Atwealth (Pty) Ltd & others v Kernick & others

The first and second respondents (the Kernicks) and third respondent (a company owned by them) were clients who sought financial advice from the second appellant (Ms Moolman), a financial advisor employed first by Atwealth (first appellant) and later by Vaidro (third appellant). Between 2009 and 2012, Ms Moolman made presentations about investment products offered by Abante Capital (RVAF and MAT Worldwide funds). Following these presentations, the Kernicks invested substantial sums (totaling approximately £515,000 and R700,000) in these hedge funds. The investments ultimately failed and the Kernicks suffered significant financial losses. The Kernicks sued on the basis that Ms Moolman had breached her legal duties as a financial advisor by giving negligent advice, and that the investments were part of a Ponzi scheme where returns were paid from investor capital rather than genuine returns. The critical meeting occurred in August 2009 at the Kernicks' Port Elizabeth residence, where Ms Moolman made a presentation about the investment products. Abante Capital and its associated funds later collapsed in 2012.

• Whether a financial advisor rendered financial advice within the meaning of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act)
• Whether breach of statutory duties under FAIS Act automatically gives rise to delictual liability
• Whether the financial advisor acted negligently in providing investment advice
• What constitutes the standard of care expected of a reasonable financial advisor
• Whether the plaintiffs discharged the onus of proving that negligent advice was given and caused their losses
• Whether expert evidence was required to establish what advice a reasonable financial advisor would have given in the circumstances

The appeal was upheld with costs. The order of the high court was set aside and replaced with: 'The action is dismissed with costs.'

In a claim for damages based on allegedly negligent financial advice: (1) A breach of statutory duties under the FAIS Act does not in itself give rise to delictual liability - the plaintiff must establish all elements of delict including wrongfulness, negligence, causation and damages. (2) To establish negligence by a financial advisor, a plaintiff must prove not only that the advisor lacked adequate knowledge or skills, but that this resulted in advice materially different from what a reasonably competent advisor would have given in the same circumstances. (3) Expert evidence is generally necessary to establish what advice a reasonable financial advisor would have given in the particular circumstances and at the particular time. (4) Negligence must be assessed based on the circumstances existing at the time the advice was given, not with the benefit of hindsight after investments have failed. (5) The test for negligence requires proof that a reasonable person in the defendant's position would have foreseen harm, foreseen the causal sequence, and would have taken steps to guard against it, and that the defendant failed to take those steps. (6) The plaintiff bears the onus of proving each element of the negligence claim on a balance of probabilities.

The Court made several non-binding observations: (1) It noted debate about whether hedge funds constituted 'financial products' under the regulatory regime in 2009 (before they were declared collective investment schemes in 2015), but stated nothing turned on this as the common law duties mirrored the FAIS Act requirements for present purposes. (2) The Court observed that Ms Moolman's presentation clearly constituted 'financial advice' in the ordinary sense of the term, even if there were technical arguments about whether it fell within the FAIS Act definition. (3) The Court commented that the notion that financial institutions like Abante would be willing or obliged to disclose portfolio details, trading activities and balance sheets to advisors was 'far-fetched'. (4) The Court noted in passing the debate among legal commentators about absolute versus relative theories of negligence, citing Sea Harvest, but indicated the true test is whether conduct falls short of the reasonable person standard in the particular circumstances. (5) The Court observed that it appeared from limited evidence that Abante had won hedge fund awards in 2008 and that major institutions like Old Mutual and Momentum had invested in Abante products, suggesting the investments may not have appeared problematic in 2009.

This case is significant in South African law for several reasons: (1) It clarifies that breach of duties under the FAIS Act does not automatically give rise to delictual liability - all elements of a delictual claim (wrongfulness, negligence, causation, damage) must still be independently proven. (2) It emphasizes the essential role of expert evidence in professional negligence cases involving financial advisors - plaintiffs must lead evidence of what a reasonable financial advisor would have done in the same circumstances. (3) It demonstrates that inadequate pleading and proof of what advice was actually given can be fatal to a negligence claim. (4) It reaffirms the application of the test for negligence from Mukheiber v Raath and emphasizes that negligence must be assessed based on the factual matrix existing at the time advice was given, not with hindsight. (5) It illustrates the danger of conducting litigation on a misconceived legal basis (here, assuming FAIS Act breach equals automatic liability) rather than properly establishing all elements of the cause of action. (6) The case provides guidance on the standard of care expected of financial advisors and the nature of due diligence required, though it emphasizes these are factual questions requiring expert evidence.