Determination proves ROA necessary

Jonathan Faurie, FAnews Journalist

While there are a lot of concerns within the industry regarding the implementation of Treating Customers Fairly (TCF) and the impending Retail Distribution Review (RDR), the latest determination by the Ombudsman for Financial Services Providers (Ombud) proves that there is a definite need for such legislation.

Retirement and investments is two aspects which the public needs expert advice on. There is a reason why we don't have direct players in this market.

This however was not the case in the dispute between Gert and Susara van Vuuren vs Kampstone Financial Services.

Taken for a ride

Gert (69) and Susara (66) are an elderly couple approaching retirement. Because of their lack of retirement savings, they approached Kampstone Financial Services to advise them on the best retirement vehicle to accumulate as much savings as they could before retirement.

During their consultation with Kampstone, and a representative Charlene van Niekerk, the Van Vuuren's made it clear that they require their capital to be invested in a fund where they would have unrestricted access to their capital for emergencies.

However, this request was overlooked and Van Niekerk, who gave the advice and made the investment, tied the Van Vuuren's money up in separate Old Mutual funds which require a 15 year investment. Further, the investments which Van Niekerk took out had significant penalties attached to them if the Van Vuuren's made emergency withdrawals, cancelled the investment or did not make the necessary investment increases stipulated when the investment was taken out.

The Van Vuuren's contacted the FAIS Ombud as they claimed they were not aware of this but had to still pay the withdrawal penalties and cancellation penalties when they cancelled the investment because they could not keep up with the payments.

Detailed defence

Kampstone reports that during the meeting with the Van Vuuren's, only Susara was present as she made the investment decisions in the family.

A number of options were then presented to Van Vuuren. She rejected a money market investment citing low interest rates and she rejected a four year retirement annuity proposal as she apparently told Kampstone and Van Niekerk that Gert would need to work for another ten years as they had no retirement savings.

This is where the first discrepancy comes in, Gert van Vuuren is 69 which is already over the allowable age to work. If he needed to work for a further ten years he would be 79. Surely if Kampstone and Van Niekerk were presented with this information they would know the urgency for having easy access to funds because of the Van Vuuren's ages.

According to Kampstone, when Susara van Vuuren was presented with the Old Mutual option she was happy with it. Kampstone further pointed out that Van Vuuren was made fully aware of the length of the investment as well as the penalties associated with the investment.

Kampstone also admitted to the Ombud that they were not involved with all of the discussions between Van Niekerk and the Van Vuuren's and that the company only found out that Van Niekerk increased the investment period from 10 to 15 years at a later stage.

Proven guilt

The Ombud carried out its investigation into the matter where it found out that Gert Van Vuuren was penalised R46370,35 while Susara Van Vuuren was penalised R16367,69. The Ombud needed to determine:

- Who to apportion guilt towards.

- If the conduct of Kampstone and Van Niekerk caused the Van Vuurens to suffer damage or financial prejudice.

- Whether Kampstone would be liable for the actions of Van Niekerk, should she be found the guilty party

When an adviser consults with clients on retirement options, they need to make detailed records of their interaction. This is governed by the Financial Advisory and Intermediary Services (FAIS) Act of 2002 and the General Code of Conduct.

The documentation given to the Ombud by Kampstone (which is pointed out in the determination) was incomplete according to the guidelines provided by the Act. Nowhere in the documents did it show that a number of plans were presented to Susara van Vuuren and there were merely notes regarding the penalties which pointed out that it is a high risk investment. Costs are applicable in the event that the contract is stopped before the term has ended. The client may withdraw in case of an emergency; however, we do not recommend it.

The Ombud ruled in favour of the Van Vuurens saying that Van Niekerk did not present them with enough plans in order to make an informed decision. It was also pointed out that nowhere in the correspondence were the penalties properly explained or the length of the investment pointed out.

The Ombud further determined that Van Niekerk failed to follow office protocol by not obtaining necessary approval when making the appropriate investments. It also determined that the ease in which Van Niekerk was able to bypass office protocol suggests that Kampstone did not have sufficient control measures in place to eliminate as far as reasonably possible the risk that clients would suffer financial loss through the misconduct of a financial representatives.

Editor's Thoughts:
It is obvious that advisers play an important role in the industry, both from a company and from a client's perspective. The bottom line on this determination is that the ROA did not, according to the FAIS Ombud, constitute as professional advice. Are your ROA's measuring up to the FAIS standards? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.