FAIS Ombud answers our questions about Sharemax determinations

The FAIS Ombud, Advocate Nonku Tshombe, says it is impossible to blame the collapse of the Sharemax property syndications on the intervention of the South African Reserve Bank (Sarb) unless “pertinent questions” about the nature of these investments have been answered satisfactorily.

This emerged from the ombud’s responses to three questions that Moonstone sent to her office in light of:

• The National Prosecuting Authority’s recent decision not to prosecute Sharemax’s directors; and
• The series of property syndication determinations that the Financial Services Tribunal (FST) has remitted to her office of late.

Impact of the NPA’s decision

Moonstone drew the ombud’s attention to her assertion, in her determination in the matter involving Alberta Magdalena Poggenpoel (complainant) and Jacomina Spies (respondent), that “Sharemax collapsed because it was a Ponzi scheme”. The ombud was asked, whether, in light of the NPA’s decision not to prosecute the directors of Sharemax, she will revise her assessment of Sharemax in future determinations.

The ombud said the NPA’s decision will not have an impact on her office’s past or future decisions, because the FAIS Ombud and the NPA have distinct mandates that are designed to give expression to different aspects of the Constitution.

The NPA operates in terms of the NPA Act and derives its mandate from section 179 of the Constitution, which, among other things, requires the NPA to institute criminal proceedings on behalf of the state, without fear, favour or prejudice.

The FAIS Ombud operates in terms of the FAIS Act and derives its mandate from the constitutional guarantees of equality before the law and the right to equal protection and benefit of the law.

In addition, she said the FST has emphasised the importance of the FAIS Ombud resolving disputes in accordance with its mandate and not acting beyond the powers conferred on it by legislation.

The issue of the Sarb’s intervention

In remitting the ombud’s Sharemax determinations, the FST, among other things, recommended that the ombud reassess her determinations in light of the High Court’s view that Sharemax collapsed because of the intervention of the Sarb. Moonstone asked the ombud whether the FST’s recommendation will influence her determinations in future cases involving Sharemax.

Tshombe said the fact that the FST has remitted some Sharemax determinations does not mean that all Sharemax determinations will be remitted, because the facts in the complaints that gave rise to the determinations were not the same.

Referring to the High Court’s judgment that Sharemax collapsed because of the intervention of the Sarb, she said her the office has considered several other judgments that also considered this aspect. So far, only one judgment has found in favour of this argument: the decision in Symons NO v Robroy Investments CC t/a Assetsure.

On the other hand, the ombud said, there were two High Court judgments in which the courts found in favour of the investors and specifically found that the Sarb’s intervention did not cause Sharemax to fail, but the actions of the advisers led the investors to suffer the loss complained off.

“The Supreme Court of Appeal (SCA) had cause to comment on the failure of one property syndication promoted by Sharemax. Although the SCA was not primarily seized with the question whether the adviser had been negligent when rendering the financial service to the investor, it did confirm the finding of the court a quo that the adviser had been negligent because he sold a financial product that he himself did not understand. According to the SCA, the property syndication had the ‘hallmarks of a Ponzi scheme’,” Tshombe said.

The three questions

Returning to the relevance of facts in any matter before a dispute resolution body, including the courts, the ombud said she has asked “three pertinent questions with respect to the aspect of causation in the failed property syndication schemes. So far, these have not been answered by any of the respondents or their representatives.”

The three questions were:

1. Considering that the prospectuses of the collapsed schemes declare that the entities in the syndication group had never traded prior to the registration of the prospectus, and had not made any profit and were still under construction, how did a reasonably qualified FSP expect the income promised to the investors to be paid, other than out of the other investors’ money for as long as it flowed in?
2. If the prospectuses referred to the investment as being an unsecured subordinated interest rate acknowledgement of debt linked to a share, which share was in an entity still under construction, how could such an investment be considered anything other than an extremely risky venture, without any substance to a guarantee on interest payments?
3. How would advising a pensioner, or other vulnerable consumer, to invest in this kind of investment constitute compliance with sections 8 and 9 of the Code of Conduct?

Tshombe said these three questions have never been answered in the court cases that arose from her determinations arising from property syndication complaints.

“In the circumstances, I find it unnecessary to even discuss the various forms of establishing legal causation, because without answering the above questions in a manner that makes sense, it is impossible to blame the collapse of the failed property syndications on the Sarb, given that these syndications had no way of surviving, as set out in the judgment of two decisions: Oosthuizen v Castro and another 2018 (2) SA 529 (FB), which decision was approved in the SCA in Centriq Insurance Company Ltd v Oosthuizen and another 2019 (3) SA 387 (SCA).

“The above cases showed that the test to be applied is a flexible one in which factors such as a reasonable foreseeability, directness, the absence or presence of an intervening cause, Iegal policy, reasonability, fairness and justice all play their part,” she said.

Outstanding property syndication complaints

According to the ombud’s 2020/21 annual report, there were 1 036 outstanding property syndication complaints at 31 March 2021. Moonstone asked the ombud’s office whether it has more recent statistics on the status of these complaints.

The ombud’s office said it was planning to issue a media release in the coming months that would provide an update on active property syndication complaints “and the project to be embarked upon to deal with them”.