REGULATOR’S ROLE

LAST WEEK, troubled financial services group Ecsponent issued an extraordinarily positive press release. “Ecsponent Limited successfully restructures balance sheet”, it crowed.

“Following extensive engagement and consultation with preference shareholders,” the release said,

“R1.8 billion debt was converted to ordinary equity, greatly improving solvency and liquidity and R0.5bn debt was converted to hybrid preference shares, which will also qualify as equity.”

The company is to be renamed and rebranded, and two new directors, representing the ordinary and hybrid shareholders, will be appointed.

“This outcome repositions the company and its underlying investments to extract maximum value for its stakeholders going forward.”

The release made no mention of the group’s share price: it was 6 cents at the time.

Also last week, the Financial Sector Conduct Authority (FSCA) released a notice saying it had suspended a subsidiary in the group, Ecsponent Financial Services, “for breaches of financial sector laws”. This was following an investigation into how the company had marketed the preference shares of Ecsponent Limited to potential investors.

“During interactions with potential clients, Ecsponent Financial Services staff provided advice on the investment product – that is, the classes of preference shares. Whilst the classes of shares that paid monthly dividends were popular amongst pensioners, as they mimicked a monthly pension payment, the one major difference between them and a pension investment was that they exposed investors to substantially more risk. It is the view of the FSCA that Ecsponent Financial Services paid insufficient attention to whether or not these shares were suitable investments for their clients,” the

FSCA statement said.

Since Personal Finance first covered this matter in February, several readers have written in about their Ecsponent investments. They are all pensioners, and their stories are heartbreaking.

Mrs S, a widow, was left with very little on which to live when her husband died and she had to sell their family home. She saw an Ecsponent ad on TV, offering a return of 12.5% a year – about two percentage points more than the banks were offering at the time. Ms S did not invest blindly in the scheme; she put a number of questions to the adviser, JJ van der Merwe. On all points, he assured her that the investment was safe, so she went ahead and invested R1.6 million, the only money she had to live on. When things went awry, JJ disappeared.

Another pensioner, Mr K, invested a total of R3.75m between 2015 and 2017. His earliest investment, of R250 000, would have matured this month. In the glossy brochure he was given when he invested, the preference share investments, on a scale from “conservative” to “aggressive”, were marked “moderately conservative”.

As I stated in a previous column, there was nothing “conservative” about these investments. A general equity unit trust fund, which invests in the stock market across a gamut of companies, will typically be classified as “medium to high risk”. How much more high risk, then, is a share in a single company?

Monday last week was the deadline on which the investors were required to vote: they could turn their preference shares into hybrid preference shares or into ordinary shares in the company. With the hybrid preference shares, the investors forfeited any guarantees to capital or returns, although they retained a preference to cash flow in the event of assets being sold off.

In two of the six of preference share classes, the investors voted for the hybrid option. In the other four classes, the voting threshold was not met, with the result that the default ordinary-share option kicked in.

In a single swoop, the Ecsponent group had purged itself of its obligations to these investors, with R2.3bn of debt being expunged from its balance sheet. Hence the selfcongratulatory, smug tone of the press release.

Back when they invested, the investors were promised a “guaranteed”, fixed-rate return plus their capital back at the end of the investment term. They are now sitting with an illiquid “penny stock” subject to the volatility of the market.

There’s also the question of Ecsponent’s ability to survive these torrid times. If the company goes under, ordinary shareholders are last in line for a slice of the pie.

Why did the FSCA suspend Ecsponent Financial Services only last week?

They have been investigating this company since mid-last year. They knew high-risk investments were being marketed to pensioners. According to one investor who wrote in, last year the FSCA advised Ecsponent to grant pensioner investors access to their money if they wanted it. But not many investors were made aware of this.

The role of the FSCA is to protect consumers. It issues warnings every week about risky investments. So why no public warning about the high-risk nature of the Ecsponent preference shares, long before the company defaulted on its payments?

I believe the investors, if they act collectively, have a case against both Ecsponent Financial Services and the FSCA.

The FSCA had not responded by the time of going to print. Go to www.iol. co.za/personal-finance for an updated version of this article, including a statement from the FSCA.