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Could advisers be held liable for ponzi losses?

by | Dec 19, 2023

Are advisers to blame for BHI Trust losses?As information comes to light regarding the BHI Trust investment scheme, investors are questioning the role of their financial advisers and whether they have recourse against bad advice.

Many individuals had trusted the investment of their life savings to their advisers. This included retirees.

One investor we spoke to, who has been in the fund since 2002, said that since she invested, there have been several name changes and different companies involved with registration numbers disappearing from her statements. However, she never questioned it because she trusted her advisers to do their due diligence.

The son of a retiree who was advised by her financial adviser to invest in BHI Trust, says he has now gone over the statements and noticed the multiple name changes over time.

There were times when Axiam Investment Managers was mentioned on the statements, then the name disappeared and then Rubicon Administrators disappeared from the statements until it was only showing Craig Warriner as the managing trustee.

“There were lots of warning signs sadly, but if you aren’t in the know or don’t suspect anything, you don’t really question it.”

The question is whether the advisers could be held liable for recommending this fund to their clients.

The only defence given by the advisers is that because the fund had delivered returns for so long, they trusted it. As one adviser wrote to his clients “over the past two decades, the BHI Trust has proven to be a reliable, and profitable investment option for our clients.”

FSCA to investigate service providers

The Financial Sector Conduct Authority (FSCA) issued a press release in which they wrote: “it has expanded the scope of its investigation, in respect of the financial sector’s laws and parties involved. The FSCA also confirms that it is looking into authorised financial services providers that may have advised or assisted their clients to invest in BHI Trust products.

“The main focus of this part of the investigation is to determine whether these providers acted with due care and diligence, and considered suitability and risk when advising their clients. It is also not permissible for financial services providers to recommend financial products to clients that are not issued by licensed entities.

“However, FSCA’s decision to extend the investigation should not be understood to convey that any regulated entity has contravened the law. If there are material developments in the matter, the FSCA will update the public.”

Neither Craig Warriner nor BHI Trust were authorised as financial services providers or licensed as collective investment scheme managers.

As the FSCA explains “When investors buy financial products and services from entities that are not licensed as financial institutions, they do so at their own risk, and they do not enjoy the protection and risk mitigation measures associated with appropriately licenced and authorised entities.”

This means that financial advisers were marketing and placing large amounts of their clients’ funds into an unregulated, unprotected entity.

While the FSCA is still to complete its investigations, Gerhard van Deventer, divisional executive of enforcement, explains that if it is found that financial service providers broke the rules, this is a serious contravention of financial laws, and may be subject to a fine, debarments of individuals involved from the sector, and possibly removal of their license.

However, FSCA would not be responsible for ruling on losses incurred and compensation payable to the investors. This would fall under the FAIS Ombud.

Claiming through the FAIS Ombud

In this case the investor would need to prove whether the adviser contravened the General Code of Conduct for Authorised Financial Services Providers and whether the contravention caused the loss suffered.

The Ombud for Financial Service Providers (FAIS Ombud) Adv Simpson explains that “it may be that an adviser should not have recommended the investment, but there is insufficient evidence that his actions caused the loss suffered. In general, to make a finding of liability for a loss, a finding would have to be made that the adviser contravened the Code or the law and reasonably should have been aware that the investment would fail or result in a loss.”

Advisers are already claiming ignorance and pointing to the fact that their own money was invested in the fund.

Harry Kalligiannis, financial planner at Accolade Financial Planning and chief financial officer of the South African Independent Financial Advisors Association (SAIFAA), says it is always easy to comment after the event.

“The majority of independent financial advisers did not recommend the BHI Trust as an option for their clients after a review of the available information and salient features. Any financial adviser who recommended this option would need to produce a reasonably structured due diligence justifying support of the product. If unable to confidently attend to the due diligence, the adviser would be negligent to place client’s funds in the investment.”

