Risk and Reward: Duties and Obligations of Financial Service Providers

Feb 26, 2018 | 2018, News

The High Court has ordered a financial adviser to pay back to her the R2 million a widow invested on his advice, plus interest and costs because he failed to exercise the reasonable standard of care and skill expected of someone in his position engaged to provide the relevant services.

  • A widow in the Free State Province, who had lost her husband in tragic circumstances leaving her with a small child, invested R2 million from the proceeds of her late husband’s life insurance policy based on the advice of a financial services provider (FSP), duly licensed to act as such in terms of the Financial Advisory and Intermediary Services Act 37 of 2002.
  • The investment was into Sharemax property syndication. The investment failed with no prospect of any recovery. One of the journalists who had warned against this scheme was Jacques Pauw, author of the recently published book “The President’s Keepers – Those keeping Zuma in Power and out of Prison.”
  • The FSP was sued for failing to act honestly and fairly in the interest of the investor in recommending the investments scheme and failing to furnish objective financial advice appropriate to the needs and interests of the investor.
  • The presiding judge considered the evidence and came down on the FSP like a ton of bricks. The judge said the FSP should have “…spoken to independent auditors, attorneys or financial analysts. He should have insisted on financial statements.” Several financial journalists and others had warned investors about this scheme over a prolonged period. The judge said that the investment bore “uncanny characteristics to a so-called Ponzi Scheme.” The FSP “should have seen the red flashing lights”. He “offered wrong and unsuitable advice…either through incompetence and/or ingenuousness and/or negligence or for the lure of a small fortune.”
  • The judge observed “it is a well-known phenomenon that promoters in these types of schemes make use of high commissions to attract brokers and so-called financial advisers to do business. In the process pensioners, widows and other vulnerable people’s savings and inheritances are being collected, often to be lost when the house of cards collapses.”
  • The FSP was found to have been negligent and even dishonest and to have failed to exercise the degree of skill, care, and diligence which one is entitled to expect from an FSP.
  • Having earned a commission of R120,000 “for an afternoon’s effort”, the FSP was ordered to pay R2 million plus interest of R718,600, and costs including advocate’s and expert’s fees, and the widow’s traveling and accommodation costs to attend the trial.
  • An expensive lesson. Fortunately for the widow, the indemnity insurer of the FSP was held liable to pay up for most of the widow’s claim.

Oosthuizen v Castro (Centriq Insurance Company Ltd as Third Party) [2017] 4 All SA 876 (FB).