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Five FAIS Ombud lessons for 2022

11 January 2022 Gareth Stokes

The 2020/21 FAIS Ombud Annual Report identifies five trends that financial advisers and financial product providers should address to avoid a flood of complaints in 2022 and beyond. The report, published in December 2021, shows how an assessment of complaints data can prove useful in identifying practices and products that could face greater regulatory scrutiny in coming years.

Trend one: An increase in cryptocurrency complaints

The success of cryptocurrencies like Bitcoin and Ethereum has seen an entire investment industry spring up almost overnight. Inexperienced investors are being courted by all and sundry to buy crypto assets through local and offshore exchanges and invest in a wide variety of volatile crypto opportunities. Unfortunately, this complex, fast-growing and largely unregulated market is ripe for so-called bad actors to ply their craft. Local consumers have already learned some tough lessons, losing billions to Mirror Trading International (MTI) and Africrypt in 2020 and 2021 respectively. 

The Office of the FAIS Ombud recorded a significant increase in complaints relating to investments made into cryptocurrencies during the 2020/2021 financial year; but are powerless to help. “We were unable to assist complainants who submitted complaints in this respect [because] crypto assets are not currently regulated in terms of any financial sector law in South Africa,” writes the Ombud. “Crypto assets are not classified as a financial product [and] such products fall outside of this office’s jurisdiction”. The Ombud warned that crypto assets were  high risk due to the underlying business models and the risk of large fluctuations in market prices. 

South Africa’s Intergovernmental Fintech Working Group on crypto assets, has already made 25 recommendations on how to bring crypto assets into the regulatory universe. And it is hoped that the Financial Sector Conduct Authority (FSCA) will make an interim declaration that crypto assets are ‘financial products’ in terms of the definition of ‘financial products’ in section 1(1) of the FAIS Act. This interim measure is seen as necessary until crypto asset-related financial advice and intermediary services are dealt with under the Conduct of Financial Institutions (COFI) Bill. 

Trend two: Homeowners’ insurance failings

The Ombud drew attention to an ongoing trend of complaints against short-term insurance claims rejections due to wear and tear and / or defective workmanship. Although such complaints are typically referred to the Ombudsman for Short-term Insurance, the FAIS Ombud raised concerns that little had been done by insurers by way of amendments or improvements in the manner in which these policies were being sold to the public. The common complaint is that homeowners’ insurance does not respond when the damage being claimed can be attributed to the poor condition of the property due to general wear and tear, improper installation or lack of maintenance, among other reasons. 

The Office also noted that homeowners’ insurance policies are often sold without advice. “Many of these policies are sold pursuant to a loan agreement, where the application forms are signed whilst completing the paperwork with the lawyers with no financial adviser in sight,” writes the Ombud, before reminding readers of outcome three of the Treating Customers Fairly (TCF) framework: “The TCF framework provisions in outcome three require that customers are provided with clear information and kept appropriately informed before, during and after the point of sale”. This requirement is further reinforced in sections 7(1)(a) and 7 (1)(c)(vii) of the General Code of Conduct for Authorised Financial Services Providers and Representatives. 

Product providers and short-term brokers were urged to revisit the sales process insofar homeowners’ insurance to ensure that consumers are provided with “concise details of any special terms, exclusions, or instances in which cover will not be provided, so that the customer is placed in a position to make an informed decision as well as in instances such as those detailed above to make an effort to mitigate any potential losses”. 

Trend three: Processes and procedures of product providers

The 2020/21 FAIS Ombud Report criticised financial services providers (FSPs) for making “no attempt” to proactively address issues that fuel consumer complaints. Using the example of an assistance policy, where child dependants who turn 21 no longer qualify for child dependant status, the Ombud noted: “This disclosure is made at the inception of the policy when the financial service is rendered … but no further attempt is made to notify the client after the policy has incepted, other than a cursory mention in the annual renewal letter…” It was suggested that FSPs who “are continuously looking to make the most of technology and innovation” explore ways to assist policyholders in remaining appropriately insured and preventing premiums being collected on uninsured lives. 

Trend four: Failure to make a recommendation

A central theme of FAIS Ombud complaints is that the product provided is inappropriate for the complainant’s needs and circumstances. In the latest report, the Office lamented the standard defences by respondents in such matters, being that the complainant was provided with a range of options from which they selected the most suitable or that “the FSP had simply provided the complainant what the complainant had asked for”. The General Code is clear that clients should receive advice that is appropriate to them. I.e. it is not acceptable for an FSP to simply leave it up to the client to make up his or her own mind! 

Section 8(1)(a-c) of the General Code requires that an FSP obtain all appropriate and available information to conduct an analysis to identify the financial product that will be appropriate to the client’s risk profile and financial needs and there is a requirement on the FSP to make a recommendation to the complainant. This requirement is reinforced by subsection 8(4)(c) which provides that where a client elects to conclude a transaction that differs from that recommended by the provider, or otherwise elects not to follow the advice furnished, the provider must alert the client as soon as reasonably possible of the clear existence of any risk to the client and advise the client to take particular care to consider whether any product selected is appropriate to the client’s needs, objectives, and circumstances. 

Trend five: Using risk analysis against complainants

The fifth and final trend flagged by the report relates to poor practices in choosing product based on a client’s risk profile. “There is still a significant reliance on the generic risk profiling questionnaire, which asks the client a specific number of multiple-choice questions to provide a score that will indicate whether the client has a conservative, moderate or aggressive approach to risk,” noted the Ombud. “This is then used to justify the selection of a specific portfolio in line with the established risk profile”. 

The primary concern is that the answers being given by clients during the risk profiling processes are subsequently being used against them in responses to complaints received by the Office. As example, the Ombud commented on advisers who used their client’s four-to-seven-year investment horizon to rationalise placing them in an endowment policy with a restricted term of five years. “In no way does the answer provided [in a risk profiling questionnaire] suggest that the client wants a restrictive option such as an endowment policy or that such a policy is even appropriate for the client,” they said. 

Warning about unrealistic returns

We conclude by echoing the FAIS Ombud’s warning about crypto assets: “The Office would like to caution the public that, despite the promise of significant gains and quick returns during these trying economic times, unrealistically high returns more often than not suggest that an investment is too good to be true, which carries the risk of losing one’s capital. More importantly, however, is that no investments should be made without seeking the assistance and advice of properly licensed financial services providers who should only offer products from licensed financial institutions”. 

Writer’s thoughts:
The 2020/21 FAIS Ombud Annual Report provides food for thought for both financial advisers and product providers. It challenges industry stakeholders to reflect on their practices and products to ensure that clients and consumers achieve fair outcomes at each stage of the advice and product process. Do you believe the FAIS Ombud concerns are valid? Or are they tainted by the Ombud’s exposure to complaints against alleged bad-actors in the advice and product world? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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