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Stop churning

14 June 2006 Angelo Coppola

Replacement of policies, advancement of retirement age and investment returns, and the duty of trustees highlighted in the latest PFA ruling.

The background
The complainant joined the Central Retirement Annuity Fund (administered and underwritten by Sanlam) in 1991. In May 2001 the initial policy was replaced and Sanlam carried forward a debit of R8331.53 in respect of outstanding expenses.

On 1 December 2004, after already passing the age of 55, the complainant elected to retire from the fund and receive her retirement benefit. Since the complainant advanced his retirement date by almost 10 years (the original retirement date was 1 May 2013), Sanlam debited her account by R6623.00.

The complainant after contributing approximately R57 000 (R6500.00 was used to provide risk benefits) received a retirement benefit of R 31 991.00. She was unhappy with the value of the retirement benefit and lodged a complaint with the OPFA.

The findings
The adjudicator agreed with the fund and Sanlam that the negative return of R 15 637.00 was as a result of poor performance in the selected off-shore portfolios.

Since the complainant could not demonstrate that the investment decisions of the board were negligent or that inappropriate investment strategies were pursued causing her loss, she was not entitled to any relief on this basis.

The fee
Regarding the fee of R6623 on advancement of retirement age, the adjudicator held that since it was not authorized in the rules of the fund or the policy provisions, the fund or the insurer may not debit such a fee.

The replacement policy
In respect of the replacement policy, the fund contended that no penalty was applied and that the member was placed in the same position as he was prior to the conversion of the older policy.

The adjudicator rejected this contention and held that it was clear from the facts that a debit balance of R 8331.00 was transferred to the new policy and this had the same effect as a premium termination adjustment fee. In addition to this, the complainant incurred further cost to the value of R3934.00 for the capture of new business.

The client
Thus, the adjudicator concluded that the member was in a financially worse position after the replacement of the old policy.

The replacement
The adjudicator stated the practice of replacing existing policies with similar policies is usually motivated by a desire to generate further income for financial intermediaries and is commonly referred to as churning, which practice is to be deprecated.

The intermediary
This tribunal has no jurisdiction over intermediaries concerning the advice they give and this falls within the domain of the FAIS Ombud. Nevertheless, the trustees of the fund, in exercising their fiduciary duties towards members cannot simply turn a blind eye to such practices.

The trustee
Moreover, the trustees of the fund are under a duty to ensure that the terms of the underlying contract taken out in respect of, and for the benefit of a member are adhered to by the other contracting party, namely the underwriting insurer.

The board
In terms of the law, the object of the board of management is to direct, control and oversee the operations of the fund in accordance with the applicable laws and rules of the fund.

The adjudicator concluded that the effective penalty of R8 331.00 was not authorized in the rules of the fund or policy provisions or legislation and therefore it cannot be applied.

The numbers
The adjudicator held that the respondents were not entitled to debit the members account with R8 331.00 and R6 262.00 and the respondents were ordered to recalculate the retirement benefit the member would have received had the aforesaid deductions not been effected and Sanlam was ordered to pay the difference with interest to the complainant.

Editors thoughts
* While the finding is against the underwriter, the role of the trustee was again highlighted.
* One wonders why anyone would want to become a trustee, especially when they are generally unprepared to take on the responsibility, and secondly not in a position to spend time getting to grips with the issues.
* The PFA appears to be forcing the issue of the development of professional trustees.
* The PFA has taken a gentle swipe at those intermediaries that are in the habit of churning. The issue becomes interesting now because it would appear that the PFA blames the broker, although he lays responsibility at the door of the trustee, over whom he has jurisdiction. It follows then that the FAIS ombud should investigate the broker concerned in this particular case?

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