OMBUD RULES FOR PENSIONER

In a recent determination, the Ombud for Financial Services Providers, Noluntu Bam, ordered Pioneer Wealth Managers, a financial advice practice in Rosebank, Johannesburg, and a former representative, Mark Colley, to repay an investor R800 000 of the money he lost in two unregulated offshore collective investment schemes.

The investor, Mr L, invested over R2 million, but R800 000 is the maximum compensation the ombud can order.

Mr L invested in Brandeaux, a property group domiciled in the British Virgin Islands, which invested in student accommodation and residential rental properties in the United Kingdom, and Glanmore Property Fund, whose administrators, Northern Trust, were domiciled in Guernsey, and which invested in commercial properties in the UK. Two to three years ago, both schemes got into financial trouble and were unable to pay investors who wanted to redeem their investments. The schemes collapsed. Many investors are still waiting for at least some of their money to be returned to them.

In July 2007, at the age of 58 and without a job, Mr L invested his entire life savings, which, he hoped, would be sufficient to sustain him and his wife when she retired in 2011. According to Bam’s determination, he wanted to be invested conservatively.

On the advice of Colley, Mr L took out a five-year endowment policy with the UK-based assurer Scottish Life (later Royal London) through African Harvest Life Assurance Company (later Sygnia Life), which had an agreement with Scottish Life to sell its products in South Africa. The two unregulated property funds were the underlying investments in the endowment policy.

In 2012, Mr L became concerned about his investment, and, when he lodged his complaint with the ombud a year later, the value was less than half of the initial capital. A statement from Royal London in February 2015 informed Mr L that he had lost 84 percent of his investment.

In its response to the complaint, Pioneer Wealth Managers said it identified Mr L as a conservative, borderline moderate-risk investor. The offshore investment had been marketed as conservative-tomoderate risk. Pioneer said it had complied with the Financial Advisory and Intermediary Services Act’s regulations and code of conduct by doing a risk profile on Mr L, keeping a record of advice and disclosing costs. It said it could not be held responsible for the investment’s poor performance, the result of an economic downturn and drop in property values in the UK.

In her determination, Bam found that Pioneer and Colley should not have taken the marketing material at face value. She says: “It is abundantly clear from [Colley’s] version that he had not carried out any work to familiarise himself with the risk involved in the two funds, Brandeaux and Glanmore. To even suggest that the risk involved in the two unregulated schemes was conservative shows he had no understanding of what he was doing, yet he advised [Mr L] that the funds were in line with his risk profile. Unregulated collective investment schemes the world over are known as high-risk investments, not suitable for conservative clients.”

Bam accepted that Colley could not have foreseen that the funds would fail.

“However, it was sufficient that [Colley] had not perused even publicly available information regarding the unregulated nature of the funds, the levels of gearing (borrowing) and the implications for the complainant. [Colley did not] provide a single piece of information that shows he satisfied himself on … governance arrangements … aimed at protecting investors against director misconduct, blatant violations of the law and, possibly, fraud. He further does not provide any evidence that he advised [Mr L] about the implications of lack of regulatory oversight.”

She also found that Pioneer had not disclosed all the costs, as it said it had, and these costs had continued to erode Mr L’s investment.

She ruled that Pioneer and Colley were jointly and severally liable for Mr L’s loss.