Issue: Sep - Nov 2013
A defeat for the workers
Where is the FAIS line to be drawn between an ‘intermediary service’ and ‘financial advice’? In a judgment with ramifications for service providers, the SCA draws it.
The Chemical Industries National Provident Fund has taken a smack of over R40m from Tristar Investments, subsequently renamed Malacynski Burn, by a decision in the Supreme Court of Appeal.
The matter having dragged through litigation processes for four years, the SCA has reversed the South Gauteng High Court decision that the ‘investment consultancy’ agreement between the CINPF and Tristar was void because it contravened the Financial Advisory & Intermediary Services Act (TT June-Aug ’12).
Critical to the SCA judgment is the distinction under FAIS between the ‘intermediary service’ and ‘financial advice’ that a financial-services provider may deliver. None of the services Tristar undertook to provide falls foul of the relevant FAIS provisions, the SCA held.
“Initially they (Tristar) were to compile and convey the appropriate mandates and instructions to the asset managers, and thereafter to take steps to ensure compliance with their mandates. It was not to bring about the relevant transactions – those would be brought about by the asset managers – nor was it to manage or administer the financial products. So far as it was to manage or administer anything at all, it was to manage and administer no more than the mandates of the asset managers,” stated Appeal Judge Robert Nugent, all four other appeal judges concurring.
What Tristar was bound to offer did not constitute ‘intermediary services’ on the ordinary meaning of the definition’s language. Neither was there any reason, and none could be suggested, why the legislature would have thought it necessary for services of that kind to be regulated. In those circumstances, said the SCA, Tristar did not require a licence to provide them.
The FAIS definition implied a direct result achieved by an intermediary acting between a client and a product supplier. It also referred to the management or administration of financial products. The agreement provided for Tristar neither to bring about transactions, nor to manage or administer any financial product.
To construe the definition as including any act that indirectly has such a result would lead to absurdities, said Nugent: “It contemplates a person who stands with a client or clients on the one side, acting as the go-between to effect the relevant transactions. Quintessentially, that person is the asset manager who is mandated to act on behalf of the fund.” It contemplated “a person who manages or administers the relevant fund assets”.
Under FAIS, a ‘financial services provider’ is defined to mean a person who, as a regular feature of his or her business, ‘furnishes advice’ or renders any ‘intermediary service’ or does both. Tristar was licensed under the Act to ‘furnish advice’ but was not licensed to render an ‘intermediary service’.
A substantial portion of the services undertaken by Tristar constituted ‘furnishing advice’, but there were also services in terms of the agreement that did not constitute furnishing advice. The lower court had found that, because Tristar was licensed only to ‘furnish advice’, it was prohibited from rendering those other services and that the agreement was consequently invalid.
That approach, the SCA held, was incorrect: “The Act does not prohibit Tristar from performing any service other than ‘furnishing advice’ (which it is licensed to do). It prohibits Tristar only from providing an ‘intermediary service’ in the absence of a licence to do so. The correct question, then, was not whether the services in issue constitute something other than ‘furnishing advice’ (which they are), but instead whether they constitute an ‘intermediary service’.
Accordingly, Tristar’s appeal was upheld with costs. Perhaps unfortunately for the CINPF, it asked the court only to examine the validity of the agreement and not all the services that Tristar had actually performed for the fund.