Your financial adviser must check that products are safe

We will soon be implementing SAIFAA’s due diligence program. As such we thought it would be appropriate to look at an article by Bruce Cameron about ensuring that your financial advisor checks their practices and products are safe.

Your financial adviser must, by law, take reasonable steps to ensure you are not sold a lemon or invest in a scam, and he or she cannot pass this requirement on to the company that provides the financial product.

This was emphasised by Charene Nortier, the Financial Services Board’s manager of financial advisory and intermediary services (FAIS) supervision, at the recent launch of the South African Independent Financial Advisers’ Association (SAIFAA).

Nortier says the purpose of the FAIS Act and the Treating Customers Fairly (TCF) regulatory regime is to protect the interests of you and your adviser by ensuring you receive proper advice and are sold products that are appropriate for your needs. TCF requires financial advisers to perform a due diligence on both the product provider and the pro-duct before recommending the pro-duct to you (see “TCF aimed at ensuring you can invest with confidence”, below). Your adviser cannot simply read the product information issued by the provider; instead, your adviser must apply his or her mind when assessing whether or not the product and the company are sound.

The due diligence process should reveal anything that may prevent the product from delivering on the undertakings made by the provider.
Nortier says if advisers do not understand a product, including its risks, they need to ask themselves whether they should recommend that you use the product.

Many complaints to the Ombud for Financial Services Providers are the result of advisers accepting the information in providers’ marketing brochures at face value and not thoroughly checking the providers and their products.

Derek Smorenburg, the chairman of SAIFAA, says that if financial advisers had performed reasonable due diligence tests, many people would have been prevented from investing in inappropriate products, such as property syndication schemes that subsequently imploded, or so-called investments that were actually scams.

Many advisers’ failure to perform due diligence tests resulted in investors, including financially vulnerable pensioners, losing billions of rands, he says.

Many advisers do not accept that they are responsible for undertaking a due diligence on behalf of their clients, Smorenburg says.

Nortier says the General Code of Conduct under the FAIS Act requires your adviser at all times “to render financial services honestly, fairly, with due skill and diligence, and in the interests of clients”.

A due diligence can be defined as an investigation into a business or person before a contract is signed, or the application of a certain degree of care.
Advisers are required to provide you with factually correct information that will enable you to make an informed decision, Nortier says. Therefore, your adviser must have the correct information before he or she can help you to make an informed decision.

That an institution or an individual has been in an industry for a long time does not automatically mean he or she is ethical, Nortier says. A prime example is United States hedge fund manager Bernie Madoff, who swindled thousands of people out of their savings.


The Treating Customers Fairly (TCF) regime for the financial services industry is aimed at ensuring that you, the consumer, can have confidence in the advice you receive and the financial products you buy.

Charene Nortier, the manager in charge of financial advisory and intermediary services (FAIS) supervision at the Financial Services Board (FSB), says many of the TCF outcomes are linked to the requirements placed on advisers in terms of the General Code of Conduct issued under the FAIS Act.

The six outcomes are:
Outcome 1. Your adviser must ensure that treating you fairly is central to the culture of his or her business. The outcome requires your adviser to render financial services honestly, fairly, with due skill, care and diligence. This includes performing due diligence tests on any product provider with which your adviser has a contract to sell products.

Outcome 2. The financial services and products that your adviser recommends must be designed to meet your needs. To achieve this outcome, your adviser must do due diligence tests on both the product provider and the products. This outcome also requires your adviser to understand your financial situation and needs, and to know which products will be suitable for your needs.

Outcome 3. Your adviser must provide you with clear information and explanations, and must update you with relevant information after the financial service has been rendered.

Nortier says an explanation of a product does not simply mean telling you that a product has performed well in the past, or providing you with the type of information you would receive from a friend at a braai. Your adviser must ensure that you actually understand how a product works and what it aims to achieve. All material facts about a product or service must be accurately and properly disclosed to you.

