Evolving our services with the future in mind
On Friday 18 November 2022, the Office of the FAIS Ombud will launch its Annual Report for the 2021/2022 Financial Year (1 April 2021 to 31 March 2022). The Annual Report and its contents reflect the period when Adv. Nonku Tshombe was the acting Ombud. Adv. John Simpson was appointed as Ombud from 1 November 2022.
Trends can be derived from the statistics collected during the investigation of complaints, and the Office of the FAIS Ombud has identified a number of themes related specifically to the way financial services are rendered; as highlighted below.
Delays in the payment of funeral policy claims
Section 2A.8.1 of the Policyholder Protection Rules (PPRs) provides that an insurer must assess and decide whether the submitted claim is valid (within two business days after all required documents in respect of a claim under a funeral policy have been received). If the claim is valid, payment must be authorised; alternatively the claim must be repudiated. If the claim is disputed, the claimant must be advised of the dispute.
The Office of the FAIS Ombud has noticed a significant rise in complaints against funeral policy providers not complying with this rule. The main reasons are the proliferation of funeral parlours and other providers of funeral policies who operate outside of the law by not being regulated in terms of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (FAIS Act), and providing long-term insurance benefits without having the scheme underwritten in contravention of the Insurance Act No. 18 of 2017.
There are schemes where the provider is appropriately licenced in terms of the FAIS Act and comply with prevailing legislation by having their schemes underwritten. However, they struggle to get their members’ claims paid due to financial difficulties experienced by the underwriter due to financial difficulties experienced both during and post the COVID-19 pandemic. In such instances this Office finds itself having to investigate both the provider and the insurer, trying to determine which entity is the responsible party.
An example of this would be the much-publicised matter of B3 Insurance and Funeral Services (B3). There is an ongoing dispute between B3 and its previous underwriter African Unity Life Ltd (AUL) regarding the reconciliation of premiums received, the settlement of claims and what would appear to be a so-called ‘offsetting’ of these amounts. The complaints received by this Office are directed against B3, and much of this Office’s focus has been in respect of B3’s actions and its ultimate responsibility to its policyholders. However, during November 2021 the Financial Services Conduct Authority (FSCA) issued a directive against AUL in terms of section 144 of the Financial Services Regulation Act. AUL was directed, amongst others, to remedy the failure to pay claims which have been assessed to be valid and to identify the cause of such failure, as well as to ensure that all valid claims are settled within 2 (two) working days in accordance with rule 2A.8.1. As a result, this Office had to refocus its investigation by concentrating on AUL’s adherence to the applicable rules.
Complaints such as those referred to in the example above, as well as those against smaller funeral parlours operating in the rural areas of South Africa who more often than not are unlicenced, tend to take longer to resolve. This Office is committed to finding an informal resolution to these matters as opposed to proceeding to a formal ruling by the Ombud in the form of a determination. After a determination is finalised, this Office is no longer involved and the complainants, most of which are without the requisite means, find themselves at the mercy of the expensive formal justice system. They struggle to get the determinations enforced and fight any appeals lodged against the decision. Therefore, this Office spends more time to find a positive informal resolution. The Office works closely with the FSCA by referring any such entity to the regulator for further investigation into the entity’s conduct.
Post-retirement planning – Living annuities
If you are a member of a pension, pension preservation or retirement annuity fund (and of late, a provident fund and provident preservation fund) and the value of your fund exceeds R247 500, in accordance with prevailing legislation you must utilise two-thirds of your fund proceeds at retirement to purchase an annuity, to provide you with an annuity income for life.
In South Africa, you have two choices in this regard, a guaranteed annuity, or a living annuity. A living annuity is an investment product that, unlike a guaranteed annuity, transfers the risk and responsibility of securing an adequate income for life onto the shoulders of the consumer. The living annuity allows you to select an annuity income between 2,5% and 17,5%, and you as the annuitant, in conjunction with your financial advisor, decide how to invest your retirement savings. The constant struggle between the appropriate drawdown rate and the optimal asset allocation that will not only supplement the income drawdown, but exceed it, to ensure that the annuity remains sustainable in the long term, then ensues.
This is where the problems begin, as most individuals have simply not made sufficient provision for retirement and attempt to rectify this situation by selecting a significant income drawdown. Further, these consumers can be poorly advised by the very individuals they regard as knowledgeable experts, to whom they turn to for advice at a critical time of their lives. A time when the decisions they make can have serious implications going forward and they are no longer economically active. In the previous Annual Report, the Office of the FAIS Ombud bemoaned the failure of certain financial service providers (FSPs) to make a recommendation as provided for by section 8(1)(c) of the General Code of Conduct for Authorised Financial Services Providers and Representatives (the General Code). Certain FSPs often simply provide the prospective client with the level of income they require to meet their current standard of living, regardless of whether sufficient provision has been made and to the detriment of the client, who will see the initial capital invested reduced over time, leaving them destitute in later years. When approached by this Office for a response, these FSPs simply declare generic terms such a single need (also addressed in previous Annual Reports) and try to blame the client, whose instructions they were executing. This approach illustrates that they failed to have the difficult discussions with their clients and to manage expectations from the beginning of the transaction.
