Selling unsuitable, in-house preferential shares was advisers undoing
The FSCA has sent a clear message about selling risky investments to just anyone, as Ecsponent FS did
The undoing of Ecsponent Financial Services and the debarring of its two key managers is a warning to companies that plan to sell higher risk financial products to all and sundry.
The Financial Sector Conduct Authority (FSCA), earlier in June, withdrew the company’s licence and forbid MD Floris Slabbert and marketing manager Anton Hay from giving financial advice or selling financial products for two years.
The action came after it found the advisory firm had been selling the risky preference shares of its parent company, Ecsponent Ltd, to investors for which these investments were not suitable.
The FSCA said Ecsponent FS was breaching various finance sector laws and fined it R3m. The advisory firm is being wound down, its listed parent company said in a Sens announcement.
The heart of its issues with the advisory firm was that it breached the Financial Advisory and Intermediary Services (FAIS) Act’s code of conduct that forbids companies or individuals from selling products that are not suitable for a particular client.
The FSCA began investigating Ecsponent FS’s sale of its parent company’s preference shares to investors, including pensioners, before Ecsponent Ltd announced in February that it would default on its promise to buy back some of the R2bn of preference shares it had issued.
Gerhard van Deventer, head of investigations at the FSCA, says the regulator did not have the jurisdiction to investigate the listed holding company’s issuance of the preference shares, but the sale of the shares to people for whom they were not suitable is regulated by the FAIS Act and falls within the FSCA regulation.
Ecsponent FS told buyers of the preference that they would deliver a regular income of up to 12.5% a year, paid monthly, and with the full capital amount returned after five years. It said the investment was a “moderately conservative” one.
Consumers cannot waive their rights under the act as Ecsponent FS had asked them to do when signing documents stating they did not need a full financial needs analysisGerhard van Deventer, head of investigations at the FSCA
One pensioner who complained to the FSCA put 60% of her savings, amounting to R1m, in these shares issued by a single, small player in financial services, Van Deventer says. The parent company’s failure to honour the redemption of the shares proves just how risky the investment was and how unsuitable it was for pensioners who cannot afford to lose any money.
The general code of conduct under the FAIS Act obliges advisers and financial institutions selling financial products to establish your financial situation and what your objectives are before determining which products are suitable for your financial needs.
Van Deventer says that even if the company’s representatives were only selling these shares, they were not entitled under the FAIS Act to sell them to investors for whom they were not suitable. The code says that if it is not possible to gather all the required information, the provider must warn you, the consumer, that you are buying it without comprehensive advice that takes all your circumstances into account.
According to Van Deventer, when Ecsponent FS representatives were selling the preference shares they misused this code within the act to justify their actions and asked investors to agree not to have a full analysis of their financial situations. But, he says, consumers cannot waive their rights under the act as Ecsponent FS had asked them to do when signing documents stating they did not need a full financial needs analysis.
The FSCA held that such an agreement is unlawful, and that Ecsponent FS could not rely on it. Advisers can only rely on this clause when you, as a consumer, refuse to participate in a full financial needs analysis — they cannot ask you to agree that the adviser does not to do a full analysis, Van Deventer says.
The FSCA found Slabbert and Hay had contributed significantly to Ecsponent FS breaching the law.
Ecsponent Ltd’s preference shares have been converted to ordinary shares but the shares are trading at a low R2 a share. Van Deventer says clients of Ecsponent FS should speak to a new adviser about whether to sell their shares or stay invested in the hopes that the share price recovers.
Investors who have suffered losses can take complaints about the advice they were given to the Ombud for Financial Services Providers or FAIS Ombud, but they must remember the ombud can only order advisers to repay losses up to R800,000.
Van Deventer says he expects there may be some civil court cases.
Ecsponent FS’s living annuity was underwritten by 27four Life. The assets are on the balance sheet of the life company, the company said through its media spokesperson.
The Ecsponent Retirement Annuity Fund is still registered in terms of the Pension Funds Act, but a new sponsor, LifeCycle Financial Advisers has been approved by the FSCA and the name will change, it said.
Neither the underlying investments, which were in 27four Life, pooled arrangements nor Ecsponent FS’s unit trust fund had any exposure to Ecsponent Ltd or any of its subsidiaries.
All the employers participating in the Ecsponent FS’s umbrella fund have been transferred to other umbrella funds, the company said.