Paul Kruger, Moonstone Monitor
Informal dispute resolution mechanisms are notoriously hesitant to become involved in complaints related to fund performance. The Ombudsman for Long-term Insurance emphatically states on its website that it does not consider a complaint that is predominantly about investment performance.
Although the FAIS Ombud has made numerous rulings in this regard where the complaints involved property syndications, this decision by the Financial Services Tribunal (FST) brings a new perspective.
The applicant and his wife (two pensioners) were invested in the Liberty Unlisted Property Income Fund. On 3 May 2019, they instructed the respondent to switch the portfolio to the Stanlib Income Fund (50%) and the Coronation Strategic Income Fund (50%).
Because of a clerical error, the instruction was not executed. The actual knowledge of the failure came to light on 25 April 2020, when Liberty informed the client that, because of the Covid-19 pandemic, it was forced to write down the value of the underlying properties of the fund by 20%. This meant that the client’s monthly income was reduced by R4 217, according to his submission.
The tribunal notes that Liberty sent the applicant two emails in 2019, which reflected that the switches had not taken place.
“If the applicant had read his emails, he would have known that switches had not taken place. The applicant stated that he had packed his computer away, apparently for at least six months, because he was about to move home. If the applicant had taken the reasonable step to open his emails, the loss would not have been suffered,” the FST said.
“Although much was made about the negligence of either the respondent or his employee, the fact of the matter is that negligence has nothing to do with the cause of action. The respondent had a mandate, and he failed to comply with his mandate. That means that he breached his contract, and the appropriate remedy available to the applicant is, of course, one for contractual damages, applying the ordinary principles of contract,” according to the tribunal.
Professional indemnity claim
The respondent approached his professional indemnity cover insurer, Santam, which rejected his claim, forcing the broker to deny liability for the client’s loss, much to the chagrin of the latter.
“What the applicant fails to appreciate is that an insured who admits liability or settles contrary to the instruction of his insurer, loses his indemnity. And when Santam, via the respondent, informed the applicant that he may sue and that they will defend the case, that is what governed the respondent’s position. It has nothing to do with blame shifting. The respondent is between a rock (the applicant) and a hard place (the insurer), but for purposes of the complaint and this reconsideration application, the insurance is of no consequence.”
Interestingly, Santam’s approach was that the proximate cause of the loss was the pandemic and not the breach.
Quantification of the applicant’s loss
In his application, the complainant proffered two options to reimburse him for his loss. This was shot down by the tribunal:
“The applicant also seeks to claim his losses more than once. To explain: if his capital loss is recovered, he cannot also claim a loss of monthly income because restoration of the capital places him in the position where he otherwise would have been.”
The tribunal further states: “The ordinary rule is thus that damages for breach of contract are assessed at the date of the breach, but the law allows some flexibility in this regard.”
In this instance, the actual date of the breach was 3 May 2019, when the broker was instructed to effect a transfer of the client’s funds, and not 25 April 2020, when Liberty wrote down the fund by 20%.
In this regard, the tribunal notes: “…if the breach had been detected by the applicant during June 2019, the loss/profit would have had to be calculated (on the applicant’s approach) on that date, and the effect of the pandemic would have been irrelevant. One cannot pick and choose the most convenient date for loss calculation. That is why the law requires that it must be done on the date of the breach.”
The FST said: “The [FAIS] Ombud (or for that matter, a court) cannot make an open-ended award, as the applicant seeks. She can only make an award of a liquidated amount. Since the loss must be calculated as at the date of breach, it means that any future loss must be capitalised as at that date. Such capitalisation requires actuarial evidence about, for instance, the life expectancy of the applicant and the expected future movement of the market. All that assumes that there was a loss at the time, i.e., that the future value of the new portfolios as then calculated would have been more than that of the property portfolio.”
In dismissing the complaint, the tribunal notes:
“It is necessary to stress that the ombud’s brief is to dispose of complaints in a fair, informal, economical and expeditious manner. The ombud and this tribunal do not conduct full-blown trials. They rely on the papers filed and must make desk decisions and be satisfied that complainants have proved their case. They are not accountants or actuaries and do not employ such persons to make calculations.”
It also said: “Last, the dismissal of a complaint by the ombud does not put an end to the claim. The complainant is not bound thereby and may sue the respondent in ordinary court proceedings.”