Financial regulator, the Financial Sector Conduct Authority (FSCA), on Friday announced the withdrawal of the licence of Ecsponent Financial Services (Pty) Ltd (EFS), a financial services subsidiary of beleaguered JSE-listed private equity group Ecsponent Limited.
The FSCA said in a statement that the regulatory action is a result of breaches of financial sector laws by EFS. The authority has imposed an administrative penalty of R3 million on Pretoria-based EFS for the breaches.
In April Moneyweb reported on the FSCA’s investigation into EFS, for selling and marketing high-risk preference shares of its holding company, Ecsponent Limited, to pensioners. The latest blow to EFS follows the FCSA provisionally suspending its financial services licence (FSP number 32968) in May.
“The FSCA had provisionally suspended this FSP’s licence on May 20, 2020, pending consideration of the outcomes of its investigation. The investigation looked at how EFS was selling and marketing the shares of its holding company, Ecsponent Limited, which is a JSE-listed entity not under the jurisdiction of the FSCA. The FSCA’s investigation focused solely on the advice and intermediary activities of the entity within its jurisdiction, EFS, and not Ecsponent Ltd,” the financial regulator noted in its statement.
“During the period of investigation Ecsponent Ltd raised capital through the sale of redeemable preference shares. These preference shares consisted of classes A, B, C and G. Ecsponent Ltd’s preference shares were marketed through the media; and leads generated in this fashion were dealt with by EFS, through a network of representatives.”
“During interactions with potential clients, EFS 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 and Ecsponent Limited are yet to comment on the FSCA’s decision.
Meanwhile, the FSCA noted that its investigation into EFS entailed extensive interaction with the company.
The regulator said that this was “mainly because the FSP was of the view that it was not required to conduct suitability testing”, adding that it “relied on a specific financial service agreement wherein the investor instructs the advisor or intermediary not to perform a comprehensive financial needs analysis, but to render a specific financial service”.
EFS argued that by signing the agreement, the investor understood that a full analysis would not be undertaken by the advisor.
However, the FSCA said that in its own view such an agreement was unlawful, and that EFS could not rely on it.
“The authority also found that EFS was in breach of suitability standards expected of FSPs as outlined in the FAIS Code of Conduct… After extensive consultation, EFS agreed to immediately cease advising unsuitable investors to invest in the preferences shares of Ecsponent Ltd,” the FSCA noted.
The FSCA added that EFS also agreed to the following measures:
* Conduct a re-evaluation of the risk requirements of all the clients who were advised to invest in the product, and to compare their risk requirements with the higher-risk nature of the product.
* To engage the FSCA on a strategy to deal with those investors identified as unsuitable. Such a strategy would likely include some action or agreement from the product supplier.
* This is a developing story