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[2021] ZASCA 54
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Impact Financial Consultants CC and Another v Bam NO and Others (856/2019) [2021] ZASCA 54; [2021] 3 All SA 83 (SCA) (30 April 2021)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 856/2019
In the matter
between:
IMPACT
FINANCIAL CONSULTANTS CC
FIRST APPLICANT
MICHAL
JOHANNES CALITZ
SECOND APPLICANT
and
NOLUNTU
NELLISA BAM N O
FIRST RESPONDENT
YVONNE
MOKGORO N O
SECOND RESPONDENT
LORENDANA
HANSEN
THIRD
RESPONDENT
NATALINA
NATALI
FOURTH RESPONDENT
HENDRIK
FREDERICK DU PLESSIS
FIFTH RESPONDENT
ERNA
ELIZABETH DU PLESSIS
SIXTH RESPONDENT
JOHANNES
JACOBUS
MATTHYS
COETZEE SEVENTH
RESPONDENT
JEANRICH
HEIN EHLERS
EIGHTH RESPONDENT
ROBERT
WILLIAM WHITFIELD JONES NINTH
RESPONDENT
CAROLINA
JOHANNA OLIVIER
TENTH
RESPONDENT
ERIKA
ELISE KRUGER
ELEVENTH RESPONDENT
MARTHA
HENDRINA CARSTENS
TWELFTH
RESPONDENT
HENDRIK
JOHANNES CARTENS
THIRTEENTH
RESPONDENT
ETTIENNE
DU PREEZ
VAN
DER MERWE N.O.
FOURTEENTH RESPONDENT
CRAIG
STEWART INCH
FIFTEENTH RESPONDENT
HENDRINA
AMEDJE RAUTENBACH SIXTEENTH
RESPONDENT
GARVITTE
HERMAN LOMBARD SEVENTEENTH
RESPONDENT
MARTHA
CATHARINA JOOSTE
EIGHTEENTH
RESPONDENT
JOHANNES
ENOCH HARTSHORNE
NINTEENTH
RESPONDENT
FIONA
AVERY KING
TWENTIETH RESPONDENT
Neutral citation:
Impact
Financial Consultants CC and Another v Bam NO and Others
(Case
no 856/2019)
[2021] ZASCA 54
(30
April 2021)
Coram:
NAVSA ADP and MAKGOKA and DLODLO JJA
and GOOSEN and UNTERHALTER AJJA
Heard
:
4 March 2021
Delivered
:
This judgment was handed down electronically by circulation to the
parties’ legal representatives by email,
publication on the
Supreme Court of Appeal website and release to SAFLII. The date and
time for hand-down is deemed to be 09h45
on 30 April 2021.
Summary:
Ombud for Financial
Services –
Financial Advisory and Intermediary Services Act 37
of 2002
– the nature of the financial product to be identified
before determination of complaint and possible compensation is
directed.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (Tlhapi J, sitting as court of
first instance):
1. Leave to appeal is granted with costs.
2. The appeal is upheld to the extent set
out in the substituted order below.
3. The order of the high court is set aside
and replaced by the following order:
‘
(a)
The decision of the second respondent to refuse leave to appeal to
the Financial Services Appeal Board
in case numbers FAB3/2015 to
FAB20/2015 is hereby set aside.
(b) The determinations of the first respondent
under case numbers FAB3/2015 to FAB20/2015 are hereby set aside.
(c) Each of the complaints
lodged under case numbers FAB3/2015 to FAB20/2015 are referred back
to
the first respondent for determination in accordance with the
provisions of the Financial Advisory and Intermediary Services Act
37
of 2002.
(d) The first respondent is ordered
to pay the costs of the application.’
4. The first respondent is
ordered to pay the costs of the appeal, including the costs of the
application for leave to appeal before
the high court.
JUDGMENT
Goosen
AJA (Navsa ADP and Makgoka and Dlodlo JJA and Unterhalter AJA
concurring)
[1]
This is an application
for leave to appeal referred for oral argument by this Court in terms
of section 17(2)(
d
)
of the
Superior Courts Act, 10 of 2013
. The parties were directed to
be prepared to address the court on the merits, if called upon to do
so. We heard argument on the
application for leave to appeal and on
the merits. The Gauteng Division of the High Court, Pretoria (the
high court) dismissed
a review application (the review application)
in which the applicants sought to set aside the dismissal of their
application for
leave to appeal by the second respondent.
[2]
The central issue in
this matter is whether the Ombud for Financial Services (the Ombud),
established in terms of section 20 of
the Financial Advisory and
Intermediary Services Act, 37 of 2002 (the FAIS Act) committed a
reviewable error in determining complaints
lodged by each of the
third to twentieth respondents in terms of s 27 of the FAIS Act. The
detailed background culminating in the
proceedings before us is set
out hereafter.
The
parties
[3]
The first applicant,
Impact Financial Consultants CC (Impact Consultants), is a registered
financial services provider in which
the second applicant (Mr Calitz)
holds a 90% membership interest. Mr Calitz is a duly registered
financial services provider who
rendered such services as a member of
Impact Consultants.