Certain FSP’s indeed address the client’s failure to have made sufficient provision for retirement and caution the client as to the consequences and implications of drawing an income that is unsustainable. However, then the FSP fails to act with the required skill care and diligence. In this regard, we refer to the FSP’s total reliance on the risk profiling questionnaire and its outcome, at the expense of what is in the client’s best interests. An example would be where a client has selected an income drawdown of 8%, however, when completing the risk profiling questionnaire, the client’s risk profile is determined to be ‘Conservative’, based on the scores from a generic set of questions. This conservative risk rating then forms the basis for selecting, for example, a Money Market Fund to correspond with the client’s apparent risk-averse nature. The selection of a money market type fund will never provide for a return that would cater for an income drawdown of 8%, and over time the client will begin eating into his original capital and find themselves in a precarious situation in years to come. Add the effects of inflation to this situation, and one can appreciate the responsibility the FSPs have in ensuring they conduct a detailed needs analysis to ensure they know their client. This will enable them to make an appropriate recommendation to the client and make all material disclosures for the client to make an informed decision. These are the cornerstones of not only the financial planning profession, but the General Code as well.
Previous insurance and assumed level of knowledge
Whilst short-term insurance complaints are no longer the bulk of the complaints received by this Office, the Office of FAIS Ombud continues to receive a considerable number of complaints in respect of the failure by FSPs to advise their clients, or where the FSP has failed to make the appropriate disclosures to their clients.
Nowhere is this more apparent than in respect of motor vehicle insurance. Especially in the personal lines space and the failure of FSPs to appropriately advise their clients of the need for a tracking device. There are serious implications and consequences for not complying with this minimum-security requirement (that theft cover will not form part of the benefits provided by the policy). It must be stressed that we are referring to situations where the FSP and the client have had a long-standing relationship and several transactions have been concluded in respect of the policy in the past, and where many amendments and or changes have been affected (not first time purchase of short-term insurance).
In these situations, a certain level of familiarity develops, and whilst it is not unusual that an FSP develops a good relationship with their clients, it often comes at the expense of the FSP’s adherence to the provisions of the General Code. The addition and/or replacement of assorted items on the policy such as motor vehicles, becomes very informal and is conducted via e-mail, where only the basic details are appropriate to add, for example, a motor vehicle to the policy. The FSP almost assumes the role of simply actioning the client’s instructions without making the required disclosures, such as the requirement for a tracking device. When the newly added motor vehicle is then stolen, the claim is subsequently rejected as the vehicle does not comply with the minimum security requirements. When approached for a response, the FSP will more often than not respond that this was not the first motor vehicle that the complainant had insured with the FSP. That this was a standard term and condition of the policy and all the complainant’s previous vehicles had been fitted with a tracking device, so the complainant ought to have known that the new vehicle would have required the same security requirement.
This is a simple illustration, and there are many short-term insurance provisions which are handled in the very same way. FSP’s must understand that it is not sufficient to merely assume that the client has knowledge or experience of material terms and conditions. Each and every transaction that involves the addition of an item to the policy requires that the requirements of the General Code be adhered to. Section 7(1)(c)(vii) provides that concise details of any special terms, warranties, exclusions, or instances where cover will not be provided, must be made to the client. This is to ensure that the client is placed in a position to make an informed decision and to ensure that he or she complies with the requirements of the policy. These requirements could be a tracking device for a certain type of vehicle, a vehicle over a certain amount, or a vehicle that is kept in a specific area.
Section 3(a)(viii) of the General Code, provides that when an FSP renders a financial service, the representations made and information provided to a client by the FSP need not be duplicated or repeated to the same client unless material or significant changes affecting that client occur. If the relevant financial service renders it necessary, a disclosure of the changes to the client must be made without delay. The addition of an item to the insurance policy, especially a motor vehicle, which most consumers consider a significant asset, is a financial service that renders it necessary for the FSP to repeat the need for a tracking device as a minimum-security requirement.
Financial planners’ duty in terms of underinsurance
The average consumer of short-term insurance policies assumes that if they have a policy for household contents in place, the policy will cover all their possessions if lost, stolen or damaged. What these consumers do not realise, until it is too late, is that if their possessions are not insured at their replacement value, there will be a shortfall on the settlement offer by the insurer in respect of the claim. The replacement value is what it would cost the client, at the time of a claim, to replace all the belongings in the house with similar brand-new ones. In the event of a claim, the insurer will calculate the replacement value the client should have been insured for, and if the insured amount is less than that, the insurer will only pay a part of the claim.
This phenomenon, known as underinsurance, means that the claimant will only receive a proportional part of the claim, as the principle of ‘average’ would be applicable. The principle of average results in the following formula (sum insured / value at risk) x amount of loss. The result is the value the insurer will settle the claim for.
Therefore, it is vital that when providing the financial service in respect of short-term insurance policies, especially those involving household contents and homeowners’ insurance, the FSP advises the client of this material term of the contract to empower the client to make an informed decision. The response this Office receives from FSPs, in respect of averaging claims, is that the FSP had asked the complainant what level of cover the client desired and it was the client that provided the specific value. The FSPs then proceed to state that they are not assessors and that they have no business questioning the value provided by the client or even recommending an alternative value.
This Office agrees with this sentiment, in that the Office of the FAIS Ombud does not expect any FSP to value a client’s belongings or make any suggestions as to what level of cover would be appropriate to result in a positive claim. What this Office does expect is that the FSP complies with section 7(1)(c)(vii) of the General Code. The client must be appropriately advised of the need to ensure one’s belongings for replacement value, what replacement value entails, and the consequences of not doing so (averaging). In doing so the FSP can place the client in a position to make an informed decision as to the appropriate level of cover that will see their belongings covered.
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