Advisers look towards legal obligations in client interactions
With the imminent implementation of the Twin Peaks model, there will be a number of changes which will hopefully improve the functionality, and the integrity of the insurance industry.
One of the biggest challenges that the industry needs to overcome is the seemingly rampant activities of certain brokers who are either unaware of the provisions contained within the Financial Advisory and Intermediary Services (FAIS) Act, or they just have a blatant disregard for them.
While the Financial Services Board (FSB) will take on the role of compliance monitoring within the industry, will the courts have recourse against errant advisers?
Michael Calitz in the spotlight again
On the 9th of July we profiled the case of Dr Michael Inch and Michael Calitz whereby Inch invested in the Relative Value Arbitrage Fund (RVAF) and the FAIS Ombudsman (Ombud) ruled in Inch’s favour saying that the product sold to him did not suit his risk profile.
The Ombud had to deal with another determination relating to the RVAF fund. This time the complainant was Robert Jones who had a long standing relationship with Calitz. The relationship extended over a number of decades, so the complainant implicitly trusted any investment advice given to him by Calitz. He also trusted Calitz to manage these investments.
The complainant wanted to make investments and Calitz recommended the RVAF fund. The complainant made two investments which amounted to R600 000. This comprised of 30% of his retirement savings, but he was secure in the knowledge that Calitz assured him that the RVAF would generate good returns.
For his part, Calitz claims that he recommended the RVAF fund with a range of other funds and he explained the long and short strategies that the fund employed. However, the Ombud ruled that Calitz was unclear in his interaction and that the RVAF did not suit the complainants risk profile. The product should never have been recommended in the first place.
The complaint was upheld and the Ombud duly instructed Calitz to pay the complainant R600 000 as well as interest of 15% per year.
Are intermediaries playing with fire?
In a world where the FSB is increasingly giving protection to the consumer, you would think that advisers who want to push the limits of the Ombudman and the FSB’s patience would think twice about doing so. However, this is not the case and these advisers are increasingly feeling that they are bulletproof. After all, a fine by the Ombud still keeps them in the industry.
What exactly are the legal obligations that an adviser needs to fulfil when dealing with a client? Donald Dinnie, Director at Norton Rose Fulbright South Africa, points out that advisers have a moral and legal obligation to act with responsible care and skill.
However, this is very subjective and can be related to the question of how long a piece of sting is. An adviser will feel that they have acted in a careful and responsible way, while the client will feel otherwise.
The proof of the pudding is in the record of advice and risk analysis. If the adviser did their duty properly, the record of advice will reflect a proper needs analysis which will also include a comprehensive risk analysis. In the case of Inch vs Calitz, no needs analysis was done, and one wonders if this was the case with Jones seeing that the Ombud ruled that the RVAF was unsuited to Jones’ risk profile.
The adviser surely has the duty to supply the client with the appropriate investment product that suits a risk profile. If brokers in the short-term industry can be held accountable to the courts if they do not offer their clients the appropriate cover, surely the same rule can apply to investments?
The adviser is obligated to deliver a copy of the policy to the client outlining the product that they are investing in. If the product was explained clearly, then the client would be able to identify the advantages and disadvantages of a product.
Finally, the adviser has a duty to act within the clients best interests. Calitz knew Jones for decades, so there was a certain level of trust and friendship which was associated with the relationship. Was it right then for Calitz to accept 30% of Jones’ retirement capital as an investment capital into a highly volatile fund?
Drawing conclusions from the evidence
By looking at the result of the determination, it is safe to say that Calitz did not act in the best interest of his client. But more important questions need to be asked. Did Calitz fulfil any of the outlines provided above?
Another question is, whether these errant advisers can continue to regard themselves as bulletproof, even after they have seen that they will get little protection from the Ombud. Some may argue that the FSB has an important role to play in the industry, if the fines that the Ombud imposes are not going to keep these advisers out of the industry, then surely the FSB can impose punitive measures which would achieve this.
Editor’s Thoughts:
The next two years will be important for the industry in terms of compliance. One feels that without the added burden of formulating legislation, the FSB has to intensify its efforts to clean up the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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