Tribunal sends Sharemax determination back to the FAIS Ombud for a second time

Between 2008 and 2010, a pensioner couple invested in two Sharemax property syndications. They complained to the FAIS Ombud in 2011 after losing their money. Seven years later, the FAIS Ombud issued a determination ordering their adviser to pay them R749 000 (with interest of 10% a year accruing from the date of the determination). Last month, four years on – and some 14 years after their initial investment – the Financial Services Tribunal (FST), for a second time, sent the ombud’s determination back for reconsideration.

The FST’s latest decision in the case between Pieter Cronje Makelaars (the applicant) and his clients and the FAIS Ombud (the respondents) indicates there is a disagreement between the tribunal and the ombud over:

• What the Financial Sector Regulation Act (FSRA) means by “reconsideration”.
• What constitutes “fair procedure” when the ombud considers and disposes of complaints;
• The criterion for determining whether an FSP was negligent when advising clients; and
• The basis for determining whether an FSP’s advice was the legal (not only the factual) cause of a client’s losses.

The timeline for the back and forth between the ombud and the FST is as follows:

• In response to the complaint laid in 2011, the ombud issued a recommendation (click here to read it) in April 2018 and her first determination in August of that year (click here to read it).
• Cronje applied for reconsideration in February 2019.
• The matter came before the FST in June 2019. It set aside the determination and remitted the matter in August of that year.
• The ombud issued a reconsideration, or second determination, in August 2020, which repeated the order she made in the first determination.
• Cronje applied to the FST in May 2021 for the second determination to be reconsidered. He raised similar grounds as those in his first reconsideration application.
• The hearing took place in March this year, and the FST set aside the second determination and remitted it to the ombud on 31 May.

Grounds for reconsideration

In his second reconsideration application, Cronje submitted that:

• The tribunal’s decision was decisive and dispositive of the matter.
• The ombud’s second determination was “fatally flawed” because it “simply attacked” the FST’s jurisdiction.
• The ombud has concluded that the tribunal cannot deal with the matter as an appeal forum or in any manner that allows it to challenge the ombud’s factual findings or the legal principles she applied.
• The ombud failed to exercise her statutory duty by not reconsidering the tribunal’s findings.
• The ombud has not considered, reconsidered or interfered with the tribunal’s factual and legal findings.
• The ombud implied that the FST’s decision was wrong in so far as the tribunal differed from her findings, and she was not bound by its findings.
• The tribunal has the power under section 28 of the FAIS Act, read with section 230 of the FSRA, to consider the factual, legal and procedural issues in the ombud’s first determination.

Ombud’s difficulties in relation to the tribunal

According the FST, the FAIS Ombud raised the following points in her second determination:

• The FSRA does not define the term “reconsideration”, and it should be given its ordinary meaning within the context of the Act;
• Whatever “reconsideration” may mean, it was not an appeal; and
• It appears that what the legislator intended was for the FST to treat an application for reconsideration similar to a review.

The FST quoted as follows from the ombud’s second determination:

“Perhaps it was never intended that the tribunal would make findings regarding the merits of the complaint and then remit the matter back to the office for further consideration. What was intended was for the tribunal to deal with the matter as a review and having found that the process in this office was, in some way flawed or unfair to one of the parties, refer the matter back for consideration. The difficulty, however, remains as to why the statute provides for reconsideration of the matter by the tribunal instead of providing for a review as would by a forum that is not expected to consider the merits of the matter.”

The ombud concluded that the FST’s August 2019 decision could not stand because the tribunal had exceeded its powers in terms of the FSRA.

She recommended that Parliament amend the Act “as soon as possible” to clear up the “confusion” between her office and the FST.

In its second reconsideration order, the tribunal revisited aspects of the ombud’s determination with which it found fault. These concerned procedural fairness, negligence and causation.

Lack of procedural fairness

The FST said sub-sections 20(3) and (4) of the FAIS Act were important in how the ombud executes her functions.