[4]
The first respondent is
the duly appointed Ombud for Financial Services, appointed in terms
of s 21 of the FAIS Act.
[1]
The second respondent is the chairperson of the appeal board of the
Financial Services Board. The appeal board considers appeals
from
determinations made by the Ombud.
[2]
The third to twentieth respondents (hereafter the respondents) each
lodged a complaint with the Ombud in relation to advice furnished
to
them by Mr Calitz to them regarding investments which each had made.
The complaints were recorded by the Ombud under case numbers
FAB3/2015 to FAB20/2015. The investments were made in the MAT
Relative Value Arbitrage Fund, later named the Relative Value
Arbitrage
Fund Trust (the RVAF Trust). The RVAF Trust was controlled
or managed by Abante Capital (Pty) Ltd (Abante Capital), an
investment
company controlled by Mr Herman Pretorius (Mr Pretorius).
The complaints arose pursuant to the collapse and eventual
liquidation
of Abante Capital and the RVAF Trust, following the death
of Mr Pretorius, who committed suicide in July 2012, subsequent to
adverse
press reports about fraud allegedly perpetrated by him, and
significant losses incurred by Abante Capital.
The
proceedings before the Ombud
[5]
It is not in dispute
that Mr Calitz furnished the respondents with advice regarding an
investment in the RVAF Trust, which was described
as a ‘hedge
fund’ managed by Abante Capital. It is also not in dispute that
each of the respondents invested funds
as advised. Nor is it in
dispute that, in consequence of the collapse and resulting
liquidation of Abante Capital and the RVAF
Trust, the respondents
suffered capital losses on their investments.
[6]
It was these losses
which gave rise to the complaints lodged against Mr Calitz and Impact
Consultants with the Ombud. The complaints
were premised upon the
allegation that Mr Calitz had negligently failed to comply with his
obligations as a financial services
provider, as set out in the
General Code of Conduct for Authorised Financial Service Providers
and Representatives (the Code)
[3]
,
published in terms of s 15 of the FAIS Act. It was alleged, inter
alia, that Mr Calitz had failed: to undertake a due diligence
assessment of the RVAF Trust and / or Abante Capital; to establish
that the ‘hedge fund’ in which investments were
made was
not duly registered and regulated by the FAIS Act; to establish that
the scheme of investment was an illegal scheme; to
undertake a proper
needs analysis in relation to each of the investors; to advise of the
high risks associated with the investment;
and had generally
negligently failed to comply with his duties as a financial advisor.
The respondents alleged that this negligent
conduct had caused the
respondents to suffer loss. They accordingly sought a compensatory
award in terms of the FAIS Act.
[7]
In answer to the
complaints Mr Calitz raised several defences. He denied that he had
rendered financial advisory services as a representative
of Impact
Consultants. He asserted that he had rendered such advice in his
personal capacity as a registered financial services
provider. He
denied that he had failed in his duties in any manner. He stated that
he was under no obligation to conduct a due
diligence of the
particular funds in which investments were to be made. His
obligation, he asserted, extended only to a requirement
that he
undertake a due diligence assessment of the fund manager. In this
instance that was Abante Capital. He alleged that: he
had undertaken
such due diligence assessment; he had satisfied himself that Abante
Capital was a registered service provider; it
was managed by
competent and qualified personnel, including Mr Pretorius who was a
highly respected fund manager; and that the
returns on investment
earned by the Abante Capital hedge fund were sustainable and in line
with returns earned by similar funds.
He alleged further that he had
advised each of the respondents about the nature of the risks
associated with such investments and
that in many instances his
clients had insisted on investing with the RVAF Trust. He stated that
Abante Capital had on two occasions
been the subject of investigation
by the Financial Services Board and that no impropriety had been
discovered. The nature and extent
of the fraud perpetrated by Mr
Pretorius upon investors was only discovered after his demise and
upon the liquidation of Abante
Capital.
[8]
Mr Calitz accordingly
denied that he was negligent in any respect or that any negligence
that was established, had caused the losses
suffered by the
respondents. The losses, he asserted, were occasioned by the fraud
perpetrated by Mr Pretorius and that such fraud
could not have been
detected by a due diligence assessment which he (Mr Calitz) was
required to undertake.
[9]
Mr Calitz also raised a
further defence, namely that the financial product in respect of
which he had furnished advice was not a
‘financial product’
as defined by the FAIS Act and accordingly that the ‘advice’
he had furnished was not
regulated by the FAIS Act. The Ombud, so he
contended, accordingly lacked jurisdiction to determine the
complaints against him
and Impact Consultants.
The
determinations by the Ombud
[10]
The first determination
made against Impact Consultants and Mr Calitz was in respect of the
complaint lodged by the fifteenth respondent,
Dr Inch (the Inch
Determination). Thereafter the Ombud determined all the other
complaints, essentially upon the basis set out
in the Inch
Determination. Reference will accordingly only be made to the Inch
Determination as reflecting the findings of and
reasoning adopted by
the Ombud.
