The Financial Services Conduct Authority has withdrawn the operating licence of Ecsponent Financial Services – and slapped it with a fine of R3 million for unlawfully marketing high-risk preference shares in its holding company to pensioners.
EFS is a subsidiary of JSE-listed financial services group Ecsponent Limited.
EFS marketed the products without conducting appropriate suitability testing to check that no undue risk was posed to its clients, said the regulator.
In addition to the fine and the withdrawal of its licence, the company has also agreed to re-evaluate clients retrospectively, work with the regulator on a strategy to deal with those clients, and work toward redress for them.
The FSCA previously suspended EFS’s licence for two weeks pending the outcome of its investigation, which had been ongoing for seven years. The investigation was initiated after “several complaints” from the public.
Ecsponent Limited did not fall under the FSCA’s jurisdiction, the regulator noted, so it focused its investigation only on EFS, which is an authorised financial services provider.
During the investigation, the regulator found that Ecsponent Financial Services had been marketing high-risk preference shares in Ecsponent Limited to pensioners, without appropriately assessing their risk profile.
“During interactions with potential clients, Ecsponent FS staff provided advice on the investment product, i.e. the classes of preference shares.
“While the classes of shares that paid monthly dividends were popular amongst pensioners as they mimicked a monthly pension payment, the one major difference between them and a pension investment was that they exposed investors to more risk,” the FSCA said.
EFS argued that clients had disclaimed any risk, saying that they signed an agreement stating that they understood the financial advisor would not be performing an analysis of their financial needs.
“Ecsponent FS argued that by signing the agreement, the investor understood that a full analysis would not be undertaken by the advisor.
“It is the view of the FSCA that such an agreement was unlawful, and that Ecsponent FS could not rely on it,” the FSCA said.
Ecsponent issued a brief statement on Friday morning. “The FSCA’s investigation focused solely on the advice and intermediary activities of EFS and not those of Ecsponent.
“The Company advises Security Holders that EFS has, with effect from 11 February 2020, not provided financial advice on any new business and the Company will resolve to unwind EFS,” it said.