Fais Ombud kicks off new year with a ruling that shows what awaits FSPs offering slap dash service

FAIS Ombud Charles Pillai has started the New Year with guns blazing - he has come down hard on a major home loans company for proving "shoddy service and minimal advice" while charging a commission totally out of proportion to the service rendered.

The Ombud's first determination for 2007 has serious lessons for financial services providers who continue to sell products with scant regard for suitability and benefits for the client but rather with an eye on lucrative commissions to be bagged.

Pillai, the Ombud for Financial Services Providers, has determined against South African Home Loans (Pty) Ltd and has ordered the company to pay an unemployed Isipingo Hills, KwaZulu-Natal, widow, Saroja Naidoo, the outstanding indebtedness on her house bond with effect from the date of death of her husband, Subramoney Naidoo.

The company had been found to have made disclosures to the client that were not provided in plain language, created uncertainty and were certainly not comprehensive enough. Additionally, they were confusing and misleading.

Pillai found that while the company had in a 14-second telephonic conversation explained an exclusion clause pertaining to pre-existing medical conditions to Mrs Naidoo, it had not equally done so to Mr Naidoo who was a cardiac patient and who was also a party to the contract.

SA Home Loans was also ordered by Pillai to refund all payments against the bond by Mrs Naidoo after the death of her husband until settlement of her claim against the company.

Mrs Naidoo had complained to the Ombud in her capacity as the surviving spouse and joint life assured after SA Home Loans had rejected a claim made by her in terms of a bond protection plan in which her life and that  of her husband were insured.

The policy was sold on the back of a mortgage loan issued by the company to Mrs Naidoo and her husband in terms of which credit protection would be provided.

In the event of a successful claim, the proceeds of the policy will be
credited towards the outstanding balance of the mortgage loan with SA Home
Loans as at the date of death of the assured. The policy is what is commonly
referred to as "credit life". It is a form of risk cover put in place to secure the
creditors interests.

The Naidoos had borrowed the sum of R100 000 from the Respondent. This sum was secured by way of a further mortgage bond over the immovable property owned jointly by the deceased and Complainant.

The policy was put in place to cover the outstanding liability due to Respondent in the event of the death of either the Complainant or the deceased.

The policy was sold on 26 April 2005 through telephonic direct marketing.

The policy documents include the following schedules: policy schedule;
basis of agreement; terms and conditions; illustrative benefits and premiums; and important information.

The Basis of Agreement includes the following pertinent terms, indicated as follows:

"This policy has been issued based upon and in confirmation of the telephone conversation between you Saroja Naidoo and Priyadharshni Naicker as recorded on 26 April 2005. A transcript of this recording is available on request.

"In this conversation you agreed and where applicable declared that all information supplied or to be supplied in connection with this policy is true and complete and forms the basis of the policy.

"SAHL Life has relied on the information and disclosures which you have made in assessing its risk and premium in terms of this policy.

"The terms and conditions of the policy were explained and you understand and accept that certain events and medical conditions are excluded from the policy.

"You were notified of your freedom of choice in terms of section 44 (1) of the Long Term Insurance Act 52 of 1998 and confirm that you exercised that choice without any coercion or inducement."

The initial sum assured is R199 436.63 and the sum assured would gradually decrease in line with the outstanding balance due on the mortgage loan agreement. The term of the policy is 16 years which is equal to the mortgage loan agreement with SA Home Loans.

The illustrative monthly premium payable is R463.74 and this sum is said to be included in the mortgage loan instalment on the Policy Schedule. Clause 13 of the Terms and Conditions Schedule deals with exclusions and pre-existing conditions. It is this clause on which the insurer relied in rejecting the claim.

The clause states that if a life assured "dies within 24 months of commencement of the policy or becomes disabled at any time during the duration of the policy, due to any condition, physical defect, illness, bodily injury or disability which the insured was aware of and/or received medical advice or treatment for prior to the commencement date or date of any reinstatement, no claim will be paid and all premiums paid will be forfeited".

Mr Naidoo died on 20 October 2005, six months after the policy was incepted. According to the Respondent, the deceased died as a result of a pre-existing heart condition.

Shortly after her husband's death, the Complainant claimed in terms of the policy from Respondent. The claim was rejected on the basis of the pre-existing conditions clause.

In her letter of complaint to the Ombud, Mrs Naidoo alleged that she was not clearly informed of the pre-existing conditions clause in the policy.

In her letter to SAHL Life dated 09 December 2005, she advises inter alia that the pre-existing conditions clause was not discussed with her or her husband.

She further alleged in the letter to SAHL Life that she did not receive the policy document and that had she and her husband been aware of the pre-existing conditions clause, they would have queried it.

She further made the point that had she known this she would not have taken the policy from Respondent but would have sought another policy more suited to her needs.

SA Home Loans, in responding to queries by the Ombud, argued that during the telephone call when the policy was sold, Complainant was informed about the pre-existing conditions clause.

Respondent also advised that on 6 December 2005, Complainant and her brother had met with the Managing Director of S A Home Loans Life, Tim Bean, to discuss her complaint. During this meeting, Complainant produced her copy of the policy document and Mr Bean then showed her the pre-existing conditions clause in the policy document.

Respondent further stated that during the meeting, Mr Bean played the recording of Complainants conversation with Respondents consultant wherein she was advised of the pre-existing conditions clause.

In Respondent's view, she had accepted the clause. Complainant, according to Respondent, was also given an example of how the pre-existing conditions clause operated.