[11]
The Ombud found that Mr
Calitz, acting on behalf of Impact Consultants, had failed to conduct
a needs analysis in terms of s 8 of
the Code
[4]
from which it could be determined whether the selected investment
product was likely to satisfy the investor’s needs. The
Ombud
was critical of Mr Calitz’s advice to place the greater part of
the savings into a high risk investment, without any
thought as to
diversification. The Ombud held that in breach of sections 4 and 5 of
the Code, Mr Calitz had failed to make proper
disclosure by not
providing full details of what they were investing in and with whom
they were dealing. It was also found that
Mr Calitz had failed to
maintain a record of the advice that was required to explain what
range of financial products had been
considered as being appropriate
to meet his client’s needs.
[12]
The Ombud also found
that Mr Calitz had failed to comply with Part III, s 4 and Part IV, s
5 of the Code. Regarding the latter provision,
it was found that
insufficient details were provided to ensure that the client knew and
had access to full details of the relevant
product supplier. As to
the former provision, it was found that, on the documentation
supplied by Mr Calitz, all that could be
ascertained was that his
client was investing capital in a limited partnership, styled the
‘Relative Value Arbitrage Fund
En
Commandite
Partnership’. Neither the nature of this partnership, nor the
rationale for this contractual relationship, it was found,
were
explained to the client.
[13]
In regard to the
conduct of a due diligence assessment, Mr Calitz alleged that he
conducted such assessment of Abante Capital. The
Ombud dismissed this
defence ‘as an afterthought’, noting that there was no
reference to Abante Capital in the disclosure
documents. The Ombud
found that since the RVAF Trust was promoted as a hedge fund, and
since the RVAF Trust directly accepted clients’
funds and
accounted for them, the RVAF Trust in fact provided intermediary
services on a discretionary basis. It therefore fell
within the
definition of a hedge fund financial services provider, as provided
by Board Notice 89 of 2007, issued by the Registrar
of Financial
Services Providers. Based upon this, the Code of Conduct for
Discretionary Financial Services Providers
[5]
applied. Section 8A(4) of this Code requires that a hedge fund
financial services provider must obtain a written mandate from a
client which confirms that the client approves the investment
objectives, guidelines and trading philosophy of the hedge
fund
financial services provider. No evidence was provided that
established compliance with this requirement or that Abante Capital
had concluded such mandate with the RVAF Trust.
[14]
The Ombud concluded
that the complainant (in this instance Dr Inch) was not adequately
apprised of the risks associated with an
investment in a hedge fund.
In relation to the fact that the RVAF Trust was not registered, the
Ombud found that proper due diligence
would have disclosed this fact.
It did not avail Mr Calitz to rely on the fact that the FSB had not
established any impropriety
on the part of Abante Capital or Mr
Pretorius.
[15]
The upshot of these
findings was that the Ombud concluded that Mr
Calitz had negligently breached the statutory duties owed to his
clients. This negligent conduct had resulted in the investments
being
placed in the RVAF Trust and the subsequent losses incurred. Impact
Consultants and Mr Calitz were accordingly found to be
jointly and
severally liable for the losses incurred.
The
applications for leave to appeal before the Ombud and the second
respondent
[16]
Applications for leave
to appeal against each of the determinations were made to the Ombud
in terms of s 28(5)(
i
)
of the FAIS Act. The applications were prosecuted on the basis that
the Ombud erred in finding that Mr Calitz and by extension
Impact
Consultants had negligently breached the statutory duties imposed by
the FAIS Act and the Code. It was contended that
even if such
breach was established and that it was found that Impact Consultants
and Mr Calitz had been negligent, it had not
been established that
such negligence had caused the loss suffered. The cause of the loss
was the fraudulent conduct of Mr Pretorius.
In the circumstances, Mr
Calitz could not reasonably have foreseen fraudulent conduct on the
part of Mr Pretorius. It was argued
that liability was not
established.
[17]
The Ombud dismissed the
applications for leave to appeal. She found that there was no
reasonable prospect that her factual findings
would be overturned.
She held that reliance upon common law concepts such as causation and
foreseeability of harm did not apply
in the context of statutory
provisions enacted to protect the clients of financial services
providers. In effect, the Ombud found
that once it was established
that a financial services provider had negligently breached their
statutory duties and a client has
suffered loss, liability and
compensation must follow.
[18]
Aggrieved with the
refusal of leave to appeal, an application for leave to appeal was
directed to the chairperson of the appeal
board, in terms of s 28
(5)(
b
)(ii).
To facilitate the conduct of those proceedings a request was directed
to consolidate the applications of each of the respondents.
[19]
The second respondent
granted the consolidation and dismissed the applications for leave to
appeal, holding that, having regard
to the record in each matter and
the reasoning of the Ombud, there was no prospect of success on
appeal.
