It is absolutely astounding how so many financial advisers and product providers – and even organs of state, such as Transnet – see elderly people as easy victims to be mercilessly exploited.
It is bad enough when the private sector victimises pensioners. It is even worse when an organ of state does so. It is the duty of the state to protect its citizens, particularly those who are vulnerable, such as the aged and the indigent.
For instance, it is unacceptable that the state inexplicably accepted guilty pleas from now-convicted criminal Arthur Brown on relatively minor charges, resulting in his slap-on-the-wrist fine of R150 000 (see “Brown’s conviction: a travesty of justice”, below).
Meanwhile, in Pretoria, a court case is under way in which pensioners of the Transnet Second Defined Benefit Pension fund are, in effect, demanding that more than R1 billion be repaid to the fund to make good what is owed to the remaining 70 000-odd pensioners, most of whom are destitute.
The fund was created by Transnet by hiving off pre-1994 Transnet pensioners and putting their money into some questionable and badly managed investments, which were to be a major source of the pensioners’ income.
Representatives of the pensioners say that, at the time, they negotiated a minimum annual increase of two percent a year. But Transnet has taken this to be a maximum as well.
As a result of the way Transnet managed the fund through its appointed trustees, and its limit of two percent on increases, it has callously impoverished the pensioners who, year after year, have seen inflation ravage the buying power of their pensions. Many of them, after paying their medical scheme contributions, now receive virtually nothing on which to live. (Transnet also tried unsuccessfully to have the pensioners thrown off the Transnet medical scheme and to stop subsidising their contributions.)
Yet again, as in the vast majority of her determinations, financial advice ombud Noluntu Bam has issued three more determinations in favour of elderly people, who were sold scam property syndication investments in which they lost their money (see “More rulings in favour of ill-advised pensioners”, below).
And in each of the property syndication cases, she has found that, in advising their clients, the advisers did not explain the very high-risk nature of the investments or the fact that investors could lose part or all of their capital.
Advisers who sold property syndications to the elderly seem to have been driven by way-above-average commissions, ranging from six to 15 percent of the capital invested. Commission paid in more traditional and safer investments is no more than three percent of the capital amount. These excessive commissions should have been a signal on their own to financial advisers of the dangers of property syndications.
Pensioners are an easy target for unscrupulous advisers. Many thousands of pensioners are struggling to make ends meet. The findings of the Sanlam Retirement Benchmark Survey, which we publish this week, show just how financially vulnerable pensioners are, with 51 percent needing more money on which to live than they receive as a pension.
And for most pensioners, the situation has been getting tougher and tougher, with stubbornly low interest rates and ever-increasing costs, particularly medical costs and things such as electricity, petrol and rates on property.
Then along comes a financial adviser who tells struggling pensioners about a wonder investment in which they can access their capital after a year or two, and from which they will receive a much higher income than they would from an interest-paying money market product.
What could make easier prey? And the authorities did nothing to stop the slaughter, despite many in the media and the more responsible parts of the financial services industry highlighting the extremely high risks and potential fraud.
And even when the whole flimsy pack of syndication cards collapsed, it has virtually been only the office of the financial advice ombud that has come to the aid of the victims.
Billions of rands have been lost.
Long ago there should have been a commission of enquiry; there should have been a lot more criminal charges brought against the perpetrators of the schemes, and much tougher, very public action should have been taken by the Financial Services Board (FSB) and the Department of Trade and Industry.
The FSB needs to up its game considerably. It is appalling that it cannot, with clear definition, say what action it has taken in each determination of the ombud where it has been found that an adviser has contravened the Financial Advisory and Intermediary Services Act and its code of conduct.
Personal Finance has been trying to get this information out of the FSB for more than nine months. Last week, the FSB sent me a list of more than 200 determinations going back to 2004, with almost half the determinations still under investigation by the FSB. Where it claimed action had been taken it did not say what action had been taken or why.
I suspect, in many of the cases where action has been taken, it was because FSB levies were not paid or annual reports submitted – not because of the determinations of the ombud.
The FSB needs to use its extensive powers to severely punish advisers who do not behave. Among other things, they should be banned from the industry for lengthy periods, if not for life, and be forced to pay hefty fines.
It is only when people are literally marched off to prison in leg irons, and action is seen to be taken, that this exploitation of the vulnerable will stop.