Sub-section 20(3) states that “the objective of the ombud is to consider and dispose of complaints in a procedurally fair, informal, economical and expeditious manner and by reference to what is equitable in all the circumstances” (tribunal’s emphasis).

Sub-section 20(4) states that the ombud is independent and must be impartial when dealing with complaints (tribunal’s emphasis).

The tribunal found that the procedure followed by the ombud did not comply with these provisions in the following respects:

• The ombud did not invite Cronje to make representations on the information in the ombud’s April 2018 recommendation before it was issued.
• Cronje did not respond to the last the section 27(4) notice of 20 November 2017, and the ombud’s office started its investigation, which resulted in the recommendation. It appears that after the ombud had completed her investigation and fleshed out or recorded more details to the allegations, Cronje did not have an opportunity to put forward his version.
• The ombud failed to disclose all the information she had obtained in her investigation, and which she intended to hold against Cronje, and allow him to comment.
• The ombud failed to inform Cronje of the issues that might result in a finding of liability against him.

Determining negligence

The FST said that the ordinary common law principles apply where a determination is based on a breach of statutory duty. Further, the appropriate common law rules apply where a determination is based on breach of contract or delict.

It referred to the case of Atwealth (Pty) Ltd & Others v A Kernick & Others, where the Supreme Court of Appeal (SCA) found that the clients (the Kernicks) failed to establish liability on the part of their adviser (Andrea Moolman).

In Atwealth, the SCA stated: “In order to lay a foundation for an attack on Ms Moolman’s abilities as a financial adviser and on the advice she gave, it was essential in the first instance to establish as clearly as possible what she told the Kernicks in regard to these investments. […] Secondly, it called for evidence on behalf of the Kemicks to identify what a reasonably skilled financial service provider would know about products in the marketplace […]” (tribunal’s emphasis).

The FST said: “In the final analysis, the true criterion for determining negligence is whether, in particular circumstances, the conduct complained of falls short of the standard of the reasonable person.”

Cronje denied that his advice was negligent. He further submitted that the ombud erred by failing to determine the standards to be expected of him and to test his conduct accordingly.

The tribunal said it took guidance from numerous court cases and “noted” that the respondents had not led any evidence regarding “what a reasonable financial adviser, possessed of the requisite skills”, would have advised them.

“We are of the view that the ombud must consider the issue of negligence as applied in cases of this nature.”

Establishing legal causation

In her first determination, the ombud stated that if Cronje had “truly appreciated what he was advising the respondents to invest in, he would have steered them in a different direction. According to the ombud, not only was the loss to investors reasonably foreseeable, it was inevitable,” the tribunal said.

Cronje denied that his allegedly negligent advice was the cause of the respondents’ loss.

The tribunal said the ombud should consider the issue of causation in light of the High Court’s finding in the case of Symons NO v Robroy Investments CC t/a Assetsure.

In Symons, the court found that Sharemax collapsed because of the intervention of the South African Reserve Bank – a risk that that adviser could not have foreseen.

Time to consider going to the High Court?

The FST traversed its powers as set out in sections 28 of the FAIS Act, and sections 230, 232 and 234 of the FSRA.

The tribunal said it did not seem that the ombud, in her second determination, had further considered or investigated the issues in her first determination in light of the FST’s decision in August 2019.

It said the ombud must consider the issues raised in its latest decision, which included aspects of procedural fairness, negligence and causation.

The tribunal said: “It is a great concern that this matter has been pending for a period of not less than 10 years, and the parties involved are senior citizens. It is in the interest of all parties to bring finality to the matter.”

The FST concluded: “It is our view that it is necessary to consider the provisions of section 235 of the FSRA should any parties feel aggrieved by the decision of this tribunal.”

Section 235 states: “Any party to proceedings on an application for reconsideration of a decision who is dissatisfied with an order of the tribunal may institute proceedings for a judicial review of the order in terms of the Promotion of Administrative Justice Act or any applicable law.”

Perhaps the tribunal is hinting that only the courts can resolve this matter.

Click here to download the FST’s decision.