Ombud comes down on advisers who push property syndication schemes
Thirteen years after parting with money, nine years after lodging complaint, and a year after her death, the watchdog orders financial advisers to reimburse woman’s investment
Relief is finally coming for ill-advised property syndication investors — but for some it is too late.
Lenita McCabe was a 51-year-old widow with two children on a monthly income of R1,212 when Impectus Brokers & Financial Services advised her to invest R150,000 in the BlueZone Spitskop Village Property syndication scheme. She lost all of it, tried to get it back, then died in 2018 having never seen the return of her money.
On March 29 2019, the ombud ordered Impectus, and Francois van der Walt, to pay the R150,000 plus interest at 10% per annum from the date of the order into her estate.
McCabe had inherited R330,000 from a policy on the death of her husband. She bought a property and later sold it, using some of the profit to make the investment. She had sought advice from Impectus because Van der Walt had been her parents’ trusted financial planner for many years. He showed her Sanlam, Liberty Life and Spitskop products, and the latter was decided on.
Often they were not developed, the properties were overvalued, or the properties were held in structures that ensured investors did not have direct ownership
McCabe had tried to cancel the investment after realising something was amiss but to no avail. When she eventually complained to the ombud, Van der Walt tried to convince the ombud that he had indeed offered McCabe proper advice on the risks involved and that she made her decision with this knowledge.
She died before the final determination, in which Ombud for Financial Services Providers Naresh Tulsie wrote: “In my view, the respondent positioned the investment to the deceased as the better option because of the income it offered, in contrast with the other products that seem to have been considered. The deceased, as confirmed by both herself and the respondent, relied entirely on this advice from the respondent.
“The respondent cannot now escape liability for the loss that was occasioned to the deceased estate when the product failed to deliver as advised it would.”
Contravention of code of conduct
Tulsie found that Van der Walt was in contravention of various sections of the general code of conduct for authorised financial service providers (FSP) and representatives, most notably that he failed to take into account McCabe’s personal circumstances and risk profile. He also contravened the Financial Advisory and Intermediary Services Act (Fais Act) by not being licensed to offer advice.
The ruling is one of a few that were issued by the Ombud for Financial Services Providers (Fais ombud) at the end of March that deal with property syndications. These follow similar rulings, such as those covered by Money regarding the Sharemax Zambezi property syndication scheme.
Broadly speaking, the property syndicates that “went bad” involve properties that were not able to generate income — often they were not developed, the properties were overvalued, or the properties were held in structures that ensured investors did not have direct ownership.
In many instances the advisers were driven by high commissions to sell to investors for whom these unlisted high-risk investments were wholly inappropriate.
During the period 2013 to 2015 there was a delay in processing complaints to the ombud regarding property syndications. This started with court action in 2011 that eventually found in favour of the ombud, but further actions in 2013 prompted the office to put a halt on processing property syndication cases.
However, after April 2015, when an important court appeal was finally decided, the office resumed processing property syndication complaints. During the period 2013 to 2015, the office received a further 2,000 property syndication complaints.
Other determinations issued by the office last month include rulings in favour of now-retired Hester Steyn, who was also living on very little income; and a couple, Mr and Mrs Hancock who had money to invest — but lost it all.
Steyn had been advised in 2009 by Barend Petrus Geldenhuys of Huis van Oranje Finansiële Dienste to invest R290,000 into the Blaauwberg Beach Hotel property syndication through a company called Grey Haven Riches. This involved R190,000 worth of class B shares and R100,000 in unsecured debentures.
By investing the complainant’s funds in a high-risk product and disregarding the complainant’s personal circumstances, the respondent failed to act in the interest of his clientOmbud for Financial Services Providers, Naresh Tulsie
Oranje was an authorised FSP until 2011 when the licence lapsed. Steyn had sold a property she inherited from her father, and was working at a local church earning a small stipend. She had heard about the scheme through a show on Radio Pretoria and made contact with Geldenhuys.
Despite being promised that her investment was safe and that she could withdraw it after a year, when the year lapsed and Steyn requested her funds back, the money was not forthcoming. She wrote directly to Realcor, the parent entity, to no avail.
During the process of her advice from Geldenhuys she was not informed that, after a PwC report, the SA Reserve Bank had ordered the organisers of the scheme to return money to investors in 2008 as they contravened the Bank Act. This was a year before her investment.
Eventually, Grey Haven Riches was placed under business rescue in 2011 and the hotel was sold for R50m, with secured creditors being paid, leaving no prospect for unsecured investors, such as Steyn, to recover their money.
In his determination, Tulsie said Geldenhuys and Oranje failed to take into account the personal circumstances of Steyn, as well as her ability to absorb risk. He said that the respondents had breached numerous aspects of code of conduct. “By investing the complainant’s funds in a high-risk product and disregarding the complainant’s personal circumstances, the respondent failed to act in the interest of his client.”
Geldenhuys and Oranje were ordered to refund Steyn the full R290,000.
‘Lured the complainants’
Dale and Tiffiny-Ann Hanckock collectively invested R560,000 into property syndication schemes run by PIC Syndications, Highveld Syndication 21 and Highveld Syndication 22.
The Hancocks approached Craig Wright Financial Planners, run by Craig Wright, who was an authorised FSP at the time but whose licence has now lapsed. They approached him after he had advised their parents to invest a sizable portion of their retirement into a property syndication. After a series of meetings with Wright the investment was made.
Then, after very little income accruing, and two years after the investment was supposed to be returned, the Hancocks realised they had lost their investment and approached the ombud’s office.
In his determination, Tulsie wrote: “The questions from the complainants prior to the investment show that the complainants were not interested in investing in the product in question, unless the product guaranteed, overall, the preservation and growth of their capital. To recommend the product if it did not carry this guarantee would, in my view, no doubt be a breach of the contract concluded between the parties.”
He further said: “The respondent’s advice that the investment was guaranteed ‘lured the complainants to invest in the property syndications’. In light of this and the aforegoing, I am persuaded by the complainants’ arguments that the respondent failed to undertake a thorough assessment of the investment or do his due diligence to recommend an appropriate product.
“The respondent thus failed to observe the duties imposed on him by the code and the Fais Act.”
Wright was ordered to refund their money.
In light of these cases, and cases that have come before, and no doubt will arise again, it is vital to approach property syndication investments with caution. In addition to property syndications, when you are considering an investment, take these steps:
- Always work with an authorised FSP who is bound by the general code of conduct and the Fais Act.
- Ensure the adviser understands you personal circumstances and risk profile.
- Make sure that after your needs-and-risk analysis, you are provided with various options that are appropriate for you and your circumstances.
- Ensure you have a full understanding of the underlying fundamentals of the investment. In other words, how it is financed, where the income comes from, who is running the investment, and if there isan independent board (among many more aspects).
- Make sure your adviser does a thorough due diligence of the investment and the parties involved — this must dig far deeper than glossy marketing material. In the case of Steyn and the Blaauwberg Hotel, there were glaring conflicts of interest.
- Remember, if promises seem too good to be true, they probably are. For most people, a balanced portfolio with a spread between asset classes, saved over many years, is the most suitable avenue to providing for retirement.