The High Court in Cape Town has handed down judgment in a matter in which a property development company argued that a property broker acted as an FSP without authorisation, making the brokerage agreement void.
The court’s decision clarifies key aspects of the FAIS Act, particularly regarding the nature of “advice” and “intermediary services”.
Jurie van Dyk, who trades as Van Dyk’s Property Brokers, brought a claim for R1 153 846.16 against M3T Developments (Pty) Ltd. Van Dyk’s claim was based on the assertion that he had fulfilled his obligations as outlined in agreements concluded with M3T.
M3T filed an exception to the claim. It contended that Van Dyk performed the services of a “financial services provider” without being authorised to act as such, thereby contravening section 7(1)(a) of the FAIS Act.
Van Dyk relied in his particulars of claim on two agreements stated to have been concluded with M3T.
Van Dyk said a verbal agreement, defined as “the collaboration agreement”, was concluded in May 2019. In terms of this agreement, he would be paid commission for assisting M3T to secure financing for its property development projects by referring and introducing the company to potential financiers.
A written contract, defined as “the brokerage agreement”, was stated to have been concluded in February 2021. This agreement confirmed Van Dyk’s responsibilities in terms of the collaboration agreement, specifically in relation to two development projects, Môreson and Fynbos. It also revised the terms of the collaboration agreement concerning the commission payable to Van Dyk.
Van Dyk said he complied with his obligations under the collaboration and brokerage agreements by referring the name and contact details of Credit Smith Capital Partners (Pty) Ltd and its investment analyst, Chris Davis, to M3T.
He further said that in November 2021, Davis sent a final term sheet confirming that M3T had obtained funding of R30 million for its Fynbos development. M3T received R14m in funding from its selected financier for the Fynbos project between 8 November 2021 and 10 May 2022, and a further R16m in funding from the same financier after 10 May 2022. As a result, M3T was liable for the brokerage fee in relation to the Fynbos project.
The final term sheet and covering email annexed to the particulars of claim showed that Salicure 2 (Pty) Ltd provided the funding of R30m.
Focus on definition of ‘advice’
M3T contended that Van Dyk furnished “advice”, alternatively rendered an “intermediary service”. As a result, the brokerage agreement was void ab initio because Van Dyk could not render any financial services to it without a valid licence as required in terms of section 8 of the FAIS Act. Accordingly, Van Dyk’s particulars of claim did not establish a basis in law for the claim because of non-compliance with the Act.
In its exception and its heads of argument, M3T focused on clause (c) of the definition of “advice” in section 1 of the FAIS Act.
In terms of this clause, “advice” is “any recommendation, guidance, or proposal of a financial nature furnished, by any means or medium, to any client or group of clients […] on the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability or the acquisition of any right or benefit in respect of any financial product […]”
M3T contended that Van Dyk’s services were covered by this clause.
Related to a financial product
Acting Judge Paul Farlam said M3T’s argument was unsustainable for at least two reasons.
First, it was not sufficient for Van Dyk to have made a recommendation or proposal to M3T in connection with the conclusion of a loan agreement. What also had to be shown was that the loan was connected with the incurring of a liability or the acquisition of a right or benefit “in respect of any financial product” (judge’s emphasis).
Counsel for M3T submitted that clause (c) did not require this, because the clause should be considered to deal with two separate events: (i) the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability; or (ii) the acquisition of any right or benefit in respect of any financial product.
But Farlam AJ said neither the context nor the language of clause (c) is consistent with such an interpretation. “Clauses (a), (b) and (d) of the definition are concerned merely with advice relating to a financial product, and it is highly improbable that clause (c) was intended to be different.”
Furthermore, clause (c) should not be read as covering two entirely different scenarios. If that had been the legislature’s intention, there would have been two different clauses, Farlam AJ said.
The plain wording of clause (c) covers advice on the conclusion of a transaction – whether aimed at incurring a liability or acquiring a right or benefit – in respect of any financial product.
He said the term sheet concluded between Salicure and M3T was not a “financial product” as contemplated in the definition of that term in section 1 of the FAIS Act. A secured loan, as entered between Salicure and M3T was also not a “financial product”. It would be a credit agreement.
No recommendation or proposal
The second problem with M3T’s argument was that for Van Dyk to have furnished “advice”, he would have had to have given a “recommendation, guidance, or proposal of a financial nature” in relation to the financial product. But this requirement was not satisfied, even if were assumed for the sake of argument that a loan agreement could be a financial product for the purposes of the FAIS Act, the judge said.
According to the particulars of claim, Van Dyk’s mandate was to refer and introduce M3T to potential financiers so that it could obtain funds for its projects. Pursuant thereto, according to the particulars, Van Dyk referred M3T to and provided it with the contact details of Credit Smith and Davis, who secured a funder.
“There was no suggestion in the particulars of claim that Van Dyk made any recommendation or proposal to M3T about any kind of financing, or offered any opinion about how the company should raise money for its projects […] Insofar as M3T was furnished with advice about a loan or other form of financing, this would, on Van Dyk’s case, have been done by Davis or the financiers,” Farlam AJ said.
He said although the phrase “of a financial nature” is wide and open-ended, he did not think that, read in context, the words “a recommendation, guidance, or proposal of a financial nature” were intended to encompass a situation in which a person recommended an investment analyst to engage with a client about potential financing and financiers.
He said this is borne out by the exclusion in sub-section 1(3)(a), which provides that “advice” for the purposes of the FAIS Act does not include, among other things, “factual advice given merely … (aa) on the procedure for entering into a transaction in respect of any financial product; (bb) in relation to the description of a financial product; (cc) in answer to routine administrative queries; (dd) in the form of objective information about a particular financial product; or (ee) by the display or distribution of promotional material”.
“If that kind of factual advice is excluded from the definition of ‘advice’, it cannot reasonably be contended that advice for which an authorisation is needed under the Act would include an introduction to, or referral of, an investment analyst who could then, in turn, discuss financing with the client,” Farlam AJ said.
The judge said M3T’s alternative allegation that Van Dyk rendered an intermediary service must also be rejected. An “intermediary service” pertains to a financial product, and the term sheet concluded between M3T and Salicure, to record the loan agreement between those parties, did not qualify as such.
Consequently, Farlam AJ concluded that the exception was without merit and dismissed it with costs.
This type of agreement is of major importance. I have referral agreements with various parties whereby I basically identify possible clients and are paid if I refer them to a supplier who does business with them. No advice is applicable anywhere in the process