Harness the legislation!

30 August 2007 SAFSIA (South Africa Financial Services Intermedia

A ruling by the Ombudsman late last year in favour of a financial services provider should snag the attention of everyone in the industry. It is a perfect example of how FAIS can work for you and should provide strong encouragement to all intermediaries to embrace it and implement its provisions.

Anton Swanepoel, lecturer and author, who has been in the industry for almost two decades and consults to SAFSIA has conducted exhaustive studies of the Act to see how it can be implemented practically to the benefit of both client and intermediary. The combination of extensive legal expertise and his practical experience enables him to make dynamic contributions to the industry.

"The law of contract makes it clear that when there is agreement between two parties on essential terms, there is a contract," he explained. "To date, we as an industry have never really defined what the essential terms are and have settled for generally vague verbal agreements based on simple quotations. Four problems immediately arise. People forget terms - especially providers with dozens or even hundreds of clients. Clients in turn agree to financial transactions without fully understanding them. In addition, people get emotional about money issues, which further clouds the situation. Finally, when it suits them, people resort to selective memory. These matters, together with the lack of a written contract and summary providing the basis upon which advice was given, have caused considerable damage in the past, contributing to the rather bad odour of the industry's reputation."

Swanepoel has developed a contract for use by financial providers and clients. This document complies with FAIS requirements, defines the essential terms integral to such an agreement and protects both parties. Endorsed by Mervyn King in the foreword to Swanepoel's book on FAIS compliance, the contract embraces five crucial aspects which both intermediaries and clients must sign as having been discussed, understood and accepted.

"In making any purchase, whether a car, house or investment, the first matter to consider is the objective. This must be clearly defined in the contract, not just implied as is generally the case in quotations. Then the key features and benefits of the product must be identified. While we have generally excelled at extolling the advantages of the product, we have been quite remiss in explaining the terms, conditions and exclusions. It is vital that these be included and clearly explained. When a client signs the contract, he will be acknowledging that he understands the implications and ramifications of his decision - we can prove this only if this step is documented. Intermediaries should also include their service model in the contract. Too many intermediaries have in the past over-promised and under-delivered. When your signature is on such a document, you will have a strong incentive to service your clients properly. Finally, remuneration must be totally disclosed."

A contract on this five-point basis will ensure that clients receive the relevant and material information an intermediary is required by FAIS to provide. The contract represents a summary outlining the basis on which the advice was provided.
This means that, should complaints be brought to the Ombudsman, advisers can enjoy the full protection of the law. "In fact, FAIS provides intermediaries with every opportunity to play on a level playing field," Swanepoel stressed.

The recent Ombudsman's ruling was based on the comprehensive and relevant paperwork the adviser provided, proving that he had complied with the law and that the client was in fact, in the wrong.

"We have had ample time since the law was first promulgated in 2002," Swanepoel pointed out. "It appears difficult for some to accept the paradigm shift but it is vital for the future of the industry. Dr Franso van Zyl of FSB stated that the law of contract fundamentally underlies all services rendered under FAIS and accounts for the final accountability factor. We must pay attention to this significant comment."

Swanepoel believes strongly that insisting on entering into a contract will enhance the integrity of and promote the financial services industry, provide the evidence and information the Ombudsman requires, strengthen the FSB and sharpen the professionalism of intermediaries themselves.

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