FAIS Ombudsman sides with complainant
Financial services professionals are guided by the Financial Advisory and Intermediary Services (FAIS) Act and the General Codes of Good Conduct. The legislation and codes demand meticulous attention to detail when dispensing financial advice. And failure to comply with these requirements can prove costly – especially when it comes to defending yourself against allegations of misconduct.
On Monday, 12 October 2009, the FAIS Ombudsman’s office issued a press release documenting its latest determination. The headline is self explanatory: Ombud finds broker chased commission by extending maturity date. As is often the case, the Ombudsman, Charles Pillai, had to base his decision on conflicting versions of the same chain of events. In today’s newsletter we’ll take a quick look at the De Vries versus Louw determination.
Turning R6 000 into R1 056
The complainant, Cornelius J de Vries, lodged a complaint with the Ombudsman when he learned that a ‘new’ endowment policy (which he expected to mature in 2011) was only going to mature 15 years later. He claimed that his broker, Jan Adriaan Louw, had ignored his instructions when writing the new policy. To make matters worse the R6 000 in premiums contributed to this policy over 12 months had a cash value of R1 606 after commission and a surrender value of just R1 056 when paid out. De Vries went to the Ombudsman to recover R4 944, being the difference between the premium paid and the surrender value.
The complainant’s version of events is as follows. In June 2005 he met with Louw who suggested making an existing Sanlam endowment policy paid up. De Vries agreed and bought a Metropolitan policy which Louw said would provide better returns than the Sanlam policy. At this stage the complainant agreed to increase his monthly premium from R465.85 to R500. Louw allegedly advised De Vries he would receive his premium contribution plus growth were he forced to ‘cash up’ the policy.
De Vries alleges he told Louw not to extend the new policy beyond the expiry date on the existing one. In other words “he wanted the term of the proposed new Metropolitan policy not to exceed [the Sanlam policy] term, and that the premiums should only be payable up to and including July 2011.” De Vries discovered that this instruction was ignored when meeting with another broker in June 2006. He met with this broker with a view to consolidate all his policies due to being retrenched three months previously.
The respondent’s version
Louw’s version is slightly different. At their first meeting, he claims he advised De Vries to surrender an existing Sanlam Life policy (with monthly premium of R766.72) held in the complainant’s wife’s name. He suggested the complainant take a life policy in his own name as he was the sole breadwinner. This was duly done – the surrender value of the Sanlam Life policy went to starting a small business – and two new Sanlam policies were issued. “One a 10-year endowment and the other a life, disability and trauma cover.” Both policies were issued in 2001. Louw says that the complainant was unhappy with the growth on the Sanlam endowment policy and accepted his suggestion of the Metropolitan Odyssey endowment product when they met in June 2005. He further alleges the 15 year term was expressly discussed and agreed to.
Up to date documentation is essential
The Ombudsman ordered Louw to pay De Vries R4 994 plus interest of 15.5% per annum. In his press release he states he was not “satisfied with the respondent’s version of what had transpired.” He determined that Louw had not complied with the requirements of the FAIS Act and the General Code for Authorised Financial Services Providers. The most notable failure in this regard was the failure to keep a written record of advice. The decision to replace one investment produce with another was questioned, as was the decision to extend the term of the product to 15 years. “The probabilities favour the view that such a long term investment was nothing other than commission driven,” said the Ombudsman.
Although the determination appears fair we’re puzzled by one of the Ombudsman’s conclusions. “The switch to a new product – with the looming retrenchment of the complainant – to a 15 year term could not have been prudent in the given circumstances…” said the Ombudsman. We wondered how the financial advisor might have known of this “looming retrenchment” when selling a policy a year prior to the event!
Editor’s thoughts: It seems the best way to motivate a client to move from one insurance product to another is to point to poor investment performance. Unfortunately changing from one product to another is a costly affair. What factors should you consider before surrendering a policy in favour of one offering ‘better’ returns? And could you ever motivate the surrender of a policy in favour of another short-term policy? Add your comments below, or send them to [email protected]
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