The Financial Services Tribunal (FST) has set aside the third determination by the FAIS Ombud in a matter between an FSP and a client whom he advised to invest in a Sharemax property syndication scheme.
The tribunal’s latest decision contains findings that have recurred when it has set aside the ombud’s property syndication determinations (not only this one). In particular, the FST zeroed in on the need to ventilate the material disputes of fact between the parties before the issues of negligence and causation can be addressed.
It said the current matter was “littered” with factual disputes, which would require oral evidence and probably also expert evidence to resolve.
These disputes concerned not only what transpired between the FSP and the client during the advice process, but also the nature of the investment itself. The FSP, Johannes Mostert, submitted evidence from experts, including renowned economist Mike Schüssler (who died in May this year), to the effect that Sharemax was a legitimate investment. The FAIS Ombud has persistently referred to Sharemax as a Ponzi scheme.
Another familiar “theme” is how long this dispute has remained unresolved.
The client (“LR”) invested R650 000 in Zambesi Retail Park Ltd in 2008. The syndication scheme and Sharemax collapsed in 2010. The complaint was lodged with the ombud’s office in 2012.
Some four years later, in May 2016, the ombud upheld the complaint and ordered Mostert to pay LR R650 000, plus interest. Two years later, the then FSB Appeal Board set aside the determination. A year later, the FST set aside the second determination. The ombud delivered the third determination in September 2021. In other words, a decade has passed since the client complained to the ombud.
Referencing section 20(3) of the FAIS Act, the FST said one would expect the ombud to act expeditiously in finalising matters. “Unfortunately, this matter was dealt with by the second respondent [FAIS Ombud] in an inefficient, time-consuming and confused manner. The first respondent [client], a lay person, and the applicant, as the FSP, have both been prejudiced as a result of the delays,” it said.
Disputes of fact between the parties
As the FST stated, there are many disputes of fact in this matter, of which the tribunal mentioned only some. Two of the key issues yet to be resolved are:
- Who made the decision to invest in Sharemax; and
- Whether the client was sufficiently informed of the risks.
On LR’s version, the decision to invest in Sharemax was Mostert’s because he did not mention any alternative investments.
LR said she was reluctant to invest in Zambesi Retail Park and wanted to reinvest her matured funds in Momentum, where Mostert had advised her to invest her late husband’s pension five years previously. Mostert urged her to invest in Zambezi, saying her money would be safe, that it would grow, and that she would get more out than what she put in after five years even after withdrawing the interest.
LR was adamant that Mostert did not advise her that Sharemax was a high-risk investment.
According to her, it was foreseeable for a person in Mostert’s position that she did not have the risk profile to invest all her money in one place. She was about 59 when the investment was made, had no other permanent income, and had a grandson to support and put through school.
On Mostert’s version:
- LR was fully aware of the potential risks when she invested in Sharemax because, among other things, the prospectus clearly set forth information warning potential investors of the risks.
- LR was aware that a full needs analysis had not been conducted and, therefore, the advice might not properly suit her circumstances or might not be appropriate. “I brought this to her attention in writing, which she signed”, as required by section 8(4) of the General Code of Conduct.
- An application form, signed by LR, contained a clause wherein LR confirmed that she was comfortable with this type of investment, that it fitted her investment objectives and needs, and that she wished to invest in a property syndication structure.
Evidence from three experts
Another layer to the disputes of fact between the parties arises from the evidence Mostert obtained from three experts: Schüssler; Anton Swanepoel, whom the FST described as an expert on the FAIS Act, with particular knowledge of compliance, financial and investment planning, and risk profiling; and Derek Cohen, a merchant banker, financier and economist.
According to the FST’s decision, Schüssler said the Sharemax investments were high risk, but this was clearly set out in the prospectus. The prospectus informed investors that the investment was in an unlisted public company developing property, and there was a possibility that their capital would be lost. In his opinion, the nature and structure of the investment model as set out in the Sharemax prospectus did not constitute a Ponzi scheme.
Cohen was also of the view that the prospectus allowed a person to make an informed decision about the business model.
He said the Sharemax structure resembled the model commonly used by property loan stock companies and the property industry in general. If one substituted the investors with a bank as a source of funding, there was little difference between the Sharemax model and the method commonly used in the property industry.
Swanepoel said section 7 of the General Code of Conduct places an onerous obligation on providers from a product disclosure point of view, and providing a prospectus complies with these obligations. Further, the Sharemax prospectus was part of the record of advice and should be considered as such, not only in the context of section 3(1) of the code, but also in the context of section 7 and the Department of Trade and Industry’s requirements for the minimum information to be contained in a property syndication disclosure document (Notice 459 of 2006).
Conclusions depend on the facts
The FST said it could not reject the evidence and/or opinions of these experts unless there was expert evidence in rebuttal of their evidence or for some other valid reason. Neither could the FAIS Ombud, but she has, it added.
The tribunal pointed out that, in its 2019 decision, the panel said the ombud should obtain expert evidence to resolve the material disputes.
The ombud had ignored this recommendation and instead made submissions in the latest determination that referred to, among other cases, the decisions of Oosthuizen v Castro and another (2018) and Centriq Insurance Company Limited v Oosthuizen and Another (2019).
The tribunal said, its view, the ombud “misses the important point that the legal conclusions reached depend on the facts of each matter” (FST’s emphasis).
The FST set aside the determination and referred the matter to the ombud for further reconsideration.
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