The
review application
[20]
The dismissal of the
applications for leave to appeal by the second respondent resulted in
a review application launched in the
high court, in which the
applicants sought an order reviewing and setting aside such
dismissal. They sought an order granting such
leave, alternatively an
order reviewing and setting aside the determinations made by the
Ombud in respect of the complaints lodged
by the respondents.
[21]
The applicants
contended that the Ombud had committed an error of law inasmuch as
she had found that liability followed on the finding
of negligence
without considering whether the impugned conduct was the cause of
such loss. Upon receipt of the record filed in
terms of rule 53 of
the Uniform Rules of Court, the applicants supplemented their grounds
of review to include the following:
(a)
that the Ombud had no jurisdiction to entertain the complaints since
the investors had invested in the
Relative Value Arbitrage Fund
En
Commandite
Partnership, which is not a financial product as
defined by the FAIS Act;
(b)
that the provisions of s 27(3)(
c
) ought to have been invoked
by the Ombud to refer the dispute for determination by a court in the
light of the disputes;
(c)
that the Code does not provide for civil liability by reason only of
a breach thereof; and
(d)
that the appeal board has in a similar matter ruled that the product
was not a financial product as
defined by the FAIS Act and,
accordingly, that the Ombud did not enjoy jurisdiction in respect of
such complaint.
[22]
The high court did not
address the challenge to the jurisdiction of the Ombud. It set out
the contentions of the parties in some
detail but did not identify
all the issues to be adjudicated in relation to the grounds of
review. In relation to the applicants’
reliance upon the
failure to consider causation as a separate element of liability,
framed as an error of law, the high court was
not persuaded that the
applicants had established the materiality of such error, even on the
assumption that the error was established.
The high court appears to
have accepted the basis upon which the Ombud determined liability as
being the correct basis.
[23]
The following is
recorded in the judgment:
‘
In
the answering affidavit the first respondent states that it is not
correct that she determined that liability followed automatically
from a transgression of the Code: “
I
submit that I made the findings against the Applicant which
cumulatively point to his wrong advice and negligence as the cause
of
the complainant’s loss…..the Applicant’s negligent
failure to establish the nature of the entity or product
(RVAF) he
invested in.”
’(Emphasis in
original text).
[24]
The high court went on
to find as follows:
‘
The
first respondent denies that how she dealt with the matter
constitutes an error of law. As I see it, the standard of service
that the applicants are held to is what is provided for in the Code,
and nothing more and it is not only the transgressions that
she
relied upon as constituting liability
but
the cumulative effect of all the transgressions, as having given rise
to liability
.’ (Emphasis added.)
[25]
In coming to this
finding, the high court did not consider whether, properly
considered, liability for the negligent breach of the
provisions of
the FAIS Act and the Code arises strictly upon such breach or, upon
the establishment of a causal link – both
factual and legal –
between the culpable conduct and the loss suffered. The court
considered that there was no error of law
in relation to the refusal
of leave to appeal and consequently did not embark on an analysis of
the specific grounds of review
raised by Calitz.
[26]
The review application
was dismissed with costs. The high court subsequently refused leave
to appeal against its order.
The
proceedings before this Court
[27]
Before this Court, the
issue was whether leave to appeal ought to be granted to the
applicants and, if so, what relief should follow.
The appellants
framed the question for adjudication as follows: whether upon the
facts it could be found that the Ombud enjoyed
jurisdiction to
determine the complaints lodged by the respondents. As I have
detailed, the Ombud made no definitive finding that
she had
jurisdiction. The Ombud proceeded upon the assumption that she
enjoyed such jurisdiction. The high court similarly did
not make a
finding that the Ombud had jurisdiction, notwithstanding that the
issue was squarely raised. For reasons that will become
apparent the
principal question is whether the Ombud established the foundational
facts upon which a determination could be based.
And consequentially
whether that constituted a reviewable error.
The
statutory scheme
[28]
The purpose of the FAIS
Act is to provide assurance to consumers of financial services and
financial products that those who render
such services are subject to
effective regulation and control. These broad objects and purposes
are achieved by establishing a
system of licencing and governance to
which providers of financial and intermediary services are
subject.
[6]
The FAIS Act (in conjunction with allied and related legislation)
does so by establishing standards, in the form of Codes of Conduct
which service providers are required to meet.
[7]
Enforcement of these provisions is achieved by various mechanisms
[8]
,
including the establishment of an Ombud clothed with the power to
investigate and adjudicate disputes and to provide remedies
for
regulatory non-compliance.
[29]
The office of the Ombud
is established in terms of s 20 of the FAIS Act. Section 20(3)
outlines the objectives as follows:
(3) The objective of the Ombud is to
consider and dispose of complaints in a procedurally fair, informal,
economical and expeditious
manner and by reference to what is
equitable in all the circumstances, with due regard to—
(
a
) the contractual arrangement or other
legal relationship between the complainant and any other party to the
complaint; and
(
b
)
the provisions of this Act.
