November 1, 2008
 By Bruce Cameron
Two of the largest financial advice-providing organisations in the country, one a bank and the other a life assurance company have tried to avoid taking responsibility for the advice provided by their employees. We report on how the High Court has forced First National Bank to make good, while Old Mutual's responsibility is being investigated.
The East London High Court has ordered First National Bank (FNB) and one of its former financial advisers, Michael Ries, to pay R243 232 plus interest to a client whose money was placed in a high-risk offshore investment.
Even though it did not deal directly with the issue, the court's judgment serves as a warning to banks that disregard client confidentiality and supply account details to their financial advisers so they can hard sell high-cost, commission-earning products.
Personal Finance has often intervened in the past when bank-employed financial advisers have preyed on elderly people, getting them to switch their investments from low-risk deposit accounts to high-risk equity products.
The judgment, which is not being appealed by FNB, could carry the same import as the landmark 1997 Durr versus Absa case in which it was found that Absa had not exercised a duty of care when it advised Valerie Durr to invest in a scam Masterbond product.
From R750 000 to R580 000
In the East London case, Ries had access to the details of East London farmer John Page's FNB money market account investment.
Ries approached Page and advised him to invest R750 000 in various Investec offshore money market accounts. The money was invested on November 11, 2002.
Ries, who earned commission of R18 750 on the investment, told Page he would receive a better return from the offshore investments.
Page told Ries that he wanted to invest for the short term and did not want to be exposed to risk.
When Page redeemed the offshore investments on October 31, 2003, the R750 000 had shrunk to R580 000 due to a "combination of currency fluctuations and charges that were levied when the investment was made".
Page's legal team argued that Ries and FNB owed Page a duty of diligence to ensure the advice was correct, particularly as Ries was told the money would be required in the short term.
Judge Nambitha Dambuza said it was common cause between the parties that offshore investments should be made on a long-term basis and that they are more costly than local investments.
The total costs of R23 000 were pushed even higher because, instead of investing directly in the Investec accounts, Ries and FNB channelled the investments through associated company Momentum Wealth, earning Momentum Wealth a fee as well.
An independent East London financial adviser, in expert evidence, said that even a period of two years was too short to invest offshore.
He said Ries should have conducted a proper financial needs analysis so he could carefully consider Page's financial needs and the cost implications of the investment.
FNB and Ries unsuccessfully argued that:
The terms of the investment agreement stated that neither FNB nor Ries would assume liability for the performance of the investment;
FNB could not be held responsible for the professional negligence of one of its consultants; and
Other people had also advised Page to make the investment.
Dambuza did not accept any of the arguments. She ordered FNB and Ries to repay R243 232.89, plus interest of 15.5 percent from October 2003, plus the costs of the case.
Xolisa Vapi, the head of FNB corporate communications, says although FNB believes it has strong grounds for an appeal, "for purely economical reasons FNB will not appeal the judgment".
Vapi says the judgment must be considered in the context of the market sentiment that prevailed during 2002, when offshore investments were widely recommended by investment experts and market commentators.
"The only risk element of Mr Page's investment was currency risk, which, it can be argued, was not reasonably foreseeable based on the information and market indicators available at the time."
Vapi defended the way in which banks pass on information about client deposits to their financial advice sales staff, claiming that "client confidentiality is of fundamental importance to FNB.
"The learned judge made no finding and, in fact, did not consider any issue relating to confidentiality, nor was confidentiality ever in dispute. In addition, Mr Ries was a mandated employee of FNB and acted within the terms of his employment contract when he consulted with Mr Page."
... being sold scam products will
Be wary about taking advice from Old Mutual sales representatives - they may just be selling you unauthorised scam pyramid products. And if they are, Old Mutual could leave you in the lurch.
This is what Personal Finance readers Mr C, his wife and mother-in-law have found out. They face the prospect of losing almost R1 million because they invested in products sold by Raymond Wienand, a former Pretoria-based Old Mutual agent. Wienand led them to believe the products were endorsed by Old Mutual.
During the almost 13 years he was employed by Old Mutual, Wienand managed to convince about 50 people to invest more than R30 million in scam investment portfolios he was running on the side.
Wienand and his two investment companies have been liquidated, leaving investors out of pocket by almost R20 million.
Old Mutual is denying any responsibility for Mr C's loss, saying Wienand acted outside his employment contract.
Personal Finance sent Old Mutual a list of questions about the matter, but Old Mutual ignored most of our questions, set its own questions for itself and answered those.
In replying to its own questions, Old Mutual provided elaborate legal reasons why it will not take any responsibility for its former agent. It did not provide any guidance to investors on how they can protect themselves from a dishonest agent.
Old Mutual claims that Mr C and his wife "elected to invest in equities and knew (or should have known) that these investments had nothing to do with Old Mutual".
Old Mutual says it "does have compliance structures in place to ensure that representatives render financial services in accordance with the provisions of the [Financial Advisory and Intermediary Services Act] and their employment contracts".
Over almost 13 years, these structures failed to reveal that Wienand:
Transferred significant amounts of money out of Old Mutual products into his two investment portfolios, Jensam Agencies and Zelgar Property Holdings;
Used the Old Mutual offices in Menlyn Park, Pretoria, to conduct his "on-the-side" businesses; and
Used Old Mutual stationery in correspondence with clients and provided Old Mutual's telephone number as his own.
Old Mutual says: "It is unfortunately not always possible to uncover 'operations on the side', mainly because the representatives concerned in these kinds of activity know that they are in breach of their obligations and hide them from Old Mutual."
Wienand told his clients that Old Mutual had approved the products.
After he left Old Mutual, he set himself up as a financial services provider (FSP) licensed by the Financial Services Board (FSB).
FSB investigation
Gerry Andersen, the deputy executive of the FSB in charge of the registration of FSPs, says he is investigating the issue, as well as Old Mutual's disclaimer of responsibility and the issuing of an FSP licence to Wienand.
"All cases of wrongdoing, if [they have] indeed taken place, by any employee that would affect such employee's fit and properness, must be dealt with by the FSP in whose employ that individual is and the prescribed action must be taken.
"In the event that the individual is no longer in the employ of the FSP, the matter should be reported to the FSB to enable it to take the necessary action," Andersen says.
The revelations come at a time when Old Mutual is running an advertising campaign with the catchline "Get the advice that's right for you, from the right people", adding that advice from its agents is "backed by Old Mutual".
One of the liquidators, Maryn van Staden, says the investment schemes were nothing but pyramids with initial investors being paid with the money from new investors or from increasing bonds on properties owned by the schemes.
Old Mutual's internal arbitrator told Mr C on July 14 that he had given Old Mutual 20 working days to respond to his complaint. Since then Mr C has heard nothing further from the arbitrator.
  
 
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