Property syndication company directors whose marketing companies obtained financial services provider licences to sell high risk, now-imploding schemes to vulnerable investors, particularly the elderly, are increasingly feeling the wrath of financial advice ombud Noluntu Bam.
In her most recent determination, Bam has ensured that the directors of syndication companies and their sales staff will not escape the consequences of mis-selling, even when the syndications have deregistered their companies, and their financial services provider licences, issued by the Financial Services Board (FSB), have lapsed.
In many of her increasing number of property syndication determinations, Bam has found that property syndication companies applied for licences from the FSB in their own right, allowing them and their representatives to advise on and sell the shares and debentures that underlie these property syndication investments.
However, often the representatives of the failed property syndication companies that operated under syndication company financial services provider licences were also financial services providers in their own right, but did not have the necessary qualifications or licences to sell shares and debentures.
The code of conduct issued under the Financial Advisory and Intermediary Services (FAIS) Act stipulates that when a financial services provider that is registered to sell shares and debentures appoints a representative, it has to ensure that the representative actually has the skills to sell shares and debentures.
Repeatedly, Bam has found that most salespeople who sold property syndication schemes that failed did not have the necessary skills or understand the high risks of the schemes, even if they were licensed in their own right to sell shares and debentures.
In her latest determination, Bam has ordered two directors of the property syndication company Propspec, which was registered and traded under various names, as well as salesman Andre Cronje of Lynn De Grace, Pretoria, to jointly and severally repay R650 000 to a physically disabled investor from Orkney, North West Province.
And she found that Propspec’s financial services provider licence only permitted the sale of shares and not the linked debentures that it was also selling in contravention of the FAIS Act.
The company directors and key individuals of the Propspec syndication promotion and marketing companies are Lourens Erasmus of Featherbrooke Estate, Gauteng, and Gerhardus Erasmus of Waver-ley, Bloemfontein.
In 2011, Bam ordered the Erasmus brothers and another salesperson, Johan Swanepoel of Durbanville, to jointly and severally pay a pensioner in KwaZulu-Natal more than R1 million, including interest, for advising her to invest in another Propspec syndication, Pacific Coast Investment 97.
The Propspec companies have mostly been deregistered, and Propspec’s financial services provider licence allowing it to sell shares and debentures in its pro-perty syndications, which had been issued by the FSB, has lapsed, according to Bam.
The pensioner, known as WO, who complained to Bam about his failed investment, was medically boarded as a result of a workplace injury.
He used part of his pension benefits to purchase a home and part to invest for an income, to supplement his income from a grass-cutting business.
Cronje advised WO on the investment for an income. He invested R650 000, “a sizeable portion of the balance”, in shares and debentures in Ruimsig Gardens Properties, a property syndication venture promoted by Propspec. WO was told that the investment would earn him a return of 40 percent a year, of which he would receive one percent a month, with the balance going to capital growth.
According to the determination, WO told Cronje this was pension money that he could not afford to lose.
Cronje told him the development was nearing completion and there was “minimal risk”.
When the investment matured in May 2009, WO was unable to redeem his investment, although he continued to receive an income until August 2009, when Cronje told him there were no more funds to pay him an income.
Since then he has been forced to sell his grass-cutting business, because of another injury, as well as other assets to survive. He is now “mired in debt and dependent on family for support”.
Bam found that Propspec and/or Cronje had not met the requirements of the FAIS Act and its codes of conduct in that:
* No appropriate procedures and systems were in place to record verbal and written communications to investors;
* No record of even the most basic understanding of WO’s needs or the advice was kept; and
* The Propspec financial services provider licence allowed it and its representatives to sell shares but not debentures. This meant that Cronje and the Erasmus brothers, as key individuals in terms of the FAIS Act, were “acting unlawfully”.
Bam concludes that there can be no question that WO “should not have been advised to invest in this scheme in the first place. Not only was it risky, but the lack of diversification magnified the risk.
“Ultimately, it was this inappropriate advice that caused the loss when the scheme failed.”