[9]
[30]
Section 27 of the FAIS
Act provides for the receipt of complaints, matters
dealing with prescription, the jurisdiction of the Ombud and its
powers of investigation.
The relevant portions of the section read as
follows:
‘(1) On submission of a complaint to
the Office, the Ombud must—
(
a
) determine whether the requirements
of the rules contemplated in section 26 (1) (
a
) (iv) have
been complied with;
(
b
) in the case of any non-compliance,
act in accordance with the rules made under that section; and
(
c
) otherwise officially receive the
complaint if it qualifies as a complaint.
(2) ….
(3) The following jurisdictional
provisions apply to the Ombud in respect of the investigation of
complaints:
(
a
)(i)
The Ombud must decline to investigate any complaint which relates to
an act or omission
which occurred on or after the date of
commencement of this Act but on a date more than three years before
the date of receipt
of such complaint by the Office.
(ii) Where the complainant was unaware of the
occurrence of the act or omission contemplated in subparagraph
(i), the period
of three years commences on the date on which the
complainant became aware or ought reasonably to have become aware of
such occurrence,
whichever occurs first.
(
b
)(i) The Ombud must decline to
investigate any complaint if, before the date of official receipt of
the complaint, proceedings have
been instituted by the complainant in
any Court in respect of a matter which would constitute the subject
of the investigation.
(ii) Where any proceedings contemplated
in subparagraph
(i) are instituted during any investigation by the Ombud,
such
investigation must not be proceeded with.
(
c
) The Ombud may on reasonable grounds
determine that it is more appropriate that the complaint be dealt
with by a Court or through
any other available dispute resolution
process, and decline to entertain the complaint.
(4) ….
(5) ….
(6) For the purposes of any
investigation or determination by the Ombud, the provisions of the
Commissions Act, 1947 (Act
No. 8 of 1947), regarding the
summoning and examination of persons and the administering of oaths
or affirmations to them, the
calling for the production of books,
documents and objects, and offences by witnesses, apply with the
necessary changes.’
[31]
Section 27(1)(
c
)
requires, in addition to consideration of compliance with the
procedural requirements for the submission of a complaint, that
the
Ombud consider the substantive nature of the complaint. A ‘complaint’
is defined in s
1,
‘means, subject to section
26(1)(
a
)(iii), a specific complaint relating to a financial
service rendered by a financial services provider or representative
to the
complainant on or after the date of commencement of this Act,
and in which complaint it is alleged that the provider or
representative—
(
a
)
has contravened or failed to comply with a provision of this Act and
that as a result
thereof the complainant has suffered or is likely to
suffer financial prejudice or damage;
(
b
)
has wilfully or negligently rendered a financial service to the
complainant which has
caused prejudice or damage to the complainant
or which is likely to result in such prejudice or damage; or
(
c
)
has treated the complainant unfairly;’.
[32]
Section 26(1)(
a
)(iii)
provides that the Board may make rules regarding- ‘the type of
complaint justiciable by the Ombud, including a complaint
relating to
a financial service rendered by a person not authorised as a
financial services provider or a person acting on behalf
of such
first-mentioned person’.
[33]
The following definition which
appears in s 1 of the FAIS Act is significant. ‘Advice’
(as it bears upon the present
matter) is defined to mean,
‘…any
recommendation, guidance or proposal of a financial nature furnished,
by any means or medium, to any client or
group of clients—
(a)
in respect of
the purchase of any financial product; or
(b)
in respect of
the investment in any
financial product’
.
(Emphasis
added)
[34]
A financial product, in turn, is defined to mean,
‘
(a)
securities and instruments, including—
(i) shares in a company
other than a “share block company” as defined in the
Share Blocks Control Act, 1980 (Act No.
59 of 1980);
(ii) debentures and
securitised debt;
(iii) any money-market
instrument;
(iv) any warrant,
certificate, and other instrument acknowledging, conferring or
creating rights to subscribe to, acquire, dispose
of, or convert
securities and instruments referred to in subparagraphs (i), (ii) and
(iii);
(v) any “securities”
as defined in section 1 of the Financial Markets Act, 2012 (Act No.