Outcome 4. Your adviser must ensure that his or her advice is suitable and takes account of your circumstances. This includes collecting information about your financial situation, your experience of financial products and your financial objectives. This also includes meeting the FAIS Act’s requirement that you are provided with a record of advice detailing why your adviser recommended certain products, in particular, when you are advised to replace a product.

Outcome 5. The products you use must perform in the way that your adviser told you they would. Your adviser must check the product’s past performance and expected future performance. Your adviser must ensure that a company provides service of an acceptable standard.

Outcome 6. The products your adviser recommends must not have unreasonable after-sale barriers that prevent you from changing the product, switching product providers, submitting a claim or lodging a complaint.


The Financial Advisory and Intermediary Services (FAIS) Act stipulates what a financial adviser must do when advising you or selling you a product, Charene Nortier, the manager in charge of FAIS supervision at the Financial Services Board, says. Nortier says your adviser must provide you with the following information:

• How the value of your investment is determined;
• The investment’s underlying assets;
• The past performance of the product;
• The adviser’s and the product provider’s charges and fees, and the implications of these charges on the value of your investment;
• Whether the adviser has a fee rebate arrangement with a product provider, and whether there are rebate arrangements among the providers of the products that he or she recommends;
• When and why the product will not pay out benefits;
• Whether the product has any guarantees;
• How easy it will be for you to access the money you invest;
• The consequences if you terminate an investment before the date of maturity;
• The tax implications of the product;
• Whether there is a cooling-off period within which you have the right to cancel the product;
• Any material risks associated with the product; and
• How the product is appropriate for your financial needs and risk profile.

Once your adviser has provided you with the above information, he or she must provide you with a written summary of:

• The information on which he or she based his or her advice;
• The financial products that were considered;
• The products that he or she recommended, and why; and
• How your risk profile and financial needs align with the recommended products.

‘Advisers will be held liable if they should have done more’ – September 26 2015 – By Bruce Cameron

Financial advisers must accept that they could be held liable by the financial services regulator or the Ombud for not acting with care if they “should have done more and known more” about a financial product or service that goes sour. This is the view of Caroline da Silva, the deputy registrar for financial advisory and intermediary services (FAIS) at the Financial Services Board (FSB), at the recent Morningstar investment conference.

However, there is no agreement in the financial services industry on who is responsible for performing a due diligence, or who should be held responsible for losses incurred by investors if the due diligence was not performed properly.

And some product providers, including well-known companies, are allegedly resisting attempts to subject themselves and their products to a proper due diligence. This claim was made by Derek Smorenburg, the chairman of the South African Independent Financial Advisers’ Association (SAIFAA), at the launch of the organisation recently.

And there is concern about the implications of independent financial advisers turning increasingly to third parties, known as discretionary investment managers (dims), to manage their clients’ investments. Dims put together wrap funds that mainly consist of collective investments. Wrap funds are not registered in terms of the Collective Investment Schemes Control Act, which means investors are excluded from the consumer protection measures that apply to funds of funds.

However, in terms of the FAIS Act, dims have to register with the FSB as category-two financial services providers (FSPs), and they are subject to the same due diligence requirements as advisers, who must register as category-one FSP.

A sales tactic of some dims is to tell advisers that they will take over their due diligence responsibilities.

Smorenburg says independent financial advisers have “traditionally based their trust in companies, and the people who represent these companies, by attending conferences and presentations of the companies. In most cases, the only due diligence call the advisers make is based on a long-term relationship.

“The vast majority of independent advisers do no due diligence at all, and most assume that, by placing their clients’ assets with well-known investment companies, they have fulfilled their legal requirements and duties.”

When advisers invest your money using an administration platform, they assume that the administrator has done a comprehensive due diligence on all the funds on the platform, and that they do not have to conduct any due diligence, Smorenburg says.

Da Silva says the FAIS Act already requires advisers to perform a due diligence.

However, she says the FSB is moving to a new way of regulating the financial services industry, namely Treating Customers Fairly, which is based on the outcomes we, as consumers of financial products, can expect from those products and how they in fact perform. This means that, when it comes to a due diligence, advisers and product providers should not think that it will be sufficient if they simply adhere to the law.

