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Can Third Circle investors expect to get any money back?

The fine imposed by the regulator will not be used to compensate them.

Earlier this month the Financial Sector Conduct Authority (FSCA) imposed a fine of R100 million on MET Collective Investments (MetCI), relating to the unprecedented losses suffered by the Third Circle MET Target Return Fund in December 2015. This unit trust lost 66% of its value in just two days when a number of derivative positions turned against it.

The regulator found that MetCI did not have proper risk procedures in place, that it did not exercise proper oversight, and that the fund’s exposure to derivatives was in contravention of the law. The FSCA held that these failures were serious enough to warrant a substantial penalty.

Read: MetCI fined R100 million over unit trust that lost 66% in two days

Momentum Metropolitan Holdings has indicated that it will appeal the ruling, but whether the fine stands or not will make no difference to investors who lost money in the fund. The FSCA has confirmed to Moneyweb that it is an administrative penalty, and there is no compensatory element. In other words, none of that money will be going to investors.

Read: MetCI disputes that it was reckless in Third Circle case

Making claims

While it is difficult to put an exact total on the losses suffered, Moneyweb estimates these to be at least R230 million. This is based on the fund’s size and net asset value per unit at the end of November 2015, compared against the net asset value per unit after Third Circle was removed as the investment manager in mid-2016.

Given that the regulator has now ruled that the fund manager failed to meet legal and regulatory standards, it stands to reason that investors should be in a position to seek compensation. The question, however, is how, and from whom?

According to Gerhard van Deventer, head of the investigations department at the FSCA, investors have two potential avenues to pursue. The first is to submit a complaint to the Financial Advisory And Intermediary Services (Fais) Ombud against whoever advised them into the fund. The basis for such a complaint would likely be that their financial advisor failed to conduct a proper due diligence on the product.

While it might seem self-evident that any financial advisor who put a client into a fund that is being run in contravention of the law didn’t do their homework properly, what exactly constitutes a satisfactory due diligence is not defined in the Fais Act. Advisors are required to show that they applied their minds to investigating the product, which may be taken to mean that they must obtain a certain level of information about it and the provider.

This would cover things such as checking that the fund and fund manager are licensed by the regulator, that they have a demonstrable track record, and that they have the necessary compliance procedures in place. Any advisor may well argue that the Third Circle MET Target Return Fund and MetCI met all of these requirements.

Where a complaint would be difficult to challenge however, is that an advisor must be able to demonstrate that they understand how a product works in order to recommend it to a client.

Given that it took MetCI as the management company nearly six months to work out what was going on inside the Third Circle portfolio, it is impossible that any financial advisor fully understood what the fund manager, Ian Lane of Third Circle Asset Management, was doing.

This is therefore potentially a factor that should be emphasised in any complaint to the Fais Ombud.

No advisor could confidently say that they understood how the fund worked, or the extent of the risks involved, and they should therefore not have been recommending it.

Going further

One drawback of laying a complaint with the Fais Ombud, however, is that this office can only consider claims for amounts of up to R800 000. Any investor who lost more than that would therefore either have to accept that limit, or seek an alternative remedy.

That would mean approaching the courts. Here it is possible that investors may have a claim not only against their advisors, but potentially Third Circle and MetCI as well.

“Investors should seek independent legal advice as to whether they have a claim against the CIS [collective investment scheme] manager,” Van Deventer told Moneyweb.

Since the FSCA has ruled that MetCI did not meet its regulatory obligations, and that Third Circle was managing the portfolio in contravention of the law, there may be potential for investors to seek damages in a civil claim. This may however require a complicated, and potentially costly, legal process.

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Indeed shocking when 66% of value is lost in 2 days, despite that it’s a regulated fund.

….also why do we have to describe things so formally? (.e.g. “derivative positions turned against it”). Better choice of words would be “we lost our bets”. Says the same!

Maybe a “Fourth Circle” could be required?

If this was a crypto investment, there would be NO recourse…

No call-centre…
No regulator to turn to…
No shareholder-rights / voting, to try and shake up company leadership.

LOL, and what difference is there really for the Steinhoff or this third circle investor??, ALSO no recourse. You might as well chuck money into crypto if you are buying into this lawless country. “shareholder rights” hahaha, you cleary not in business in SA.

When reaching the Third Circle, Dante and Virgil find souls of gluttons who are overlooked by a worm-monster Cerberus. Sinners in this circle of Hell are punished by being forced to lie in a vile slush that is produced by never-ending icy rain.

Is anybody else concerned that the regulator issues such large fines? What will be done with this money and who oversees their spending? I think Steinhoff fine was also R100m. Where does the money go?

The money ends up in the fiscus, from where government efficiently redistributes it to create a better life for all … connected cadres, that is.
So the poor investors got screwed twice – once by the incompetent/ reckless fund managers, and then a second time by the thieving government.

“No advisor could confidently say that they understood how the fund worked, or the extent of the risks involved, and they should therefore not have been recommending it”

This can be applied to every single Discovery Invest product!

Sorry chum, it would be grossly unfair to paint Discovery’s overtly complex products with the same brush as Third Circle’s MetCI:

Discovery’s products just needs some effort to understand, once you BLOW most of the thick SMOKE away & COVER UP all the remaining MIRRORS 😉

….then once this ghostly spectre’s inner workings are revealed, we’ll run away together.

I managed to figure out what went wrong here. The short Condor structure crashed into the long butterfly structure and one of the wings came off and it flew right through the third circle. After all the dust settled down they managed to clear the feathers and droppings from the trading room, they realised that the money is gone. Now they are left with a lot of droppings and no money.

Sad event.

….thanks for pointing this out Sensei, as this was the last piece of the puzzle I was missing.

I’ve originally discovered that the fund’s colour-spectrum was set too high, causing its salt to diminish to number 28. The result was the frequency became too dry, which did not secure the butterfly property…..which then unexpectedly teleported to your “short Condor structure” to complete the picture.

Sadly, no joke for the investors though 🙁

As somebody who has worked many years in my early days backoffice admin in investments, this whole story is a joke. Typical SA. “fund’s exposure to derivatives was in contravention of the law” how is that a risk management issue? Why is the fund manager not behind bars. If the managers are lying to the fund admin people with what they are up to with the accounts, how the hell can you even think of blame the advisors? The real story here is that the managers were fraudulent, working in cahoots with individuals in MetCI and the FSCA are not qualified to perform oversight. Typical SA.

A question for any Third Circle investors: What made you invest in the Fund? If you select a Fund and it goes pear-shaped through fund manager recklessness why should you be compensated? No body was forced to invest in the Fund and the woe-is-me attitude after the fact does not undo that you choose out of your own free-will to do this. If it was fraud then I understand why MetCI is taking some of the pain but it wasn’t.

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