FAIS Ombud Ruling: Broker gave wrong advise

The FAIS Deputy Ombud has dismissed a complaint by a Vereeniging company that a Pretoria broker had wrongly advised it to move from an existing provident fund to a deferred compensation fund in order to save employees and the company money.

Ms Noluntu Bam (pictured right), the Deputy Ombud for Financial Services Providers, ruled that the Respondent, PJH Brokers CC, had not been negligent in rendering financial services.
The Complainant, Truss & Timber (Pty) Ltd, represented by a director, Adolph Louw, complained that Danny Claasen, a representative of PJH Brokers CC, had wrongly advised the company to move from a provident fund to a life assurance scheme which included an investment component.

The Complainant said it was only when the first claim was submitted that the company was told that the new fund was a life assurance scheme.

When the employees were informed, they were upset and requested that payment of premiums in the new fund be stopped.

The Complainant said when he confronted Claasen with the fact that the so-called values of the policies were not actual values payable to members, his response was: “Just tell the people that it is the payable values to keep them happy.” This was denied by Claasen.
The Complainant said the policies were thereafter cancelled and added the company had been “misled and in the process lost a lot of money because we all know that money paid on life assurance is not refundable”.

The employees, according to the Complainant, wanted the full value of the premiums paid to be refunded.

Upon investigation, the Office of the FAIS Ombud was informed by Claasen that the company had requested an alternative scheme as the provident fund “caused numerous problems”.
The company was not satisfied with the long time it took for withdrawals to be made from the provident fund. The administration costs of R6000 per month for the provident fund were considerable.

Also, since the proceeds of a provident fund were paid directly to the employee on his or her exit from the fund, the company often could not recover any loans it had made after an employee had left the company.

To address these issues, the Respondent suggested an alternative structure which would provide a retirement vehicle combined with life cover where the administration costs would not be a cost to the company. A separate policy for funeral benefits was also recommended.

The company would pay the premiums and be the owner of both policies to accommodate the problem where employees left the company whilst still owing advances granted to them.
The Respondent said the structure was accepted and approved by managing director MJ Louw, father of Adolph Louw, as well as the employees.

To ensure that the employees understood the new product, a consultant interpreted and explained the details to the employees. At first, all the employees, except five, were happy and signed the application forms. The five also later accepted the new product.
The Respondent said the previous fund was then liquidated and the new structure was activated. A withdrawal claim and a funeral claim were subsequently paid out and there were no problems with the new structure.

In April 2007 when Adolph Louw was acting managing director, he requested policy schedules with up to date values. These were provided and reflected the death values, total investment values and illustrative maturity values.

The Respondent said it was explained to Adolph Louw that the investment values and the current cash values were two different values.

Adolph Louw then said he was going to stop payment for the new product. The Respondent advised him not to do so as it would cause “huge damage” to the members’ cash, investment and maturity values. In spite of this warning he stopped paying the premiums.

The Respondent added if the new retirement vehicle was still active, no member would have incurred any loss whatsoever.

The Deputy Ombud found that the Respondent had not misrepresented the nature of the new product. A copy of a quote for one of the employees showed abundantly clearly that the policy was a life policy with an investment component.

Ms Bam also said in her ruling that there was no evidence that the Respondent’s advice had caused the Complainant financial loss.

“Noteworthy is the fact that when the product replacement took place, MJ Louw dealt with the Respondent and signed the necessary forms on behalf of Complainant.

“Dolf was not involved in the discussions leading to the replacement of the product. MJ Louw accepted the advice given and signed the relevant forms.

“The doubts about the correctness of the advice given had been raised by Dolf after he assumed the post of acting managing director almost two years later and when he was not party to the initial discussions between his father and the Respondent.

“The financial service was rendered by Respondent to the company. The Respondent resolved the issues for the company. In my view the employees, therefore, do not feature in this complaint.

“The matter is one of an employer/employee and co-directors issue rather than one of advice or misrepresentation by Respondent. MJ Louw sought advice from Respondent on how to reduce the company’s administrative expenses and the other problems listed above.
“All these objects were achieved. The administrative expenses borne by the company were effectively eliminated while any loan taken by an employee was secured against the life policy and could be deducted from the proceeds of the policy. Whether that was in the interests of the employees is another issue altogether.

“In the result I am of the view that this complaint falls to be dismissed,” Ms Bam said.