19 of 2012);
[10]
(b)
a participatory
interest in one or more collective investment schemes;
(c)
a long-term or
a short-term insurance contract or policy, referred to in the
Long-term Insurance Act, 1998 (Act No. 52 of 1998),
and the
Short-term Insurance Act, 1998 (Act No. 53 of 1998), respectively;
(d)
a benefit
provided by—
(i) a pension fund
organisation as defined in section 1 (1) of the Pension Funds Act,
1956 (Act No. 24 of 1956), to the members
of the organisation by
virtue of membership; or
(ii) a friendly society
referred to in the Friendly Societies Act, 1956 (Act No. 25 of 1956),
to the members of the society by virtue
of membership;
(e)
a foreign
currency denominated investment instrument, including a foreign
currency deposit;
(f)
a deposit as
defined in section 1 (1) of the Banks Act, 1990 (Act No. 94 of 1990);
(g)
a health
service benefit provided by a medical scheme as defined in section 1
(1) of the Medical Schemes Act, 1998 (Act No. 131
of 1998);
(
g
A) an investment,
subscription, contribution, or commitment in an alternative
investment fund;
[11]
(h)
any other
product similar in nature to any financial product referred to in
paragraphs
(a)
to
(g)
, inclusive, declared by the
registrar by notice in the Gazette to be a financial product for the
purposes of this Act;
[12]
(i)
any combined
product containing one or more of the financial products referred to
in paragraphs
(a)
to
(h)
, inclusive;
(j)
any financial
product issued by any foreign product supplier and which in nature
and character is essentially similar or corresponding
to a financial
product referred to in paragraph
(a)
to
(i)
,
inclusive;’
[13]
A
reviewable error
[35]
As noted earlier, the
Ombud did not deal with the challenge to her jurisdiction, namely
that the financial product in which the
investment was promoted, was
not a financial product as defined by the FAIS Act. The difficulty
extends further than this.
[36]
The respondents
identified the financial product in which they were advised to invest
as being a ‘hedge fund’. Mr Calitz,
in his answer to the
complaints, admitted that what was promoted was an investment in the
RVAF Trust, apparently being a hedge
fund managed by Abante Capital.
The documents disclosed during the investigation indicated that the
respondents had invested in
what was designated as the RVAF
En
Commandite
Partnership.
They had accordingly, so Mr Calitz maintained, become partners in a
limited partnership and the returns earned by them
were profits
earned by the limited partnership.
[37]
In its determinations
the Ombud treated the investment as an investment in a ‘hedge
fund’. It also treated the RVAF
Trust as a discretionary
financial services provider which invested in a hedge fund. The Ombud
however, recognised that the true
nature of the investment was not
explained and was not known or understood by the respondents. Indeed,
the Ombud found that Mr
Calitz did not understand the nature of the financial product in
which the investment was made.
[38]
What is apparent from a
reading of the complaints and the record, is that although the
product was described as a ‘hedge fund’
the true nature
of the investment product and indeed, if it was an investment product
at all, remained unknown. That being so,
it was not possible to
ascertain whether the investment that was the subject of the
compliant was a financial product as defined
in the FAIS Act. And if
not, what consequences, if any, this would have for the Ombud
exercising jurisdiction to entertain the
complaint. It is
common ground that hedge funds were not included in the definition of
a financial product in the FAIS Act
at the time that the complaints
arose.
[39]
The failure to
determine the nature of the financial product which was the subject
of the advice furnished by Mr Calitz, constituted
a fundamental error
on the part of the Ombud. It is not known, nor were any steps taken
to ascertain, whether the funds were in
fact placed in any investment
product at all or invested in a hedge fund or merely siphoned off by
Mr Pretorius. That ought to
have been ascertained. It also ought to
have been ascertained whether Mr Calitz had taken steps to determine
the destination of
the invested funds. Absent a proper determination
of the nature of the financial product and without establishing what
is referred
to earlier in this and the preceding paragraphs, the
Ombud was not entitled to conclude her adjudication and to finalise
the complaints
lodged in terms of s 27 of the FAIS Act. The Ombud
enjoys extensive powers of investigation in terms of s 27(6), the
exercise of
which would have permitted the Ombud to ascertain facts
relevant to the issues identified above, which relate to jurisdiction
and
remedy for a complainant, if any. This she failed to do. That was
what the high court ought to have concluded was a reviewable error,
necessitating a remittal.
[40]
It is necessary to deal
briefly with two aspects which arose in argument before us. The first
concerns the judgment of this Court
in
Atwealth
(Pty) Ltd and Others v Kernick and Others
(
Atwealth
).
[14]
The second concerns the approach of the Ombud to the application of
principles of the common law.
[41]
The
Atwealth
matter concerned a claim for damages against a financial services
provider who was alleged to have furnished advice in breach of
legal
duties owed to a client. The legal duties alleged to have been
breached were those set out in the FAIS Act and in the General
Code
of Conduct for Financial Services Providers promulgated under the
FAIS Act. The investment product which was promoted was
an investment
in the RVAF Trust Fund operated by Abante Capital, ie the same
‘product’ promoted in the present matter.
The judgment in
Atwealth
was relied upon by counsel for the applicants, as authority for the
proposition that the advice relating to the RVAF Trust was
not advice
in relation to a financial product as defined by the FAIS Act. In
this regard reference was made to a passage in the
judgment where
Davis AJA records that:
‘Central to appellants’ case was
whether Ms Moolman provided advice to the Kernicks and, if so,
whether this advice,
failed to comply with Ms Moolman’s legal
duties and caused the Kernicks to invest in ill-fated products.
Before the court
a quo
and
again in this Court, Counsel for both parties focussed their
arguments on whether Ms Moolman breached the provisions of the
FAIS
Act read together with the General Code of Conduct for Authorised
Financial Service Providers and Representatives (the “Code”).
