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FSCA inquiry into Ecsponent Financial Services

Accused of selling high-risk preference shares in its listed parent group, largely to pensioners.
Ecsponent’s offices in Garsfontein Road in Pretoria. Image: Moneyweb

Ecsponent Financial Services, a subsidiary of struggling JSE-listed private equity and financial services group Ecsponent Limited, is under investigation by the Financial Sector Conduct Authority (FSCA) for marketing “high risk” preference shares in the holding company to pensioners.

Gerhard van Deventer, head of enforcement at the FSCA, confirmed this to Moneyweb on Wednesday.

He said the authority has been investigating Pretoria-based Ecsponent Financial Services “for several months” and noted that the inquiry was not directly linked to its parent company’s recent financial woes.

Moneyweb reported in February that Ecsponent Limited had defaulted on paying out around R188 million to preference shareholders. The group also posted a record operating loss before taxation of R1.98 billion on Friday (April 17) for its half-year to December 31, 2019.

Read:
Red flags as Ecsponent faces ‘default event’
Embattled Ecsponent reports record R1.98bn half-year loss

Van Deventer said the FSCA’s preliminary investigation into Ecsponent Financial Services has been completed and that it is awaiting a response from the company related to the findings. The investigation came in the wake of the authority receiving “a few complaints” over the last year.

“While the original nature of the complaints did not have much merit, it was clear from one complaint that the company was not conducting proper suitability testing when it sold the higher-risk preference shares largely to pensioners,” he said.

Van Deventer noted that Ecsponent Financial Services is an authorised financial services provider registered with the FSCA and that the company is a full subsidiary of the listed entity Ecsponent Limited.

“It is important to distinguish between the two entities. Ecsponent Limited is not regulated by the FSCA, and we did not investigate it, except only to the extent that we needed to establish the risk rating of its preference shares. Ecsponent Financial Services on the other hand is regulated by the FSCA,” he explained.

“We did investigate this financial service provider … . Our main issue was and is that it marketed and sold Ecsponent Limited shares to the public, basically without considering the suitability of the financial product to the clients,” he said.

Regulation contravention?

Van Deventer believes this is in contravention of Section 8 of the Financial Service Provider (FSP) General Code of Conduct, which prescribes procedures for suitability testing.

“In practice this means that the FSCA expects financial service providers, when advising clients, to consider the risk rating of the product, and then match it with the risk appetite of the client, or more importantly, the risk that the client can afford … . Put simply, a high-risk product is not suitable for a retired person … who does not have a proper spread of investments,” he noted.

“We considered the preference shares of Ecsponent Limited, a relatively small listed entity, in terms of market cap on the JSE. We also obtained expert evidence with reference to the financial position of Ecsponent Limited,” he added.

Read: Ecsponent’s default puts R2bn in preference shares at risk

“The upshot of this was that the preference share, as a result of both the company-specific financials and the nature of a preference share, was considered a high- or higher-risk financial product, only suitable for a wealthy investor, and even then as only a small part of [their] portfolio,” said Van Deventer.

He said that Ecsponent Financial Services had aggressively marketed and sold the preference shares of its holding company, in most cases, to members of the public who could ill afford the risk.

“To add to the tragedy, Ecsponent Limited’s preference shareholder base displays a bias towards older persons, often retired. This was most likely because the preference shares provided a monthly income, which was popular among pensioners,” he explained.

“Unfortunately, these monthly dividend payments depended on the company showing a profit. Many of the clients were told that the capital was ‘guaranteed’, but once again that only works if the company is making profits and can repay the investment,” he added.

Worried pensioners

Following Ecsponent Limited first announcing in February that it would default on its payment obligations to a batch of preference shareholders, which included not being able to pay out dividends, Moneyweb has received a few complaints and enquiries from worried pensioners.

“I have invested several million rand in their preference shares and now don’t know what’s going to happen. It’s very scary because I am in my seventies and can’t afford to lose out on my retirement savings,” one pensioner confided to Moneyweb on condition of anonymity.

