FAIS Ombud determination - G and LM Baben and Koch & Kruger Brokers CC and D Kruger - 12 October 2018

This determination deals with a financial services provider who had been a trusted advisor to the complainants for 15 years and the events that lead to the destruction of this relationship.

Bridget Morony

Determination in terms of section 28(1) of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act): 12 October 2018.

Summary: The specific form of financial service that this complaint is concerned with is advice. That advice, had to meet the standard prescribed in the FAIS Act and the General Code (the Code), such that any material breach of the FAIS Act and Code would amount to a breach of the respondent’s contractual duties. The issues to be determined focused on the aspects surrounding whether the respondent explained the true risks to his clients. The complaint was upheld.   

Trusted Advisor

Deon Kruger (Mr Kruger) a representative of Koch and Kruger Brokers CC had been the ‘sole financial advisor for about fifteen years’ to George Baben (Mr Baben) and his wife Lucille Miriam Baben (Mrs Baben), the complainants in this matter. The couple trusted Mr Kruger completely and were satisfied with his advice regarding their retirement and investment planning. What happened to destroy this long relationship with a trusted advisor? 

Investment Promises

In 2008 when Mr and Mrs Baben were already retired Mr Kruger recommended property syndication schemes promoted by Sharemax Investment (Pty) Ltd (Sharemax) that promised an ‘initial income of 12.5% as opposed to the 6.25% return per annum’ the couple received from their existing investment. In April 2008 the decision was made to withdraw funds from their Investec investment and transfer an amount of R330 000 into Zambezi Retail Park Holdings Limited (Zambezi Retail Ltd), in the name of Mrs Baben.

During 2009 Mr Kruger recommended an investment into a new development, The Villa Retail Park Holdings Limited (The Villa Ltd) that promised an income starting at 12.5% for the pre-occupation period and would ‘escalate in the five years after occupation to 15%, 15.6%, 16.22% and 24.02% respectively.’ Mr Baben decided to use ‘savings and inheritance, transferred from Investec’ and on 29 September 2009 invested an amount of R450 000, in The Villa Ltd.

Mr Kruger told his clients ‘that there was no risk attached to the investment as they were investing in physical assets – “bricks and cement” – and he assured them further by stating he ‘had even invested his own father’s money into Sharemax.’

In mid-2010 Mr and Mrs the Baben were alarmed by media reports that raised concerns over Sharemax but Mr Kruger reassured his clients that there were ‘no problems and that the reports were simply propaganda.’ The couple did not receive income for September and approached Mr Kruger to resolve the matter and when this did not succeed they lodged a complaint on 14 December 2012 with the Office of the Ombud for Financial Service Providers (the Office). What was Mr Kruger’s response to the complaint?

Be Patient

The response from Mr Kruger, dated 22 January 2013, contained reference to the fact that he acted in the capacity of a representative of Unlisted Securities South Africa (USSA) and did so under their supervision. Mr Kruger also stated that he had not been licensed in terms of categories 1.8 and 1.10.[1] and as a result was never licensed to render financial services with regards to the Villa Ltd and Zambezi Ltd syndications.

It was apparent from Mr Kruger’s submission that his lapses in record-keeping, contravened the Code, namely:

• No financial needs analysis document existed to explain why the investment recommendation was ‘appropriate to the needs and circumstances’ of his clients; and
• No record was made to demonstrate, as per the replacement-protocol, that his clients were advised of the consequences and implications of replacing a particular financial product with another financial product.

Mr Kruger ended his response with a reference to the section 311 Scheme of Arrangement, that was intended to ensure Mrs Baben was repaid her historical capital and advised the complainants to ‘be patient until it was finalized.’

In closing Mr Kruger claimed that the ‘only gain that he made from the recommendations made to the complainants was the commission paid to him, which amounted to R46 800, and that this would be the only amount he would be willing to reimburse to the complainant.’ This offer was rejected by the complainants.

What did the Ombud conclude?

Mr Tulsie, the Ombud, rejected the defence raised by Mr Kruger that he could not be held accountable for the advice rendered on the grounds that he acted in the capacity as a representative of USSA. After careful analysis of the evidence the inescapable conclusion could only be that the recommendations made by Mr Kruger were ‘either a result of incompetence or lack of skill, in which case the respondent was negligent. Either way he ‘violated his duty to act with skill, care and diligence as provided for in section 2 of the Code.’

In summing up the Ombud noted that had the complainants been made aware of the high risks and that they could lose their capital, they would not have made the investments into the Zambezi Retail Ltd and The Villa Ltd. 

Finding

The complaint was upheld and the Ombud ordered that the respondent pay complainants losses in the amounts of R330 000 and R 450 000, with interest on this amount at a rate of 10% per annum from the date of determination to date of final payment; and the complainants to cede their rights and title in respect of any further claims in respect of this investment to respondent.

The full text wording of the determination

The FAIS Ombud recommendation letter
 
[1] Described in the FAIS Act as Securities and Instruments: 1.8 Shares; and 1.10 Debentures and Securitised Debt