Broker must refund pensioner after property syndication loss

The financial advice ombud, Noluntu Bam, has issued another ruling against Grabouw financial adviser Petrus Swart and his company, Groenland Insurance Brokers, for putting a pensioner client into a property syndication that subsequently imploded.

Bam ordered Swart to pay Mr F the R120 000 he invested in one of the group of property syndication companies collectively referred to as Realcor, which went into liquidation in 2011.

Mr F was a factory worker who, in 2010, at the age of 66, received a retirement fund payout of R128 000. He approached Swart to invest what represented his entire life’s savings in an income-generating investment. Following advice from Swart, he invested R120 000 in unsecured debentures issued by Iprobite, a company in the Realcor group. Before making the investment, Mr F told Swart that he was in no position to take risks with his money. Swart told him that Realcor was big and secure for conservative investors.

In the 2000s, Realcor, a promoter of property syndication investments, mushroomed in the Western Cape. The idea was to develop a luxury hotel in which the man in the street could invest. Investors were sold the idea that their investments would be secured, because they were “‘in property”. The hotel would be known as the Blaauberg Beach Hotel. While the hotel was under construction, investors were paid income and the debentures were marketed as lowrisk with impressive returns.

In 2008, after an investigation, the Registrar of Banks found that Realcor was conducting the business of a bank without being licensed to do so. It ordered Realcor to return the monies unlawfully collected from investors.

This plunged Realcor into liquidation, and the unfinished hotel was sold for R50 million, most of which was paid to the secured creditor, FNB. Thousands of investors, most of whom were pensioners, lost their money.

In upholding Mr F’s complaint, the ombud found that Swart had contravened the code of conduct under the Financial Advisory and Intermediary Services Act in several respects.

First, he had failed properly to ascertain the risks associated with the Realcor investment. The ombud notes: “He had no appreciation of the risks involved in the Realcor offer and could therefore not have been in a position to advise complainant as to the nature and material terms of the relevant contract.”

He also failed to “assess the risk capacity and profile of complainant prior to recommending the said investment”.

As a consequence of his breach of the code, Swart was held to be liable for Mr F’s loss.