Marais and Storm in collaboration with a view to share the commission.
With regard to liability of Momentum, they argued that the third respondent was not authorised nor licensed to sell Sharemax hence the referral to the second respondent. Further, they argued that in fact, the second respondent would have been forced to contravene the Act by insisting that he should have advised the complainant not to invest in Sharemax. In rejecting Momentum's submissions, the Ombud ruled that:
"The difficulty I have with Momentum's submissions is that they failed to see that Marais obviously collaborated with Storm in order to share in the lucrative commission paid by Sharemax. Without the collaboration of Marais, Wallace would not have been persuaded to invest in Sharemax. Marais was aware of the fact that his presence was necessary to persuade Wallace that the Sharemax investment was legitimate and suitable for his needs."
In finding that Momentum was liable for the actions of the third respondent as its employee, the Ombud stated that, firstly, Momentum was a financial services provider and is bound by the Act and Code to act with due care, skill and diligence and in the interests of the complainant. As a representative, the third respondent is bound by same. Secondly, on the third respondent's own version, he recommended the second respondent in the process of giving advice as a Momentum employee. Lastly, on the third respondent's own version, he was advising the complainant simultaneously with the advice being given by the second respondent.
On this specific aspect, the Ombud ruled as follows:
"(a) Marais's conduct in advising Wallace was expressly authorised by Momentum.
(b) His conduct is necessarily incidental to his work as an FSP representing Momentum.
I accept that Marais' advice to invest in Sharemax was not in itself authorised by Momentum and it does amount to a deviation from his contract of employment. However this does not absolve Momentum from liability as Marais's conduct was reasonably incidental to his work with Momentum."
This ruling has far-reaching implications for FSPs and their representatives. It highlights that there is a fine line between the actions of a financial advisor acting in his or her official or personal capacity and this line can easily be crossed. In this case, the share of the commission of the third respondent was paid to his personal account and as such, this was neither revealed to Momentum nor the client. What is necessary is that checks and balances within FSPs should be strengthened and be reviewed from time to time as part of risk management in order to prevent situations of this kind from happening.