The Respondent maintained that from its investigation, it was clear that the pre-existing conditions clause was explained to Complainant and that she did in fact receive the policy document.

In reaching a conclusion, Pillai said it was important to consider whether:

* There was proper disclosure to the appropriate parties of the terms and conditions of the policy during the rendering of the financial service. In particular was the pre-existing conditions clause on which the insurer relies properly explained to the appropriate parties in line with the applicable codes of conduct as set out in the FAIS Act; and whether

* Sufficient information was disclosed during the rendering of the financial service by Respondent to enable Complainant and the deceased to have made an informed decision about the proposed transaction.

To establish whether appropriate disclosures were made to the relevant parties, in terms of the FAIS Act during the rendering of the financial service, Pillai interrogated the material aspects of the exchange between the said Priyadharshni Naicker and Complainant.

The following extract of the conversation relates directly to the advice regarding the pre-existing conditions clause:

'Consultant: "There are some exclusions ...If you suffer from a pre existing condition then you wont be covered for that condition in the first two years, meaning let's say if you have had cancer in the past, for the first two years you wont be covered for cancer, that kind of thing... but you sound very healthy to me?"

Complainant:  "Yes, yes, yes....."'

Pillai said in his ruling: "It is an undisputed fact that Respondent spoke to only one of the life assured, namely Complainant.

"No conversation was ever held with the deceased who was also a party to the policy. It is common cause that both Complainant and the deceased were joint life assureds.

"An analysis of the conversation between Priyadharshni Naicker and Complainant relating to the critical exchange wherein Respondent alleges that it made the disclosures of the pre-existing conditions clause on which the insurer relied, it is material to mention that even though the policy covered the lives of both Complainant and the deceased, the disclosures were made to Complainant alone and not to the deceased.

"It is important to highlight the fact that the basis of the agreement is the conversation between Complainant and the said Priyadharshni Naicker. That conversation did not include the deceased.

"Nowhere on the undisputed facts is there any reference to any disclosures or warnings or discussions regarding the pre-existing conditions clause, or any other terms and conditions for that matter, in relation to the deceased.

"He was a crucial party to the policy being the 1st Life Assured, described in the Policy Schedule. I question how Respondent can reasonably expect that whatever it advised Complainant will apply with equal force to the deceased.

"Logic would demand that any discussion relating to the pre-existing conditions of the deceased ought to have been discussed with the deceased himself and not with his surviving spouse.

"In any event there is no record on the available evidence that there was even a reference to the deceased in relation to pre-existing conditions."

Pillai said the Respondents case is that the claim was repudiated based on a term of the contract.

He said in terms of the FAIS Act, material disclosures must be made to the client to whom the financial service is rendered.

"In this case, we have two clients, the Complainant and the deceased. The responsibility to disclose those terms would have rested on Respondent.

"That responsibility entails appropriate communication to both parties to the contract. It cannot reasonably be accepted that some vague disclosures to Complainant must be seen to be automatically applicable to the deceased," said the Ombud.

He said the disclosure regarding the pre-existing conditions clause was confusing, created uncertainty and was misleading.

"The conversation ending as it does with the statement: 'but you sound very healthy to me' does not invite Complainant to make any disclosures about pre-existing conditions; rather it compliments her on her state of health which, to a person of Complainant's circumstances, would communicate a very different message to that which is intended."

Pillai said a further question that needed to be answered was whether the disclosure about the pre-existing conditions clause was adequate and appropriate in the circumstances of the financial service, taking into account the factually established or reasonably assumed level of knowledge of the client.

Pillai said in the course of the investigation by the Office of the FAIS Ombud, the Complainant was interviewed and it became quite clear that she was "an unsophisticated woman with only basic education".

"Since the death of her husband, she has been relying heavily on her brother and daughter with regard to her financial matters. Her daughter writes all her letters. Whilst this may not have been known to the Respondent at the time of the rendering of the financial service, some simple questions would have led Respondent to understand that this is a vulnerable consumer.

"Financial services and financial products are by their very nature complex. A consumer in the position of Complainant can generally be considered to be a vulnerable consumer."

Pillai also commented on the amount of commission that was to be charged on the transaction.

"It is material to mention that considering the shoddy service and minimal advice given, the commission charged is totally out of proportion to the service rendered.

"The commission charged is some 21.75% of the monthly premium. This is close to the maximum legislated commission of 22.5% for group credit schemes where the intermediary also does administrative work.

"It is also interesting to note that no mention is made of commission anywhere in the policy documents, except in the Illustrative Benefits and Premiums Schedule. The level of commission is, in any event, high relative to the type of policy, the sales channel and the level of financial advice that was in fact provided in this case.

"What emerges from this exercise is that notwithstanding that Respondent was not prepared to provide that quality of service that would have warranted the commission charged, it was nevertheless prepared to charge close on to the maximum legislated commission.

"The quality of service provided, bearing in mind that Respondent did not bother to speak to both parties to the contract, provided the barest minimum by way of disclosures and took a mere 14 seconds to provide a pertinent disclosure on which the insurer relies, leads me to conclude that the last thing on the mind of the Respondent was to place the interests of the client before its own, as required in the FAIS Act."

"At no stage during the conversation was there any reference that the policy provides decreasing life cover. People familiar with financial products may understand the nature of the product.

"However many consumers, particularly those in a similar position to Complainant, labour under the mistaken belief that they enjoy life cover once provided, when all they have is a decreasing life cover.

"Consumer protection demands that material features of the product must be communicated to the client," said Pillai.