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.
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.
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.
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.