Moonstone: Switching in the Short-term industry

There are very specific requirements in the FAIS Act which needs to be complied with when a client’s policy is switched, and the truth of this was discovered when a brokerage switched their entire book from one underwriter to another.

When the client bought her car, insurance was arranged with Hamford (Pty) Ltd via the dealership with a brokerage on 26 November 2007.

In February 2008 she received an SMS from Hamford that her policy had been cancelled effective from the end of that month. She duly arranged cover with another insurer on her own.

Nine months later she discovered that unbeknown to her a debit order in favour of Niche Insurance had been in operation on her bank account all the while in addition to the one she had arranged herself.

In its response to the allegations the brokerage intimated that it had informed the client that it was switching insurers as it was not satisfied with the service from Hamford. The switch was effected on the strength of a mandate signed by the client.

From the Ombud’s investigation the following became apparent:

The documentation signed and completed by the client on the day of purchase was faxed to the dealer where she had bought the car. The advisor was not present and had in fact pre-signed it before faxing it to the dealer.

A detailed discussion of the documentation makes it very clear that while on paper a case could be made out for the existence of most of the required paperwork, the fact of the matter is that none of the prescribed steps required to assist the client in making an informed decision were taken.

One example of this is the cost comparison with another insurer. No other details, other than cost, were provided to enable the client to compare like with like. In the case of another document, the client mandate and letter of engagement, she was apparently asked to sign the document by the salesperson with no explanation whatsoever. The letter of introduction to the FSP was also part of the faxed documentation.

In fact, it appears from the determination that the client did not even know who the broker was, hence her inability to contact the broker when she received the SMS stating that the policy was cancelled.

The relevant section of the General Code of Conduct defines the duties and disclosures in the case of a replacement as follows:

“…where the financial product (“the replacement product”) is to replace an existing financial product wholly or partially (“the terminated product”) held by the client, fully disclose to the client the actual and potential financial implications, costs and consequences of such a replacement, including, where applicable, full details of-
(i) fees and charges in respect of the replacement product;
(ii) special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided, which may be applicable to the replacement product;”

A very important point raised by the Ombud concerns the signed mandate given by the client. While it does allow for certain actions to be taken, it may not happen without proper consultation with the client, outlining the details listed above and consequences of such changes, and written conformation of such consultation.

In this case, the premium was increased from R391.30 to R600, and there is not sufficient proof that the client was informed.

With the prevalence of policy replacements in the short-term industry our advice is that you read the determination and check your own systems and procedures against the findings of the Ombud.

Please click here to read the full Ombud determination.