Be warned: merely because someone is, or claims to be, a licensed financial services provider (FSP) does not mean that you will not be scammed or given bad advice.
Neither does the FSP appellation mean that a financial product has been approved - despite financial services providers quoting, in their marketing material, the fact that they are licensed FSPs as if it does.
And unless the Financial Services Board (FSB) improves the way it processes FSP licence applications, as well as the speed at which it acts when the Financial Advisory and Intermediary Services (FAIS) Act is contravened, there is a very real danger that the initials "FSP" could become a warning sign of danger rather than a trademark for advice in which you can place your confidence.
In terms of the FAIS Act, FSP is the designation given by the FSB, the regulator of the financial services industry, to people and com-panies that are authorised to provide financial advice and sell financial products.
The initials are supposed to guarantee that a FSP meets the "fit and proper" standards set out in the FAIS Act.
The "fit and proper" requirements are that FSPs and their agents should be honest, hold certain minimum qualifications, have a minimum level of experience and act in your best interests.
In the past week, Charles Pillai, the Ombud for Financial Services Providers who stands as the last guard against inappropriate advice, bluntly said that he is "satisfied that the legislative framework was adequate, but that its application by the regulator was wanting".
Unfortunately, the FSP appellation is being abused on too wide a scale by individuals and com-panies, and in too many instances the FSB seems to be detecting the problems only when things go very wrong. It is also allowing offenders to stay on the streets while it conducts long, drawn-out investigations. Examples include:
- Leaderguard (1)
Pillai's revelations this past week of what appears to be a lack of oversight by the FSB in the R300-million Leaderguard foreign currency trading scam include:
* The FSB delegated the processing of granting exemptions for foreign currency trading com-panies to the Foreign Investment Association, which was headed by Chris de la Guerre, who, unknown to the FSB, was also a director of Leaderguard, as well as its "key individual" and compliance officer in terms of the FAIS Act.
Exemptions were granted until the FSB had time to process the applications for FSP licences.
So Leaderguard's application for a temporary exemption was processed by its own compliance officer, director and key individual.
The FSB finally rejected Leaderguard's application for an FSP licence after the company filed for liquidation seven months later.
* An exemption to be licensed was too easily granted to Leaderguard Securities, Pillai says.
* Insufficient checks were carried out by the FSB on key individuals, including directors and major shareholders of the Leaderguard group of companies.
Pillai says proper checks would have revealed that some of them were associated with other foreign currency scams at companies called Prozet and Chinza, and that Leaderguard had no audited financial statements.
- Leaderguard (2)
The FSB launched its own investigation - using accounting firm Ernst & Young - into the Leaderguard scam after the company collapsed. Ernst & Young identified 210 FSPs that were involved in selling the Leaderguard product.
Its report was completed in March 2006.
Gerry Anderson, the FSB's deputy executive in charge of the FAIS Act and licensing FSPs, says the report was referred to the National Prosecuting Authority to consider laying charges against the Leaderguard perpetrators. No arrests have yet been made and no criminal charges have been laid.
The FSB also sent the report to all 210 FSPs that sold the products, asking them why they should not lose their licences. But a year later the FSB says it is still awaiting replies from about half the FSPs. It also cannot say how many FSP licences have now been cancelled as a result of the Leaderguard scam.
Against this, Pillai has now issued seven determinations ordering FSPs to repay the investments in Leaderguard, because, among other things, they did not properly assess the investment and the people involved.
He has also disclosed that at least one financial adviser, Michael Shacklock, an agent of Ewing Trust Company in KwaZulu-Natal, sold the Leaderguard product despite the fact that Ewing Trust Company's FSP licence did not include selling foreign currency products.
So a year after the completion of Ernst & Young's report, the very people who sold the Leaderguard products are out there, unnamed and selling other products.
- Ovation/Common Cents
Both Ovation and Common Cents had FSP licences.
The ultimate owner of both companies and the controller of the assets in Common Cents, where more than R100 million has gone missing, was Angus Cruikshank.
Cruikshank was an unrehabilitated bankrupt when he bought Ovation and launched the so-called Common Cents money market fund, which was listed on the Ovation platform and from which the money has gone missing.
Both companies have been placed under curatorship. Cruikshank committed suicide last year after the FSB discovered that money in the Common Cents fund had gone missing.
- Fidentia
Fidentia Asset Management (FAM) was bought by Brown Brothers in 2003 from asset manager Cliff Warren. The FSB approved the transfer of ownership even though:
* The first application for a new "key individual" to replace Warren was made by Rudi Bam. This was rejected by the FSB as it knew that Bam had left the employ of the JSE under a cloud a short while earlier.
* J Arthur W Brown, the chief executive of Brown Brothers and later of Fidentia Holdings, had no apparent track record in the financial services industry. This should have been a warning to the FSB.
* Brown Brothers has never had audited financial statements, according to the latest report of the Fidentia curators. This means the FSB could not have conducted proper checks into whether Brown Brothers was "fit and proper".
