The High Court in Johannesburg has ordered a brokerage to repay a client €600 000 after finding that their asset management agreement was void because the brokerage was not licensed in terms of the FAIS Act.
The brokerage, Stone-Bird Investments (Pty) Ltd, argued that it did not render financial services, as defined by the FAIS Act, to the client and applicant (“KW”). It said the financial service was provided by an international company, AS Private Equity, for which it acted as an agent.
Stone-Bird describes itself as “a broking house employing innovative alternate processes to source and secure non-specific funding. All financial transactions are conducted in strict compliance with best international practice and legal prescription.”
It states it is not a financial adviser or an FSP but “fulfils only a consultation, facilitation and brokerage role”.
KW asked the High Court to declare the agreement void ab initio (from inception) because Stone-Bird did not have a licence as required by section 7(1) of the FAIS Act.
According to the High Court’s judgment, KW wanted to raise funding for international projects. She was introduced to Stone-Bird by a consultant.
KW entered the asset management agreement with Stone-Bird in December 2017. Pursuant to this agreement, KW transferred €600 000 from her bank account on the Isle of Man into an account at Barclays in London nominated by Stone-Bird.
According to the evidence, the consultant had informed KW that Stone-Bird did not need an FSP licence, but that the overseas asset manager, who was an officer of London-based AS Private Equity, held an international equivalent licence.
Furthermore, one of Stone-Bird’s directors informed KW that an FSP licence was not required because the transaction was a “private placement”.
Stone-Bird’s defences
The respondents (Stone-Bird and its directors) argued that it was “glaringly obvious” that Stone-Bird was the agent of AS Private Equity, incurred no obligations of its own, and had no standing to be sued. For this reason, the joinder of Stone-Bird constituted a misjoinder and the failure to join AS Private Equity constituted a non-joinder.
But, in his judgment handed down on 17 October, Acting Judge Johan Moorcroft said there was “no merit” to these contentions.
He agreed with KW’s submission that the agreement had been void from inception because Stone-Bird was not licensed to provide financial services.
The respondents argued that the agreement was not unenforceable because Stone-Bird was a product supplier in addition to being an asset manager (whether as principal or an agent of AS Private Equity).
But Acting Judge Moorcroft said nothing in the agreement pointed to Stone-Bird’s acting as a product supplier.
“No financial products issued by the first respondent were identified in argument or on the papers. Rather, the first respondent is expected to give advice and provide intermediary services, and a guarantee was to be obtained from a bank. The bank may be the product supplier.”
He said when a member of the public falls victim to a service ostensibly offered by an unlicensed person and, as a result of this invalid act, a transaction is entered into between the client and the product supplier – for instance, a bank – the transaction remains enforceable as between the client and the product supplier.
“The client is not prejudiced because, perhaps unknown to it, the service provider it deals with is not licensed. In this way the [FAIS] Act protects the public as the agreement between the client and the bank that issued a financial product will still be valid.”
Acting Judge Moorcroft said Stone-Bird may not act as an FSP. “It cannot perform under the agreement. The agreement is a nullity and is void ab initio for impossibility of performance and for illegality. This would be the case if it were a financial services provider under section 7(1)(a) [of the FAIS Act] or a representative under section 7(1)(b).”
Rectification application dismissed
The court dismissed Stone-Bird’s counter-application for the rectification of the agreement to reflect its status as the agent of AS Private Equity.
Acting Judge Moorcroft said the agreement would still fall foul of the FAIS Act if AS Private Equity was substituted as the principal and Stone-Bird as the agent. AS Private Equity was not licensed by the FSCA, and Stone-Bird would not be a representative of an authorised FSP, in terms of section 13 of the FAIS Act.
He ordered Stone-Bird to pay KW €600 000, plus interest of 9% a year from 16 January 2018 to the date of final payment.
In terms of section 218(2) of the Companies Act, Acting Judge Moorcroft also held the directors of Stone-Bird to be personally liable, jointly and severally with their company, for repaying KW the €600 000, plus interest.
