Can a financial advisor be held liable for bad advice which results in substantial financial losses for a client?

It is common knowledge that it is very important to save regularly and build investments to assist you when you are either unemployed or retired. Employees work for a very long time and through that, they hope that they will be in a position to retire comfortably and enjoy their so-called “golden years”.

There are many different ways to save money, for example, cash savings at a financial institution, property investments or equity investments like shares in different companies on different stock markets, either locally or abroad.

Having regard to the complexity of certain investments, it is important to obtain the right advice before entering into financial obligations which will have an effect on the long term growth of your investment.

But what if you do obtain and follow the advice and it all goes wrong? What if you invest a lot of money in a scheme or investment portfolio and you incur a huge financial loss as a result of the bad advice? Do you have any remedies against the Financial Advisor who gave you the advice?

In the Supreme Court of Appeal matter of Atwealth v Kernick1, Kernick was a client of Ms Moolman, a Financial Advisor in the employ of Atwealth. Moolman was claimed to be negligent in her duties as Financial Advisor based on her giving bad advice to Kernick which resulted in them losing their investment entirely.

Davis AJA found that the Plaintiffs (Kernick) failed to present the necessary evidence on i) what kind of research and due diligence a reasonably skilled Financial Advisor in her position should have done and ii) whether or not another Financial Advisor in the same scenario would come to the same conclusion and give the same investment recommendation. Given the fact that Kernick failed to produce such evidence, the Court held that they failed to establish liability on the part of Ms Moolman.

The second test of this case was quite subjective as it would be difficult to find two Financial Advisors who would come to the same investment recommendation when taking a lot of different factors into consideration. Different advisors would come to different opinions based on each party’s own experiences and reliance on different key figures.

Kernick’s expert should’ve assessed and i) taken Kernick’s risk threshold into consideration ii) the information publicly available to Kernick at the time of consideration iii) whether such information pointed out risks which exceeds their threshold and iv) whether a reasonable Financial Advisor in the same circumstances would come to the same or different recommendation.

The Supreme Court of Appeal matter of Durr v ABSA Bank2 provides a better scope for determining liability on the part of a Financial Advisor. Schutz JA considered two questions namely what level of skill and knowledge is required of a Financial Advisor? The Court held that the Financial Advisor is not expected to bring the highest level of skill and knowledge, only the same level as his/her colleagues in the same branch or level. The second question relates to whether the required advice is on the same knowledge and skill level of a normal Financial Advisor or a specialist.

It is quite notable that the Court steered away from the question of whether another Financial Advisor in the same position would’ve come to the same conclusion.

In this instance, the Court held that the level of knowledge and skill required was that of a specialist advisor and Schutz JA was of the opinion that the Financial Advisor did not satisfy himself that the investments were safe for the company; that he ventured into a field that required skills which he did not have; and that he should’ve obtained additional advice from a more experienced colleague before making recommendations to his client.

It was based on the aforesaid that the Court held that the Financial Advisor had been negligent in giving advice which he was not qualified to give.

It is thus quite evident which grounds a Plaintiff can rely on in order to prove that a Financial Advisor acted negligently when he/she gave investment recommendations.

By Werner Cilliers
Associate Attorney

Rule 32 – Summary Judgment as amended

The Rule 32 of the Uniform Rules of Court has been amended with effect from 01 July 2019.

The changes are not very drastic, and therefore one may still be able to apply the old rules to a certain extent.

The amended Rule 32 is applicable to a Plaintiff requesting summary judgment in the High Court only after the defendant has delivered a plea to the liquid documents, liquid amount and/or the delivery of specified movable property or the ejectment by the Plaintiff. This is very similar to the application of the old rule whereas it was applicable in the ancillary aspect- in terms of Rule 46/Rule46A.

It is very important to note that this procedure may only commence 15 days after the Defendant has delivered it’s a plea and not 15 days after the Notice of Intention to Defend has been delivered, which was the norm previously.
In the case, Firstrand Bank Limited v Shabangu and others and a related matte

r (2019 ) JOL 45493 (GJ) it was held that the Rule 32 was amended specifically to require that summary judgment may only be applied for once the defendant’s plea has been delivered.

Therefore, the above amendment may be one of the most important reasons for the previous rule to be amended.

Further to the above, it is also important to note that the Plaintiff may attach an affidavit as well as annexures to the summary judgment application. The annexures may only contain the liquid document in question. No further evidence may be adduced apart from the contents in affidavit.

