Ruling opens door to more property syndication complaints
A financial services company and its representative were ‘clueless’ when they advised a pensioner to invest in a property syndication company, the Ombud for Financial Services Providers has found. Bruce Cameron reports
In the first of what is expected to be a series of determinations on property syndications that have soured, Noluntu Bam, the Ombud for Financial Services Providers, has ordered a financial services provider (FSP) and its representative to repay R495 000 plus interest of 15.5 percent backdated to November 2008 to a wrongly advised 66-year-old investor.
In her ruling, Bam says that neither Cape Town-based Lifesure Financial Services nor its representative, Nigel Segers, undertook an adequate due diligence investigation before in 2005 they advised Bernard Dudley to invest in Propdotcom, a now failed Blue Pointer property syndication scheme, which offered an annual return of 10.5 percent.
And even after the Blue Pointer scheme had collapsed, Segers and Lifesure attempted to advise Dudley to invest in another property syndication scheme, on which they also failed to undertake a proper due diligence investigation.
Bam’s determination comes in the wake of thousands of people, mainly pensioners, losing hundreds of millions of rands in flimsy property syndications.
Syndication schemes that have imploded recently include those promoted by Dividend Investments, King Financial Services, City Capital and BlueZone.
Vulnerable pensioners who need extra income have been targeted by financial advisers, who are paid extraordinary commissions of at least six percent by the promoters of property syndication schemes. Bam’s ruling will open the way to many more complaints to the ombud about property syndications and should slow down the aggressive selling of property syndication schemes to pensioners.
In the deter mination, Bam says much has been written about the risks associated with property syndication, and “the history we have in this regard in South Africa does not make for a pleasant read.
“Notwithstanding the giant steps taken in legislative measures, this area continues to be plagued by stories of investors having been robbed of their investment in the most crude and opportunistic fashion.”
Bam says that requirements by the Department of Trade and Industry for property syndication schemes have gone a considerable way to address the muchpublicised gaps in public property syndications, but exploitation still takes place.
She says the duty placed on FSPs and their representatives by the Financial Advisory and Intermediary Services Act to act with due skill, care and diligence forces FSPs and their representatives to take responsibility for the advice they provide to investors.
The fact that an investor may have extra funds to invest does not give an FSP a licence to act recklessly, she says.
“In addition, embarking on an exercise of advising a client to invest in a product which the provider has not the slightest idea of how it works and no appreciation of the risks borders on criminal conduct.”
Bam says neither Segers nor Lifesure had a “clue what they were doing in recommending the (syndication) product”.
Had Segers “known how to spot the risks involved in this type of product, he would have cautioned his client to look elsewhere for investment”, she says.
Segers was also at fault, the ombud says, because his “erroneous assumption that Blue Pointer was licensed, without even conducting a basic check whether it had been licensed by the Financial Services Board (FSB), was fatal. From here, it would have been reasonably easy for the first respondent or any reasonable provider to foresee the consequences of conducting unlicensed business, as the person or persons have no accountability to anyone. The consequent theft of investors’ funds and the shambolic state of the financial records would have been foreseeable.”
Bam also accused Segers of attempting to mislead Dudley about an FSB warning that neither Blue Pointer nor its owner, Louis Baartman, was registered with the FSB, as Blue Pointer claimed.
Segers told Dudley that the warning related to an outstanding civil case against Baartman and not the property syndication scheme, she says.