Going beyond the call of duty
The Battle of Trafalgar was a defining encounter during the Napoleonic Wars. England won the battle after being inspired by a message by Admiral Horatio Nelson, in which the British sailors were told that England expects them to do their duty. At the end of the battle, it transpired that this message actually inspired the sailors to go beyond their normal duty in order to win the battle.
How does this relate to the role of the adviser? Basic financial literacy is severely lacking in the country with the majority of the population not having any knowledge of the workings of the financial services industry. The Office of the Financial Advisory and Intermediary Services (FAIS) Ombudsman (Ombud) has urged advisers to go beyond the provisions set out in the FAIS Act when discussing possible investments.
Do not ignore the red lights
It is human nature to be cautious when engaging in certain activities or making key decisions regarding the future. If a certain clause in a contract is raised to the attention of your client, it may dissuade them from entering into the contract. These are the material terms relating to the investment.
It is necessary to highlight these terms as doing so is governed in the FAIS Act. It is also reinforced by the outcomes of Treating Customers Fairly (TCF). In its latest newsletter, the Ombud points out that it is imperative that advisers highlight every aspect of the product they are trying to sell to clients as it may interfere with their goals, plans or needs.
However, there is also a certain level of responsibility that rests with the client. The client is required to ask the adviser to explain every aspect of the product and to re-explain it if he or she is unsure.
The slippery slope of misunderstanding
The issue of not understanding the material terms relating to an investment was at the heart of a recent complaint the Ombud had to handle. The complainant sought advice from the respondents on how best he could invest his money given a need to access his investment on short notice. He was offered an endowment, a product that comes with several restrictions and severe penalties in the event of breach of the material terms of the contract.
After having made two withdrawals from his investment, the complainant decided to increase his monthly contributions in order to make up for the withdrawals.
When he sought access to the investment on a third occasion, he was told that further access would not be possible due to his increased monthly premiums.
According to the complainant, the respondent had failed to explain to him that by increasing his monthly contributions by more than 20%, a new restriction period of five years would begin immediately after the increased premium where the increase exceeds 20%. This is known as the 20% rule and all endowment products are subject to this rule in terms of Section 54 of the Long-Term Insurance Act.
The Ombud pointed out that the 20% rule is material because it bears limitations on the policy owner. This should have been disclosed to the complainant at the time the financial service was rendered. Failure by the respondent to provide documents demonstrating that he had informed the complainant of the 20% rule, the effect that it would have on his finances and the reasons why an endowment policy was suitable for the complainant resulted in the matter being decided in favour of the complainant. The respondent made an offer to resolve the matter, which was accepted by the complainant.
In the adviser’s defence, there may have been no indication at the time of selling the product to the complainant that he would have wanted to increase his contributions to the product beyond 20%. However, even if this was the case, the adviser still had the duty of explaining this situation to the complainant.
A case for RDR
One of the big issues in the industry is that there is significant confusion when it comes to fees. Some advisers are not clear on the fee structure that they are using when providing advice.
This was the case with a recent complaint brought before the Ombud. The complainant was dissatisfied with the commission of R11 129.73 charged by the respondent, on the transfer of proceeds from the Government Employees Pension Fund (GEPF) to a Capital Retirement Portfolio.
The Ombud pointed out that the complainant claimed that she did not remember signing any documents agreeing to the commission payable to the adviser.
Upon receipt of the complaint, the respondent advised the Ombud that the representative reduced his commission on the Capital Retirement portfolio to 2.14% instead of the allowable 3% maximum. Furthermore the consideration amount received by the insurer was a total sum of R429 283.85 which was used to purchase a living annuity. In addition to this, the respondent highlighted that the adviser took 1.71% commission from the said amount.
It was noted by the Office that the complainant’s funds, after being transferred to the financial institution, were not used to purchase a Living Annuity, but were initially placed in a Capital Retirement Portfolio and later removed from this portfolio to purchase a Living Annuity.
This unnecessary transfer of funds from the GEPF to the retirement portfolio, and later to the Living Annuity, cost the consumer unnecessary commission.
There are simply no words to describe these actions. Even if the adviser described the commission structure to the complainant, the fact that the adviser followed a course of action that would knowingly be to the complainants detriment means that profit was most likely the only motivating factor on the adviser’s mind.
Editor’s Thoughts:
While advisers may have always gone beyond the duties outlined in the FAIS Act, it may be important for every adviser to follow this mindset. Doing this builds trust with clients, and a relationship built on trust will prove to be profitable in the future as it will be easier to upsell products to these clients. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Comments
details but have on numerous occasions experienced through interaction that basically there is a lack of expression and understanding
with literacy failing. Believe the F S B should be including this basic type of financial and insurance basic knowledge to the public in general, or particularly to any member of the public who are looking for particular products.
Believe brokers intermediaries and insurers are in a difficult position as it is an education process. Report Abuse