Personal Finance investigations, however, reveal that Brown had already entered the financial services industry with a currency trading company. At the time the FSB approved transfer of the FSP licence, Brown was already being sued by at least four investors who had lost their money. Brown paid back the investors from the R200 million that the Transport Education and Training Authority (Teta) placed under the control of FAM (after Brown had bought the asset manager). The Fidentia curators concluded in a report to the Cape High Court this week that the Teta money was stolen.
In reply to questions put to him by Personal Finance, Anderson says: "There is no evidence to support your contention that the transfer of the FAM licence was improper based on the information in our possession at the time. The FAIS fit and proper requirements have proven to be extremely robust and have (as the number of declinations of licences indicated) largely achieved the objectives for which they were put in place."
- Agents of FSPs
FSPs that use agents to sell their products are responsible for ensuring that these agents meet the "fit and proper" requirements of the FAIS Act. Yet it seems that a number of FSPs do not ensure that their agents provide appropriate advice.
For example:
* Personal Finance reported more than a year ago that Old Mutual does not ensure that its agents tell you about its low-cost, versatile unit trust retirement annuity (RA). Instead, they punt its high-cost Max RA product range, which can result in you losing as much as 30 percent of your accrued savings if you do not keep paying your contributions over the full term of the policy.
Personal Finance has evidence that Old Mutual agents actually deny that the more appropriate unit trust RA product exists. The reason is that they are paid upfront commissions on the Max product but only ongoing commissions on the unit trust product.
* Pillai has issued rulings against a number of agents of large FSPs, but there has been no sign of the FSB taking action against the companies concerned.
In contrast, under similar legislation in the United Kingdom, the entire sales teams of some major financial services companies have been ordered off the streets so they could be properly trained.
- Abuse of FSP initials
Many large financial services companies state in advertising and product brochures that they are licensed FSPs. The advice given in the advertisements is often misleading and/or dubious, but has a veneer of respectability because of the reference to the FSP licence.
- Fronting
People who would not qualify under the "fit and proper" requirements because of past misdeeds use their relatives or other people to front for them when applying for an FSP licence.
Unfortunate past
Many of the problems the FSB faces in policing the financial services industry are historical.
It had a huge problem in registering about 13 000 FSPs in 2004, most of whom left it until the last moment to apply for their licences. And a crook is not going to tell you or the FSB that he or she is crooked.
Under Rob Barrow, the head of the FSB who was appointed comparatively recently, there has been a greater sense of urgency in taking on the miscreants in the industry.
But the FSB also needs to take a long, hard look at the way it is applying the FAIS Act and at any potential gaps in the legislation.
(One gap that is about to be filled is legislation that will allow the FSB to take control of a deviant company without the long process of applying to the High Court for a curatorship.)
If necessary, the FSB should improve its capacity to act with greater speed against FSPs that do not provide you with appropriate, honest advice that is based on meeting your best interests.
PAYBACK TIME: WHAT PILLAI HAS DONE ABOUT LEADERGUARD
Charles Pillai, the Ombud for Financial Services Providers, has made seven orders against brokers who advised their clients to invest in Leaderguard's products.
- In October last year, Pillai ordered Durant van Zyl, of Trade First Financial Consultancy CC, to repay Henry and Anneke Stephan R800 000 as compensation for the £59 919 (more than R870 000) they invested in Leaderguard Spot Forex. This ruling is on appeal.
- In May last year, Pillai ordered Marius Naude, of Kameeldrift West in Tshwane, to repay Wonderboom pensioner Michael Mackrory the R60 000 he invested in Leaderguard Spot Forex. This ruling is on appeal.
- In August last year, he ordered Wilma Willemse of Centurion, trading as Willemse Financial Services CC, to repay Pretoria East pensioners Charl and Brechtje du Plessis the more than R600 000 they lost in Leaderguard Spot Forex.
- Last week, Pillai ordered:
* Willemse and Willemse Financial Services to repay Riana du Plessis of Pretoria East R60 000 because of the negligent advice Du Plessis received.
* Ewing Trust Company, of Hillcrest in KwaZulu-Natal, to repay Gillitts pensioners Selwyn and Christine Comrie e28 477 (R275 000) plus interest they lost after Michael Shacklock of Ewing Trust Company advised them to invest in Leaderguard Spot Forex, assuring them they would lose no more than 20 percent of their investment. Ewing Trust Company was not licensed to advise on foreign exchange products.
* Johann de Klerk and Adfinity Financial Services, of Bellville in the Western Cape, to repay Bellville pensioner George Pickup US$13 369 (R98 500) plus interest. Pillai says their advice displayed "a complete lack of knowledge and understanding of what the law expected of them while rendering financial services in forex".
* Johannes Cornelius van der Merwe and Johan C van der Merwe Makelaars to repay Desiree Ludewig, of Pretoria, and her son, Tyran, R450 000 plus interest, because Van der Merwe did not comply with the Financial Advisory and Intermediary Services Act when selling the Leaderguard product.