Take care! Unscrupulous financial advisers, driven by commissions, and scamsters are still taking advantage of naïve investors despite the best efforts of the regulators to rope them in.
The continuing problems with financial advice and financial products are highlighted in latest annual report of the Ombud for Financial Services Providers, also known as the Financial Advisory and Intermediary Services (FAIS) Ombud, Noluntu Bam.
In the report, Bam, Finance Minister Pravin Gordhan and Abel Sithole, the chairman of the Financial Services Board (FSB), all express their concern about how investors continue to be duped into putting their money into high-risk investments such as property syndications, which are often straight scams.
Gordhan says he is saddened that scamsters continue to find their way into the savings of consumers, in particular the savings of the aged.
This is despite efforts to educate consumers and additional legislation to protect them.
Gordhan says an increase in the number of complaints resolved by the FAIS ombud indicates that consumers are becoming increasingly aware of the work the ombud’s office does.
However, he says “another way of looking at the increased numbers would be that cowboy tactics are still being practised, despite efforts to combat these”.
And Gordhan adds his own warning to consumers that they have to take steps to protect themselves, using as an example imploding property syndication schemes in which billions of rands stand to be lost by investors.
The battle of protecting the consumer and fostering integrity in the financial services industry is being made more difficult when licensed providers, instead of dispensing proper advice to clients, opt for short cuts to claim commission, Gordhan says. Clearly, without the aid of advisers, property syndications such as BlueZone and BluePointer would not have been able to exploit consumers, he says.
Gordhan says the first property syndication determination last year, in which Bam ordered Lifesure Financial Services to reimburse an elderly pensioner, Bernard Dudley, R495 000, conveys two very important messages, namely:
* You as a consumer must not take anything at face value. The fact that a financial adviser claims to be licensed to sell a particular product must be verified with the licensing authorities, namely the FSB.
* If in doubt, keep your money with reputable institutions; and do not be lured by promises of high returns. Remember the saying “if it sounds too good to be true, it probably is”.
Gordhan’s concerns were reinforced by Sithole.
Sithole says the work of regulatory bodies in carrying out their mandates to protect the rights of consumers by enforcing compliance with the law “continues to be undermined by those whose aims are focused on exploiting or downright stealing from them through misinformation or disingenuous schemes”.
But he warns that the unscrupulous succeed because of public gullibility and/or greed.
He says you need to appreciate that regulations aimed at protecting you as a consumer are “not meant to be paternalistic or to eliminate every possible risk there is in financial products and services.
“Regulation cannot anticipate future wrongdoing; nor can it know the specifics of all products and services.”
The maxim “buyer beware” remains the first line of defence, Sithole says.
WARNING TO ADVISERS
Financial advisers be warned. If you sell a product that you and/or your client do not fully understand, it may result in a determination going against you, with an order for compensation of losses suffered by your client.
The warning comes from Noluntu Bam, the Financial Advisory and Intermediary Services Ombud, in her latest annual report released this week.
And she has a message for you, the consumer: “If an investment sounds too good to be true, it is very likely that it is.”
Bam says that in dealing with complaints about the imploding property syndication market, where investors stand to lose billions of rands, financial advisers sold the schemes often without being licensed to do so, without conducting proper due diligence, and not ensuring that clients understood the risks.
In her report, Bam highlights the problem of licensed financial advisers whose licences do not allow them to sell things such as unlisted shares and debentures used in property syndication structures.
“Often, these unqualified (financial services) providers are a crucial link between the public and these fraudulent investments. Without these providers and other promoters of these schemes, they would not reach consumers,” Bam says.
She says the situation is exacerbated by an “ugly trend” of advisers, whose licences are limited in terms of the products they can sell, being registered as representatives of the property syndication schemes, which are registered as financial service providers and are entitled to appoint representatives to sell shares and debentures – in effect allowing unqualified advisers to sell shares and debentures.
The property syndication companies “deliberately turned a blind eye to the requirement of competency as a ground for the issuing of a licence ...”
Bam says this happened without any training and without an objectively assessable infrastructure by which such advisers may have been trained and accredited to sell unlisted shares and debentures to the public.
Licence holders and advisers were merely paying lip service to compliance, with the result that incorrect information about property syndications was given to investors.
Bam warns that service providers “who render financial services in such a reckless fashion will pay”.
She says that company directors who are involved in perpetrating fraud will also be held liable, particularly where they steal from unsuspecting investors by making use of financial advisers.
Bam says that over the past year most of her office’s time was taken up by complaints about money lost in property syndication vehicles and other phoney schemes.
She says many financial advisers have little idea of how property syndications are structured, including the fact that returns are often paid from the capital of investors; investments are sold as low to medium risk; and the advisers do no independent assessment of the syndications.
“It is not only consumers who are naïve. Some intermediaries have shown themselves to be as naïve,” Bam says.
STATISTICS
The Financial Advisory and Intermediary Services ombud received 7 944 complaints during the 2010/11 financial year, and resolved 8 784 (which includes matters carried over from the previous reporting year).
Of the 8 784 complaints dealt with, 3 312 were dismissed, 4 393 were referred to other adjudicators, settlement was reached between parties in 988 cases, and 91 determinations were made, with a total of R34.7 million awarded to investors in compensation.