Brown’s conviction: a travesty of justice
In the Eastern Cape mainly, there are thousands of destitute widows and orphans of deceased members of the National Union of Mineworkers Provident Fund who are the victims of the collapse of the Fidentia empire in 2006.
Most have no idea of how much money they are entitled to. All they know is that money left to them to survive after the death of the family breadwinner stopped being paid in January 2007. Since then they have received irregular payments.
According to the Financial Services Board and the Fidentia curators, there was no cash left in the bank to pay the stipends, far less the exorbitant salaries of the Fidentia executives and staff.
In various reports, which have been tabled in court, acts of terrible waste, mismanagement and even theft are alleged to have occurred at Fidentia.
Yet the state chose not to press ahead with the criminal charges based on the allegations.
It is unacceptable that Arthur Brown and some of his associates who were never criminally charged may never have to answer to these allegations.
Brown was allowed to plead guilty to lesser charges of fraudulently ignoring the investment mandates of trust funds, which, according to trial judge Anton Veldhuizen, did not include proof of any actual prejudice (harm) caused by Brown.
And the judge would not allow evidence of that prejudice to be led in aggravation of sentence because it was not related to the admission of guilt.
No matter the legal arguments, it is appalling that there are thousands of widows and orphans who have, for years, not received what was due to them, and that those involved have not been made to face the full force of the law.
It was for the state to test the guilt of Brown, as well as his plea of not guilty based on his assertion that it is, in fact, the curators who have mismanaged the assets of Fidentia.
The signal that the management of the Brown trial sends to others is that the rule of law is weak, and that the protection of the vulnerable is not a high priority.
More rulings in favour of ill-advised pensioners
In determination after determination involving advice given to pensioners to invest in property syndication schemes, financial advice ombud Noluntu Bam has found that the risk of losing all their capital has not been explained to investors by financial advisers.
The latest victims in cases in which determinations have been issued against advisers are:
* A 69-year-old Nelspruit pensioner, Ms M, who in 2007, on the advice of Marianda Cronje, a key individual of advice company Gert Cronje Brokers of Nelspruit, invested R120 000 in the fraudulent Spitskop BlueZone property syndication scheme.
The money came from the proceeds of a Liberty Life policy.
Bam, in ordering Cronje to pay R120 000 compensation to Ms M, says even a cursory investigation by Cronje of the Spitskop scheme would have “signalled trouble”. She says that, despite the fact that Ms M was a conservative investor, Cronje advised her to invest in what was a high-risk investment that was “incompatible with the complainant’s risk profile”.
* An 80-year-old pensioner, Mr D, from Aberdeen in the Eastern Cape, and his now deceased wife, four years younger than him, who were advised by Beaufort West financial adviser Marius Barendse. In 2005, Barendse, who trades under the name Barendse Makelaars, advised Mr D and his wife, who were married in community of property, to invest R140 000 of their pension money in a Thabazimbi shopping centre property syndication promoted by a company called Dividends Investments, which merged with another company called City Capital, which, in turn, became Capital Investments. The property syndication company has since been liquidated.
Barendse told the elderly couple that they would initially each receive R586 a month, increasing to R610 in the second year, R658 in the third year, R711 in the fourth year and R768 in the final year. But the payments were never made as promised and further promises also failed to be met.
Bam, in ordering Barendse to repay Mr D the R140 000 the couple invested, found in her determination that Barendse:
- Failed to properly explain the risk to a couple already at an advanced age who were reliant on the income derived from their savings. “By virtue of the complainants’ age alone, it can be deduced that the risk profile of the complainant was unsuited to an investment in a property syndication,” the determination says.
Barendse also failed to explain to the couple that they risked losing all their capital.
- Failed to produce any documentation to show that he had personally done an assessment of Dividend Investments.
- Never kept a record of the advice he gave the couple, as is required under the Financial Advisory and Intermediary Services (FAIS) Act, which is the only way to show whether an adviser complied with the FAIS Code of Conduct to give fair and proper advice.
- Failed to inform Mr D that the investment was not liquid. He said it could be cashed in after a year, but failed to add that Capital Investments would not pay them out – they would need to find a buyer for their investment.
- Claimed that the couple did not want to invest in shares, but sold them unlisted shares in the property syndication.
- Blamed Capital Investments for the failure of the syndication, saying some of the properties were deliberately mismanaged so that investors could be bought out at a lower price.