“If I had known how risky this thing was, I would have never invested. Now we are being told that Ecsponent Limited want to convert our preference shares into ordinary shares, but there is a lot of uncertainty and I am yet to receive a detailed proposal,” added the pensioner.

Meanwhile, Van Deventer says that the FSCA intends to take “significant enforcement action” against Ecsponent Financial Services.

“We have informed the company that it failed in its duty of good faith and due care towards its clients. We await their feedback, before the matter can be finalised,” he said.

He pointed out that any financial services provider that “materially contravened” industry rules could face having its licence revoked and significant administrative penalties.

Ecsponent’s stance

Moneyweb could not reach Floris Slabbert, the head of Ecsponent Financial Services, for comment. However, Ecsponent Limited CEO George Manyere confirmed that the group is aware of the FSCA’s investigation.

George Manyere, CEO of Ecsponent Limited. Image: Supplied

Manyere said it was disclosed in “Note 19” of Ecsponent Limited’s interim results, released on April 17.

“As is the case in the financial services industry, which is regulated, Ecsponent Financial Services has been subjected to various inspections and investigations by the regulator … . It has cooperated fully and this is the case with any current engagements going on with the regulator,” he said in an emailed response.

Read: Major Ecsponent shareholder to pump R200m into group

“The FSCA has provided Ecsponent Financial Services with their preliminary findings and the company is currently in the process of considering these, prior to re-engaging with the FSCA. The final outcome of the ongoing investigation remains uncertain and dependent on further deliberation with the regulator,” he added.

Manyere said Ecsponent’s preference shares were marketed through Ecsponent Financial Services as well as through a network of independent financial advisors.

“The Financial Advisory and Intermediary Services Act [Fais] as well as the Fais General Code of Conduct, compel financial advisors to adhere to strict compliance obligations when advising clients on investments,” he added.

“Regulation requires clients to sign off on these compliance documentations and they also receive a copy thereof. Strict sanctions apply against any financial advisors who do not comply with these regulations.

“Ecsponent Financial Services is not in a position to provide more information at this stage until the investigation has been concluded,” he said.

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The only question I have is, ‘what took so long?’ This is a very good example of ‘ho aha serobe phiri e se e jele.’ FSCA has been asleep at the wheel, who couldn’t see that the ciminally high dividends qouted in the SENS dauy – you couldn’t even get that sort about return if you were printing counterfeit notes! So, how do you manage in running a legitimate company(all of us would like to know)?

Why do people time and time again risk their savings when there are so many more lower risk opportunities with companies who have been around for decades.

Your question is an interesting one. A lack of intelligence has got nothing to do with it though. Neither has greed because greed is a basic motivator in all kinds of investments. Now stupid greed is another matter altogether.

I am certain of this because I have experienced how the same intelligent and successful professionals have lost money in three successive Ponzi-schemes. They invest in the next Ponzi scheme for the same reasons that they invested in the previous one.

Firstly, they abdicate their responsibility in favour of the broker. Secondly, the broker is a jovial person and popular in the community and is, therefore, the target of the shrewd operator of the Ponzi-scheme. Thirdly, the broker receives brokerage fees from the operator of the Ponzi-scheme that are way above average. The broker takes a concealed bribe, in other words. Fourthly, the operator of the Ponzi scheme is a master salesman. He knows which boxes to tick with investors and their brokers. He uses all the apposite words and phrases to play on the insufficient knowledge that those parties do have, and he drives a flashy car and he drops the right names.

Then, there is the crucial mistake that investors make. They exchange diligence for hope, and they exchange accountability for trust. Investors tend to base their decisions on hope and trust instead of facts and regulations, especially when they have insufficient savings.

The riskiest investment is the one that either claims to be regulated or is regulated, has no substance. Abante, the Relative Value Arbitrage Fund, Basileus Capital and BK One are examples of this situation.

Hi
Because they made their money in other fields. Its like an Nurse trying to wire a DB board. If it works she tells her friends it so easy. If it burns down her house then everybody says she should have done her research!!
Ecsponent should be held accountable!!

Where is the JSE? It is starting to look like a roulette wheel.

