Failure to comply with the General Code of Conduct is the cause of client's financial loss
A FAIS Ombudsman determination
During the period of 2006 and 2007, the complainant invested money into UG2 Platinum Limited and Lazaron Biotechnologies shares on advice received from the respondent. The Complainant lodged a complaint with the FAIS Ombudsman ( herein referred to as “Ombudsman”) seeking repayment of a capital amount from the respondent. The Ombudsman made a decision on the matter based on the information from the complainant and its own investigation.
The FAIS Ombudsman investigation revealed the following:
The second respondent was a director of UG2 Platinum Limited which posed a conflict of interest which was not disclosed;
The respondent has been involved with 19 companies in various capacities which all have been deregistered;
The evidence shows that the respondent target investors under false pretences and offered exorbitant returns that did not realize;
The risks involved in the investment was not explained to the complainant;
The respondent was previously investigated by the FSB.
The FAIS Ombudsman had to decide on the following:
Question 1: Did the respondents comply with the FAIS Act and the General Code of Conduct( herein referred to as “the Code”)?
The Ombudsman established that the respondent contravened the following sections of the Code:
Section 3(1)(c) - Provisions regarding conflict of interest in that it failed to disclose its relationship with UG2 Platinum Ltd;
Section 2- To at all times render financial services honestly, fairly and with due skill care and diligence and the interest of the client;
Section 7(1)(a) - Failed to disclose material aspects and explain the risks involved in the investment; and
Section 8(1) - Failed to do a financial needs analysis and establishing the client’s risk profile.
Question 2: Were the respondents conduct the cause of the complainant’s loss?
In this instance the Ombudsman referred to the decision of the Appeal Board J&G Financial Service Assurance Brokers (Pty) Ltd and another v RL Prigge in establishing whether the non-compliance of the provisions of the Code can give rise to legal liability:
“The liability of a provider to a client is usually based on a breach of contract. The contract requires of a provider to give advice with the appropriate degree of skill and care, i.e., not negligently. Failure to do so, i.e., giving negligent investment advice, gives rise to liability if the advice was accepted and acted upon, that it was bad advice, and that it caused loss”
In the case of a provider under the Act more is required namely compliance with the provisions of the Code. Failure to comply with the code can be seen in two ways. The Code may be regarded as being impliedly part of the agreement between the provider and the client and its breach a breach of contract. The other approach is that failure of the statutory duty gives rise to delictual liability. In both instances the breach must be the cause of the loss…...”
The Ombudsman found that the respondent failed to provide the complainant with sufficient information about the investment. If the investment and the risks involved were explained to the complainant he would not have proceeded with the investment. The complainant relied on the advice of the respondent and thus his failure to act according to the Code of conduct resulted in the complainant's loss of capital.
Question 3: What is the amount of damages suffered by the complainant(the quantum)?
The extent of the complainant's loss is the capital the complainant invested and Ombudsman ordered the respondent to pay the capital amount.
This determination reiterates the importance of compliance with the requirements stated in the FAIS Act and the Code, to read the determination please click here.