Whereas previously, the affidavit merely allowed one to verify the cause of action, the amount claimed as well as making reference to the bona fide notice of intention to defend delivered.

The Plaintiff, however, does not have to indicate what exactly its cause of action is or what facts it relies on or why the defendant does not have a defence. Instead, the plaintiff is merely required and permitted to file a brief affidavit “verifying the cause of action”.

The affidavit should be made by the plaintiff himself or by any other person who can swear positively to the facts in question.

One must note that to say that the amendment is prospective would only be to accept that the legislature was content that the potentials for injustice may continue after the date on which the new rule came into operation. If the legislature had intended that the rule apply retrospectively, it would have been expressly mentioned.

Common Law Right to Set Off No Longer Applicable in Respect of Credit Agreements

National Credit Regulator v Standard Bank of South Africa Limited (44415/16) [2019] ZAGPJHC 182; [2019] 3 All SA 846 (GJ) (27 June 2019)

The judgment handed down by Honourable Judge Keightley on 27 June 2019, in the Johannesburg High Court was welcomed by the South African Human Rights Commission and consumers alike.

The applicant in the matter, is the National Credit Regulator, an independent juristic person, entrusted with the regulation of South Africa’s credit industry. Among many, one of its prime functions is ensuring the National Credit Act be enforced.

The Respondent in this matter, Standard bank had, had numerous complaints against it for their practice of debiting the accounts of their clients without prior consent and crediting other accounts said clients also held with them. This practice referred to hereinabove is known as the common law right to set off and until the handing down of this judgment, the same was prejudicially enforced in everyday banking practice.

The South African Human Rights Commission sought leave not only to be admitted as amicus curiae (friend of the court) but also to present evidence pertaining to the ramifications in applying the common law right to set off to the debt review process. The respondent did not oppose the SAHRC’s appointment as amicus curiae but did oppose the adducing of the evidence. The Respondent’s opposition proved futile and the SAHRC was successfully joined in on the motion and received leave to proffer the aforementioned evidence.

In a nutshell, the National Credit Regulator approached the court for a declaratory order to clarify whether sections 90(2)(n) and 124 of the National Credit Act rendered the common right of law set-off applicable in credit agreements.

The respondent’s defence lay in a loophole in the National Credit Act which afforded them the option to fall back and rely on the common law right to set-off if the initial credit agreement bore no clause pertaining to the set-off procedure. Thus silence on setting off and the consumer not being informed or aware of the same in the first place afforded the respondent the ideal opportunity to utilise common law procedures.

This said loophole comes as no surprise, the National Credit Act and the manner in which same was drafted has been deplored by various courts over the years. Often being referred to as confusing and lacking in clarity, the Supreme Court of Appeal has even gone as far as to sound off on how inarticulate the act is.

Section 90(2)(n) of the National Credit Act deals with the regulation of consumer credit agreements and the unlawful provisions of a credit agreement.

Section 124 of the National Credit Act states various provisions for a set-off clause to be deemed valid, such as;

S124(1), read with S124(1)(e) written prior authorisation by the consumer being given beforehand.

S124(1)(a) said set off only being applied against a specific account/asset or amount authorised by the consumer.

S124(1)(b) Set-off only being utilised to satisfy specific obligations named by the consumer.

S124(1)(c) & (d) Set-off can only occur in respect of amounts specified, and set authorised dates as agreed to by the consumer in the credit agreement.

S124(2) The credit provider is obligated to furnish the consumer with adequate notice in the prescribed manner before set-off may be effected.

It is more than evident that the provisions of S124 of the National Credit Act afford the consumer vastly more control over the process.

The Respondent averred that common law set-off was a primary banking practice as it allowed the banks to recover the debt owed to the establishment almost immediately when funds were deposited into a client’s account. In response to this, the SAHRC submitted that debiting consumers’ accounts often left them in dire financial straits, mostly resulting in said consumers not being able to purchase the basics such as food, fuel, for the rest of the month or to satisfy their other financial obligations.

The SAHRC thus submitted that this was a gross infringement of consumers’ socio-economic, and basic human rights. Further to this, the SAHRC went on to submit that the commons law right to set off and how same was currently being applied in banking practice was also detrimental to South Africa’s credit industry.

