Adviser not liable for Sharemax investors’ loss, says tribunal

The Financial Services Tribunal (FST) has upheld a reconsideration application by an FSP whose clients invested in a Sharemax-managed property syndication scheme, saying his provision of inappropriate advice did not necessarily mean he was liable for their loss.

Last month’s ruling brings to three the Sharemax-related determinations set aside by the FST since September last year.

Read: Tribunal rules that FAIS Ombud failed to apply her mind to application for a court hearing

Read: Tribunal appeals to FAIS Ombud to get her act together

In February last year, the FAIS Ombud ordered Charles Malherbe (trading as Charles Malherbe Brokers) to pay R345 000 to Alida and Louis Wilken. The amount was equal to their composite investment in The Villa Retail Park in September 2009.

The ombud found that Malherbe’s advice was the cause of the Wilkens’ financial loss.

Click here to download the ombud’s determination.

Malherbe submitted 41 grounds for reconsideration, including that the ombud lacked jurisdiction to hear the complaint, failed to resolve material disputes of fact, and was biased against him.

The key points to emerge from the FST’s judgment include:

• It “has been established” that the Sharemax scheme, including The Villa, collapsed because of the intervention of the South African Reserve Bank (SARB), not because the intrinsic risks of the investment eventually “erupted”.
• This risk was not reasonably foreseeable.
• Malherbe’s breaching of the General Code of Conduct did not in itself establish legal liability for his clients’ loss.
• Awarding “fair compensation” for prejudice suffered as a result of inappropriate advice does not mean that the ombud can order an FSP to repay the invested capital.

Where the tribunal agreed with the ombud

The tribunal was in agreement with the ombud that Malherbe’s failure to comply with the General Code of Conduct meant factual causation existed with respect to the Wilkens’ loss.

It reached this conclusion after considering Malherbe’s obligations in terms of sections 2, 7 and 8 of the code of conduct.

It said there was “no proof” that Malherbe had discharged his duty to place his clients’ interests first and foremost when rendering financial advice.

The FST said it was not sufficient for Malherbe to contend that the Wilkens had received a copy of the scheme’s prospectus. He had not proved that they had read or understood the prospectus, or that he had explained its contents to them.

It said Malherbe failed to maintain a proper record of advice.

He was “evidently at fault” to have recommended what appeared to be high-risk product without having satisfied himself, by way of producing evidence before the ombud or the tribunal, that the product was suitable to the Wilkens’ risk profile, taking into account their financial needs.

Legal causation not established

But the tribunal disagreed with the ombud that Malherbe’s wrongful act (breaching the code of conduct), which resulted in inappropriate advice, was sufficient to establish legal causation.

“For liability to be present, the applicant must also have acted negligently: in other words, he must have acted differently from the way in which a reasonable FSP would have acted under the same circumstances.”

In addressing the issue of legal causation, the cases of Oosthuizen v Castro and Another and Symons NO v Robroy Investments CC t/a Assetsure came into play.

The tribunal said the ombud relied on the Bloemfontein High Court’s decision in Oosthuizen v Castro for ordering Malherbe to pay the amount of loss suffered by the Wilkens.

It agreed with Malherbe’s submission that Oosthuizen could not serve as an authority on the aspect of causation in his case, because the facts were different.

In Oosthuizen, the FSP did not contest the evidence against him, and the client (the plaintiff) gave evidence and presented expert evidence that was uncontested. In particular, the FSP referred his claim to his professional indemnity insurers, which were also a party to the proceedings but did not challenge the evidence on the facts. Its defence was on enforcing an exclusion clause in the PI policy.

SARB’s intervention could not be foreseen

In Symons, the Pietermaritzburg High Court held that:

• The collapse of Sharemax was caused by the intervention of the SARB;
• Sharemax was receiving deposits from investors in contravention of the Bank Act, and the SARB ordered it to refrain from receiving further payments and to return all payments to the investors; and
• This was not a foreseeable risk and as such the requirement of legal causation had not been established.

The tribunal said it agreed with Malherbe that it was the SARB’s intervention that resulted in the scheme’s collapse. It would not be “legally sustainable” to conclude that he could have reasonably foreseen this risk.

Fair compensation does not mean repay the capital

The tribunal stated that Malherbe’s failure to comply with the General Code of Conduct should result in an award of compensation, the amount of which was at the ombud’s discretion.

However, section 28(1)(b)(i) of the FAIS Act – “the complainant may be awarded an amount as a fair compensation for any financial prejudice or damages suffered” – should not be interpreted to mean that the ombud could award the repayment of the amount invested.

Where an FSP’s non-compliance with the code causes prejudice to the complainants, nothing precludes the ombud from imposing “an appropriate and just monetary award that serves the interest of justice and fulfils a ‘fair compensation’ for a financial prejudice suffered” (the FST’s emphasis).

The tribunal said that whenever the ombud believes she may have to award damages, she has to follow an applicable court procedure or, if she believes it is more appropriate to refer the complaint to a court, decline to deal with the complaint and refer it to court.

It referred the matter back to the ombud, with “the proposition” that she considers the application of section 28 in relation to awarding compensation payable by the FSP because of non-compliance with the FAIS Act, the code and “the rules”.

Click here to download the FST’s judgment.