She says even if an adviser has followed the legislation on how to conduct a due diligence, the adviser could still be held liable for bad advice that results in investor losses if he or she “should have done more and known more” about the product.

Da Silva says some advisers have been held liable by the Ombud for Financial Services Providers for advising investors to invest in an entity that subsequently collapsed.

She says the FSB will in future focus on the outcome the investor could reasonably have expected when deciding whether an adviser should be liable for investor losses.

Smorenburg says SAIFAA has developed an advice process for its members that includes how to conduct due diligence tests on companies and their products.

“SAIFAA has been meeting with product providers to assist in compiling the due diligence test questionnaires and asking the companies to submit themselves and their products to the due diligence tests. After initial resistance, most companies are now co-operating, but some major companies are refusing to participate.”

Smorenburg declined to name the companies, because discussions with them are continuing.

He says financial advisers will have to decide whether they should recommend the products of companies that will not submit themselves or their products to due diligence tests drawn up by advisers or organisations that represent advisers.

Advisers not doing enough to protect you – September 26 2015 – By Bruce Cameron

Many complaints to the Ombud for Financial Services Providers are the result of financial advisers failing to fulfil the requirements placed on them by the Financial Advisory and Intermediary (FAIS) Act and the Treating Customers Fairly (TCF) regulatory regime, Charene Nortier, the manager in charge of FAIS supervision at the Financial Services Board (FSB), says.

In particular, advisers failed to do due diligence tests on products and providers, which resulted in serious losses for investors.

Nortier says the complaints to the Ombud indicate that the advisers:

• Advised their clients to use unknown companies that did not have a track record.
• Failed to check whether the company and its products were legitimate – for example, ensuring they were licensed by the FSB. Even checking a company’s website will provide some indication of whether or not it is legitimate.

Red flags that a company may not be legitimate are, for example, the absence of details about the directors or a physical address. Another way to establish whether a company is legitimate is to check if its financial statements are audited by an independent third party.

• Failed to examine the structure of the company to see if it provided investors with adequate protection. For example, did the company own any assets against which investors could make a claim?
• Failed to check whether the company’s directors had been involved in irregularities.
• Failed to examine, and ask proper questions about, the financial product.

Nortier says that, when your adviser performs a due diligence on a product, he or she must determine whether:

• The product and its underlying investments are viable;
• The product is compatible with your needs; and
• The promised returns are attainable.


It is absolutely essential that there should be no confusion about which party or parties are responsible for conducting a due diligence on any financial product or service to reduce the potential of investor losses, and reimbursing investors who have been sold scams or unsuitable products, received inappropriate advice, or been subject to maladministration, Derek Smorenburg, the chairman of the South African Independent Financial Advisors Association (Saifaa), says.

Smorenburg says some product providers, such as linked-investment services providers, mistakenly believe that advisers are absolved from undertaking a due diligence on the underlying investments in their portfolios. However, when challenged to make good any losses you suffer because of fraud or maladministration because a due diligence test was not properly undertaken, “they rapidly say your adviser is responsible”, Smorenburg says.

He says a good example is the collapse of Corporate Money Managers (CMM) six years ago, when it was found that everything was not quite as its owner, Johan Bakkes, claimed it was.

Among other things, Bakkes was operating an unregistered money market fund in contravention of the Collective Investment Schemes Control Act.

He was also running a registered collective investment scheme, but it did not adhere to its mandate of investing in money market instruments. Instead, it was providing finance to property developers, most of whom were bankrupt.

According to the latest report of the liquidators of CMM, so far only R70 million of the more than R1.1 billion that was invested in CMM has been distributed to investors. Many of these were pensioners who invested through advice and asset management company Dynamic Wealth, which has been liquidated.

Smorenburg says you should find out – from both your financial adviser and any product provider – who is responsible for the due diligence on a product you buy and who is responsible for your loss if the job is not done properly.

September 26th 2015 – By Bruce Cameron

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