The Case for Further Reform of the Banks’ Advisory Duty in South Africa Post the Financial Advisory and Intermediary Services Act 37 of 2002

• Author: Schulze, W.G.
• DOI: https://doi.org/10.47348/SAMLJ/v33/i3a4
• Published date: 16 May 2022
• Date: 16 May 2022
• Citation: (2021) 33 SA Merc LJ 419
• Pages: 419-446

THE CASE FOR FURTHER REFORM OF THE

BANKS’ ADVISORY DUTY IN SOUTH AFRICA

POST THE FINANCIAL ADVISORY AND

INTERMEDIARY SERVICES ACT 37 OF 2002

WG SCHULZE*

Professor in Banking Law, University of South Africa

SLW MOKOBI**

Attorney, High Court of Botswana

Abstract

The nature and extent of a financial service provider’s (‘FSP’s’)

liability for the advice or information that it provides is a core issue

globally and is frequently cited in complaints and lawsuits.

Commercial banks are particularly vulnerable to advice liability and

cannot afford to downplay the risk as they continue with fast-paced

innovation. In this context the Financial Advisory and Investment

Services Act (‘FAIS Act’) has attempted to intervene in the FSP–

customer relationship by regulating conduct and elevating advisory

standards. Unfortunately, the Act is constrained by antiquated

distinctions and has failed to improve on the common-law advisory

duty. It is hoped that the proposed Conduct of Financial Institutions

Bill will improve on this. The current statutory exclusions from the

definition of ‘advice’ lead to a dichotomy that is unhelpful in modern

banking. Furthermore, the lack of recourse to a statutory mechanism in

respect of what are currently deemed ‘non-FAIS’ activities is confusing.

The consequences of the current legislative framework are a lack of

legal clarity (which is not good for business), inadequate regulation,

and an increase in abusive practices. A reform of the legislation is

needed, failing which the courts should develop the common law to

impose liability even absent a regulated advisory relationship.

Keywords: financial service providers; banks; advice; liability; pure eco-

nomic loss

*BLC LLB (Pret) LLD (Unisa).

** BSocSci (Rhodes) LLB (Rhodes) LLM (Unisa). This article is an abridged and updated

version of the second author’s LLM dissertation with the same title (Unisa 2020) supervised by

Prof WG Schulze, Department of Mercantile Law, College of Law, University of South Africa.

419 https://doi.org/10.47348/SAMLJ/v33/i3a4

(2021) 33 SA Merc LJ 419

© Juta and Company (Pty) Ltd

IINTRODUCTION

In South Africa, as with comparable jurisdictions, there can be no

liability for advice (either for the non-tendering of advice or for the

tendering of incorrect advice) unless there exists a legal duty to advise,

including a duty to exercise some measure of skill and competence.

1

In this context, the Financial Advisory and Investment Services Act 37 of

2002 (‘FAIS Act’) was promulgated on 15 November 2002 and brought

into effect on 30 September 2004. The legislation applies to all institu-

tions that conduct f‌inancial advisory and intermediary services related

to a f‌inancial product.

2

It seeks to ensure that f‌inancial service providers

(‘FSPs’) are licensed, suitably qualif‌ied and experienced, with the

ultimate aim of ensuring that advice and services are provided in an

honest, accountable, professional and responsible manner.

Despite this ostensibly broad application of the FAIS Act, the central

hypothesis of the present article is that the exclusions from the def‌inition

of ‘advice’ in the FAIS Act have led to a statutory dichotomy that is

impractical and artif‌icial in the context of modern banking. An expan-

sion of the statutory def‌inition of advice is advocated for herein,

including a reform or repeal of the exclusions under s 1(3)(a)(i) of the

FAIS Act.

This article restricts itself to the statutory regulation of commercial

banks, because these institutions are particularly prone to advice

liability.

3

Statistics suggest that consumers, almost as a matter of course,

tend to place a signif‌icant level of trust in the information (advisory or

not) received from staff members of banks.

4

At the same time, banks are

at risk of embedding a culture in which f‌inancial products that are not

suitable to a customer are nevertheless promoted to that customer, often

1

Allan, ‘Bankers’ liability for f‌inancial advice’ 1987 Melbourne University LR 213.

2

Section 1 FAIS Act.

3

Swanepoel, ‘Assessing suitability with regard to investments advice in South Africa’

available at http://enhanceifa.com, accessed on 18 December 2018. See also National Audit

Off‌ice (United Kingdom), ‘Financial Services Mis-selling Regulation and Redress’ available at

https://www.nao.org.uk/wp-content/uploads/2016/02/Financial-services-mis-selling-

regulation-and-redress-Summary.a.pdf, accessed on 4 March 2019.

4

See World Bank Group, ‘South Africa retail banking diagnostic’ available at http://

www.treasury.gov.za/publications/other/

SA%20Retail%20Banking%20Diagnostic%20Report.pdf, accessed on 4 March 2018. It is

stated there that ‘the relationship and communications between the frontline staff and the

consumer can resonate more than written disclosure information. In this respect, frontline

staff are in a powerful position. Aggressive, high-pressure sales tactics, or even subtle

de-emphasising of key product features and prices, can have a signif‌icant impact on a

consumer’s understanding of a product and his or her ultimate purchase decision.’ See also

Deloitte, ‘Automation of f‌inancial advice’ available at https://www2.deloitte.com/content/

dam/Deloitte/za/Documents/f‌inancial-services/Deloitte%20Robo%20Automated%20

Advice_June%202018.pdf, accessed on 4 February 2019.

https://doi.org/10.47348/SAMLJ/v33/i3a4

(2021) 33 SA MERC LJ

420

© Juta and Company (Pty) Ltd