Ombud sounds warning bell on fee disclosures
In today’s newsletter FAnews Online takes a look at another of the FAIS Ombud’s recent determinations. Charles Pillai ruled on 4 February 2008 in a complaint lodged by Elizabeth Penzhorn (the complainant) against Point Broker Services cc (the respondent). Point Broker Services was represented by its member (and broker) Mr Seppo Ranta.
During the hearing it emerged that Penzhorn, early in 2006, had purchased two annuities after a series of meetings with the respondent. The Ombud records that these “contracts were purchased with lump sums of R560 000 in Investo Linked Investment and R188 337 in Investo Designer Annuity respectively.” Penzhorn’s complaint stems from the costs associated with these investments. She alleges that the respondent failed to provide adequate information on the costs during their various meetings, instead indicating that these costs would be ‘nominal’.
A question of inadequate disclosure
The first time that Penzhorn became aware of the full costs on these annuities was when she received the contract documents from Momentum (the product supplier). These costs were R31 920 on the Linked Investment and R5 574.27 on the Designer Annuity. The Investo Linked Investment carried an initial advice fee (or commission) of 5% and a trail fee of 1% while the Investo Designer Annuity carried a 1.5% initial advice fee and 1% trail fee.
These costs form the basis of Penzhorn’s complaint. She felt that the costs levied on these investments were far from ‘nominal’ as she had been informed. The Ombud states early in his determination that “The sole issue to be decided in this case is whether the respondent, as alleged by complainant, failed to disclose costs.”
More care could have been taken
During the hearing, Ranta argued he had shown the complainant various fund fact sheets and that this went far enough by way of explaining costs. The Ombud challenged this assertion, pointing out that costs relating to the investments in question were not contained in these fact sheets. He also asked a number of other probing questions. Why had the broker not provided or referred to the product quotations when asked about fees? And why did the complainant’s signature appear only on the last page of the application form, with no initials on the page (or alongside the section) containing details of how costs were calculated?
The Ombud pointed out that the costs were clearly indicated on the product quotations obtained by the broker – and that he could have used these quotations to disclose costs to the client upfront. These oversights supported the complainant’s version of events i.e. that the broker had indicated fees would be ‘nominal’ – and had then glossed over references to such costs in the advice and application process.
In not properly disclosing fees, the broker violated various aspects of the FAIS Act and the General Code of Conduct for Authorised Financial Services Advisers and their Representatives. One of the main compliance failures stems from Part VI section 7(1)(c)(iii)(bb) of the Code, which provides that: “where the financial product is marketed or positioned as an investment or as having an investment component – separate disclosures of any charges and fees to be levied against the product, including the amount and frequency thereof and, where the specific structure of the product entails other underlying financial products, in such a manner as to enable the client to determine the net investment amount ultimately invested for the benefit of the client.”
‘Excessive’ commission must be refunded
What this case highlights is the danger of using vague responses when answering questions about the fees associated with, and expected performance of investment products. When the claimant asked for more information on the costs of the proposed investments she was told that they would be ‘nominal.’ We checked our trusty Chambers dictionary for an appropriate definition of the word… Nominal, it notes, is “relatively very small.”
On examining the facts, the Ombud determined that the broker had enough information to fully disclose the fees – and that the use of the word ‘nominal’ was inappropriate given that a 5% (the maximum allowable) upfront fee was charged. In his conclusion, Pillai states: “Respondent’s conduct… falls short of compliance in the respects mentioned. This non-compliance resulted in financial loss in that what complainant expected to be nominal costs were in fact the full costs on at least the Investo Linked Investment.”
The Ombud thus ordered the respondent to refund the sum of R22 344 in respect of fees deemed in excess of a ‘nominal’ fee. In other words, 3.5% of the 5% upfront fee on the Investo Linked Investment had to be refunded.
Editor’s thoughts:
This determination provides interesting insight into consumer behaviour. The word ‘nominal’ was enough information for the claimant to sign investment forms to allocate three quarters of a million rand. Yet as soon as the ‘nominal’ amount was quantified as R36k the complainant had second thoughts. Does upfront disclosure of investment fees make it difficult to sell financial investments – and how does this impact on the fee or commission debate? Send your thoughts to [email protected] – or submit them below.
Comments