There was some debate before us in
regard to the applicability of these provisions as hedge funds were
not regulated by the Financial
Services Board until 1 April 2015,
when they were declared to be collective investment schemes in terms
of
section 63
of the
Collective Investment Schemes
Control Act 45 of 2002
.’
[15]
(Emphasis
added.)
[42]
Based on this passage,
it was asserted that the RVAF Trust Fund was not, at the time of the
Ombud’s determination, a financial
product within the meaning
of that term as defined and, therefore, the Ombud lacked
jurisdiction.
[43]
The passage, however,
is not authority for such proposition. It merely records that hedge
funds were only defined to be collective
investment schemes in 2015
and thereby came within the ambit of the definition of a financial
product in the FAIS Act. The court
in
Atwealth
was not called upon to decide whether the product was indeed a hedge
fund and that the provisions of the FAIS Act accordingly did
not
apply. The claim in
Atwealth
was premised upon
the breach of common law legal duties owed by a financial advisor to
their client. The provisions of the FAIS
Act were pleaded as
reflecting the legal duties of the financial advisor.
[44]
This Court equally did
not decide that financial advice provided in respect of any financial
product (whether or not it is one as
defined by the FAIS Act) renders
a financial advisor subject to the enforcement mechanisms provided by
the FAIS Act. In the first
instance the court made no such finding.
Secondly, it was called upon to decide issues of wrongfulness and
fault to establish liability
in the context of the pleaded case. It
is in this context that the following passage in the judgment should
be understood.
‘
Ms
Moolman’s Counsel contended that she had merely given the
Kernicks objective information about particular financial products
and, at best for them, no more than advice on the procedures for
concluding an investment transaction. In Counsel’s submission
this did not constitute “advice” as defined in the FAIS
Act. Furthermore, he contended that the Kernicks had invested
in a
hedge fund, which was structured as an
en
commandite
partnership.
He submitted that a hedge fund or a partnership of this particular
kind did not constitute a “financial product”
as defined
in terms of the relevant law as it existed in 2009 and therefore,
whatever Ms Moolman might have told the Kernicks,
it could not have
constituted “advice” for the purposes of the FAIS Act
read together with the Code. The difficulty
with these contentions
was that, even if they had merit, on a careful parsing of the
language of the FAIS Act, the presentation
by Ms Moolman constituted,
in ordinary parlance, the giving of financial advice, at least in the
form of product information, to
the Kernicks. It was advice on which
they clearly intended to rely and on which they were entitled to
rely, coming as it did from
a professional financial advisor from
whom they had sought that advice.’
[16]
[45]
That brings me to the
second issue, namely the Ombud’s approach to the application of
common law principles in the determination
of a complaint. As
indicated earlier in this judgment, in response to the application
for leave to appeal to the board of appeal
the Ombud suggested that
common law principles of delictual liability do not apply. She took
the view that the statutory scheme
establishes liability upon a
breach of the FAIS Act and the Code. This view is emphatic,
insufficiently reasoned and requires further
exploration. We need
however express no definitive view on this. Section 28, which deals
with determinations, is rather widely
worded, and provides that fair
compensation may be awarded for financial prejudice or damage
suffered.
[17]
Furthermore a ‘complaint’, as indicated above, is widely
defined in the FAIS Act as is advice. In addition, the objectives
of
the Ombud as set out in s 20 must also be taken into account. Why,
one might rightly enquire, should a registered financial
advisor, be
dealt with less punitively for providing advice beyond the products
recognised and regulated under the FAIS Act, when
such an advisor has
breached both common law duties echoed in the statutory provisions.
Be that as it may, it is foundationally
necessary to establish
the true nature of the investments complained about before any final
conclusions are reached, including
in relation to questions related
to compensation.
Remedy
[46]
It follows from what is
set out above that the applicants are entitled to relief before this
Court, both in relation to the application
for leave to appeal and in
relation to the merits of the appeal, on the circumscribed basis
presaged above.
[47]
In the light of the
finding that it is necessary for the Ombud to determine her
jurisdiction in respect of the complaints on the
basis of facts, no
purpose would be served by permitting an appeal to the appeal board.
Instead, the only appropriate remedy is
to set aside the
determinations made by the Ombud and to refer each of the complaints
back to the Ombud for investigation and determination
in accordance
with the guidance provided in this judgment. All the issues
identified above require full exploration and further
evidence and
full debate.
[48]
In respect of costs,
the second respondent abided the decision of this Court. There is no
compelling reason why, in respect of the
Ombud, the costs should not
follow the result.
[49]
In the result the
following order is made:
1. Leave to appeal is
granted with costs.
2. The appeal is upheld to
the extent set out in the substituted order below.
3. The order of the high
court is set aside and replaced by the following order:
‘
(a) The
decision of the second respondent to refuse leave to appeal to the
Financial Services Appeal Board in
case numbers FAB3/2015 to
FAB20/2015 is hereby set aside.
(b) The determinations of the
first respondent under case numbers FAB3/2015 to FAB20/2015 are
hereby set
aside.