Lelané Bezuidenhout, CEO of the Financial Planning Institute of South Africa (FPI), argues that advisers have been required to write the Regulatory Exam and would be aware of Section 2 of the general code of conduct which states that “a provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of the clients and the integrity of the financial services industry.”

If an adviser is placing a client’s funds in an unregistered fund, additional due diligence should be done.

Red flags around BHI Trust

As Bezuidenhout points out, a 15-minute basic Google search would have revealed some red flags about BHI Trust.

Firstly, BHI Trust, or any name associated, is not registered on the FSCA website. In fact, there is very little information about BHI Trust in general and no website or information regarding it.

The address given for BHI Trust is a residential home, and the address is shared with several other registered entities including a hygiene company, a construction company, a charity and welfare organization, and another company that provides “trusts and fund activities”.

When you call the number listed for the “trust and fund activities” you get an answering machine message for three other companies.

“Already this raises red flags,” says Bezuidenhout, who adds that another simple check an adviser could have done was to request a tax clearance certificate in order to at least ensure that the Trust was filing tax returns.

A search on BizPortal – which is accessible to anyone – shows multiple companies registered in Warriner’s name over the years, including Berkshire Hathaway Investments which eventually became BHI Trust.

Even the use of the name Berkshire Hathaway, which is the name of the investment fund run by famous US investor Warren Buffet, should have raised questions. Ironically the mandate of the fund to actively trade shares daily is the complete opposite of Buffet’s buy-and-hold strategy.

Then there was the constant changing of names, financial service provider numbers, and administrators that should have raised questions. Statements provided to clients were very basic with little information as to how the shares were traded.

Section 8 of the code of conduct that requires that the investment is suitable for the client. This relates to the level of risk of the investment versus the risk tolerance of the client. “A client with a low-risk requirement like a pensioner should not be advised or assisted to invest in a high-risk product,” says van Deventer.

Investment experts have agreed that the mandate provided by BHI Trust was high risk. Despite claiming to invest conservatively, the fund was actively trading just eight shares, which is not a low-risk investment strategy.

It is the inappropriateness of the investment for low-risk investors that may be the strongest argument in any case brought against an adviser. However, the likelihood of full compensation is low.

The wheels of justice grind slowly

FAIS Ombud Simpson says they have received some complaints from clients invested in BHI Trust, however the losses are still to be determined. This can only be done after a full investigation by the authorities has been completed.

If the Ombud rules that the financial services provider (FSP) did not comply with the code of conduct, they could recommend a settlement.

If the FSP refuses to make the settlement, then the Ombud can issue a determination which is a civil court judgement. However, this could be appealed at the Financial Services Tribunal.

Even if the Tribunal upholds the ruling, it can again be appealed at the High Court. Simpson says in many cases the insurer, who has issued indemnity insurance to the FSP, will appoint a lawyer to fight the case in court.

“This is why it is best to get matters settled between the parties involced. There are risks attached to determinations. It means courts and lawyers and appeals.”

Currently the maximum loss that can be awarded by the FAIS Ombud is R800 000. This, however, is about to be increased to R3.5 million. This change will take place in the next few months and will most likely only apply to applications made after the introduction of the new limit.

Investors should consider this before lodging their complaint. However they would need to lodge their complaint within three years to avoid prescription.

Some of the FSPs who sold investments in BHI Trust are registered with the Financial Planning Institute and can be reported. The FPI cannot award compensation, but they can take disciplinary action against the service provider.

This article first appeared in City Press.

2 Comments

  1. What is your recommended path to try get some of our investment in BHI back. We invested, on our Financial advisor’s advice, mostly in 2017 & our tax free pension portion in July 2023. (If we could just get that back)

    Reply
    • The FSCA is investigating – so the best thing would be to lodge your claim with them. Technically it cannot get money back for investors – that is a civil suit – but it can try find the money. It is important they know who the claimants are. They may also refer claimants to a lawyer

      Reply

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Maya Fisher-French author of Money Questions Answered

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