Unfortunately, the FSCA only gets involved after the horse has bolted. They were advised (alerted)as to improbably high avertised returns, long before the fermented grass hit the fan.
Their standard answer has always been ‘We can only get involved after valid complaints are received’.
And it follows that the complaints can only be valid when the company has defaulted and the investments have disappeared into that black hole, gone forever.
However,their marketing blurb states “The Financial Sector Conduct Authority (FSCA) is responsible for market conduct regulation and supervision. FSCA aims to enhance and support the efficiency and integrity of financial markets and to protect financial customers by promoting their fair treatment by financial institutions, as well as providing financial customers with financial education’
Protect, my @ss.

Cant agree more – Typical of any state organ in this country – Overpaid, useless civil “servants” – They are supposed to be PRO ACTIVE!

Ecsponent has offered “high, limited tax if not tax free returns, with capital guarantees not since yesterday. Many radio ads etc. I have a long WhatsApp history between myself and a client dating back to July 2016. I did homework on Ecsponent and very quickly realized it is to good to be true. FSCA (and JSE for that matter) you are reactive NOT PROACTIVE. No use for clients who lost their money. To now try and distinguish between what you regulate and not (Ecsponent Ltd vs Ecsponent Financial Services) is laughable if not so sad.

Sensei, on the subject of greed and stupid greed. I warned the client but to no avail….And I lost him with my “ordinary” investment offerings.

Why do all these actions come after the event – once the investment is failing/has failed?
Surely a watch dog needs to bark and bite before the intruder is in your space.
Otherwise why have a watch dog – just keep a pet.

In January 2019 Moneyweb ran a series of paid-for Ecsponent articles, together with uncritical radio interviews. At the time I posted the following comment under one article:

“Nothing is certain in life, but the prospect of a bad investment outcome with Ecsponent prefs is about as sure a thing as one can find.”

My comment was deleted.

Only now…you were warned more than a year ago. Then I said that you will not investigate until the *&^% hits the fan. Also mentioned that you must be sued if you don’t act…..what now?..I think the pensioners must to a class action againts the FSCA for not protecting them.

If only pensioners (and a lot of other investors) can learn that: ‘If it sounds too good to be true, it probably is’ – the ones that are short of funds are the most vulnerable and targeted.

Pensioners are always the soft targets, the low hanging fruit of these shysters that employ some of these very well educated marketing ‘’idiots’’ to sell their fly by night deals.

In my working life in FX Corporate Treasury, we (I) had a plethora of calls of people (local and overseas) that wanted to come and discuss fancy deals whereby very large direct investments were to be made. We started calling these schemes – the ”Mystical Millions” – which is what it was, as the profit margins that they projected were astronomical! Ther salesman-talk were extremely convincing (mostly ‘’tax-free funds’’ etc) from tax havens like the British Virgin Islands, the Cayman Islands, the Channel Islands, The Isle of Man, Mauritius, etc, and had all the ‘’documentation’’ at hand – even ‘’Swift’’ confirmations of these funds that were invested in Triple-A institutions, etc. I think these schemes were the front-runners of the Ponzi schemes – which caught out the cream of the financial world! All of these schemes had one thing in common – they came from a regime outside the borders of SA (i.e. no SA exchange control applicable to trace the source of the funds) and totally non-regulated in nature.
I think the ANC led Government from 1995 – tried to regulate the financial sector – a sector that has been regarded as resilient and sound, all over the world! The Government just has to look at regulators like the FSCA. They should be investigated as the laws are inadequately enforced, and their accountability is low.
We all in the financial markets (very retrospectively) had to complete the Regulatory exams some years ago – the FAIS Act became the be-all-end-all peanut in the packet – the system failed as more and more innocent pensioners are getting screwed by the day!

My mom lost her life savings. There is a route to follow, sue the broker. They have liability insurance.Ombudsman is your first stop.
Move quickly , maybe a class action suite.

Did your mom lost it in the Ecsponent portfolio? Please help! As my dad invested his whole pension in this and I live overseas and it’s just been bad!!! As that was his monthly income!

Yes Ecspobent

End of comments.

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