In their application to adduce further evidence, the SAHRC filed an affidavit deposed to by a ‘seasoned’ debt counsellor, a one, Mr Slot. This affidavit extensively detailed Mr Slot’s professional opinion and experience of how the common law practice of setting off was annihilating the debt review process in South Africa. He averred that consumers under debt review were constantly being put in a position where they were defaulting in terms of their debt review court order due to setting off being applied against them and thus their funds were not readily available to satisfy their court-ordered payments, placing them further into financial disparagement. He went on to submit that in his experience, the common law practice of setting off was sending South Africa’s credit industry further into dejection.

The court ultimately held that while the common law right to set off was still being applied in banking practice, it would render s90(2)(n) & s124 quite honestly, useless. Judge Keightley quite simply put it as, “It is clear to me that so long as common-law prevails as an alternative form of set-off, s124 and s90(2)(n) will serve no purpose.” Judge Keightley also went on to submit that s124’s main purpose was to establish the break from the common-law practice.

The National Credit Regulator and South African Human Rights Commission was thus successful in their application and the declaratory order was handed down by Judge Keightley, “in light of sections 90(2)(n) and 124 of the National Credit Act 34 of 2005, the common law right to set off is not applicable in respect of credit agreements which are subject to the National Credit Act.” The Respondent was also ordered to pay the applicant’s costs, along with that of counsel.

This declaratory order will hopefully in future aid in the simplification and understanding of the often ‘bemoaned’ National Credit Act.

By Tarryn Fulton 

Section 18 of the Superior Courts Act – When will a judgment under appeal not be suspended pending the Outcome of the Appeal process?

Interden Management Services (PTY) LTD and Another v Denneboom Informal Traders and Others.

The Court looks at a Leave to Appeal Application and the effects of the suspension of a previously granted order. The requirements of section 18 of the Superior Courts Act (hereinafter referred to as “the Act”), is analysed and applied as well as the definition of exceptional circumstances.

Section 18 has 3 subsections which the court analysed and applied, namely:

“1)    Subject to subsections (2) and (3), and unless the court under exceptional circumstances orders otherwise, the operation and execution of a decision which is the subject of an application for leave to appeal or of an appeal, is suspended pending the decision of the application or appeal.

(2)    Subject to subsection (3), unless the court under exceptional circumstances orders otherwise, the operation and execution of a decision that is an interlocutory order not having the effect of a final judgment, which is the subject of an application for leave to appeal or of an appeal, is not suspended pending the decision of the application or appeal.

(3)    A court may only order otherwise as contemplated in subsection (1) or (2), if the party who applied to the court to order otherwise, in addition, proves on a balance of probabilities that he or she will suffer irreparable harm if the court does not so order and that the other party will not suffer irreparable harm if the court so orders”.

In other words, subsection one (1) says; when a Leave to Appeal Application is brought to the court, the order under appeal is suspended, until the leave to appeal can be heard and judgement is passed, UNLESS there are exceptional circumstances. Subsection two (2) states: that if the leave to appeal is based on an order in an interlocutory application the order that is being appealed will NOT be suspended unless there are exceptional circumstances.

Subsection three (3) is the test used to determine whether an order should be suspended or not during a Leave to Appeal Application. The test has three (3) requirements:

  1. Whether or not exceptional circumstances exist
  2. Proof on a balance of possibilities by the applicant that:

2.1 There will be irreparable harm to the applicant if the appealable order is suspended

2.2 The absence of irreparable harm to the respondent, who seeks leave to appeal.

The court in the above-mentioned case analysed the phrase exceptional circumstances and found that a “strict rather than literal meaning to the phrase” should be applied to really emphasise the legislature’s intention. The court found the phrase to mean ‘something out of the ordinary, unusual, rare or different’. The exceptional circumstances should be a matter of fact, the court should not apply any form of discretion to the circumstances.

The court found that the applicants in the above-mentioned case were able to prove that irreparable harm would have come to them had the order remained suspended during the Leave to Appeal application. They were also able to show that there would not be any irreparable harm to the respondents and that sufficient means had been taken to assist the respondents. The court also found that the order that was under appeal had been granted in an urgent court and therefore should be treated urgently, creating exceptional circumstances. The court stated that section 18(3) of the Act had been complied with and therefore stated that the order under appeal should NOT be suspended due to the irreparable harm it could have on the applicant.

The three (3) requirements in section 18(3) as stated above, are all that one has to use in order to give effect to an order pending in an Application for Leave to Appeal.