(c) Each of the complaints
lodged under case numbers FAB3/2015 to FAB20/2015 are referred back
to
the first respondent for determination in accordance with the
provisions of the Financial Advisory and Intermediary Services Act
37
of 2002.
(d) The first respondent is
ordered to pay the costs of the application.’
4. The first respondent is
ordered to pay the costs of the appeal, including the costs of the
application
for leave to appeal before the high court.
G.
GOOSEN
ACTING
JUDGE OF APPEAL
Appearances
For
applicants:
M Daling
Instructed by:
Laas & Scholtz
Inc., Cape Town
c/o Webbers, Bloemfontein
For first
respondent: S L Shangisa and B B
Mkhize
Instructed
by:
Kgokong Nameng Tumagole
Inc., Johannesburg
c/o Lovius Block, Bloemfontein.
[1]
The first respondent was cited
nomine
officio
. She has since been replaced
by the current Ombud. The current Ombud participated in the
proceedings before this court.
[2]
See s 28(5)(
b
)
of the FAIS Act read with s 26(1) of the
Financial
Services Board Act 97 of 1990. The Financial Services Board Act was
repealed by the Financial Sector Regulation Act,
9 of 2017 which, in
respect of the provisions relating to the appeal board, came into
effect on 1 April 2018. The appeals process
is now regulated by the
latter Act.
[3]
General Code of Conduct for Authorised Financial
Services Providers and Representatives, Board Notice 80 of 2003,
GG
25299, 8 August 2003.
[4]
Ibid.
[5]
Code of Conduct for Administrative and
Discretionary FSP’s Amendment Notice,
Board
Notice 89 of 2007,
GG 30228.
[6]
Section 7 of the FAIS Act provides that a
financial services provider is not authorized to offer such services
unless they have
been issued with a license to do so by the
Financial Services Board in terms of s 8 of the FAIS Act. In terms
of s 8 the Registrar
is required to establish ‘fit and proper’
requirements to be met by applicants for authorization.
[7]
Section 15 of the FAIS Act permits the registrar
to publish codes of conduct to regulate the conduct of service
providers. Such
codes of conduct must comply with a set of
principles set out in s 16.
[8]
Section 9 allows for the withdrawal or suspension
of a licence under specified conditions.
[9]
This is how s 20(3) read at the time that the
Ombud was engaged with this matter. The section was subsequently
amended by s 290
of the Financial Sector Regulations Act, 9 of 2017
(the FSR Act), which commenced on 1 April 2018, read with Schedule 4
to the
FSR Act. There is no substantive difference between the
provisions. The new subsection now reads as follows:
‘(3) The
objective of the Ombud is to consider and dispose of complaints
under this Act, and complaints for which
the Adjudicator is
designated in terms of section 211 of the Financial Sector
Regulation Act, in a procedurally fair, informal,
economical and
expeditious manner and by reference to what is equitable in all the
circumstances, with due regard to—
(
a
) the
contractual arrangement or other legal relationship between the
complainant and any other party to the complaint; and
(
b
) the provisions
of this Act and the Financial Sector Regulation Act.’
[10]
Sub-para
(v)
substituted by s 175
(d)
of Act No. 45 of
2013, i e after the complaints arose but at a time when the
complaints were being determined by the Ombud.
[11]
This is a
pending amendment: Paragraph
(
g
A) to be inserted by s 290 read with Sch. 4 of Act No. 9 of
2017 with effect from a date determined by the Minister by notice in
the Gazette – date not determined.
[12]
Paragraph
(h)
substituted by s 175
(e)
of Act No. 45 of
2013, i.e. after the complaint in this matter arose but at a stage
when the Ombud was called upon to determine
the complaint.
[13]
Paragraph
(j)
substituted by s. 290 read with Sch. 4 of Act
No. 9 of 2017 with effect from a date determined by the Minister by
notice in the
Gazette: 1 April, 2018 (Government Notice No. 169 in
Government Gazette 41549 of 29 March, 2018). This is after the
determination
of the complaints by the Ombud.
[14]
Atwealth and Others v Kernick and Others
[2019] ZASCA 27 (SCA); [2019] 2 All SA 629 (SCA);
2019 (4) SA 420 (SCA).
[15]
Ibid para 25.
[16]
Ibid para 30
[17]
The relevant portion of s 28 of the FAIS Act
reads as follows:
‘(1) The
Ombud must in any case where a matter has not been settled or a
recommendation referred to in section
27(5)(
c
) has
not been accepted by all parties concerned, make a final
determination, which may include—
(
a
) the dismissal
of the complaint; or
(
b
) the upholding
of the complaint, wholly or partially, in which case—
(i) the complainant may
be awarded an amount as fair compensation for any financial
prejudice or damage suffered;
(ii) a direction may be
issued that the authorised financial services provider,
representative or other party concerned take such
steps in relation
to the complaint as the Ombud deems appropriate and just;
(iii) the Ombud may make
any other order which a Court may make.’