An insurance broker is faced with many challenges when dealing with endowment policies. Attractive commissions and significant differences in surrender versus resale values mean that plenty of opportunities exist to generate profit at an endowment holder's expense. A major concern is that brokers do not always explore the resale option before advising their clients to surrender policies.
Recent legislation leaves little doubt as to the best practice approach a broker should take when advising on endowments. Gerry Anderson, Deputy Registrar Financial Services Providers at the Financial Services Board offers the following: "In terms of the principal of best advice, there would be an expectation on the advisor, intermediary or broker to inform his or her client what would be the best value under the particular circumstances, i.e. surrender or resale."
The best advice requirement applies to any financial services provider when dealing with the disposal of an endowment and creates an interesting debate where banks are concerned. As South Africa's major lenders, the banks inevitably require that customers provide surety for mortgages and other loans. And the surety supplied by customers often includes endowments and other insurance products.
An unexpected bonus for credit consumers
Unfortunately banks have not always had the best interests of their debtors at heart where cession of policies as security is concerned. A quick look at the Ombudsman for Banking Services annual reports reveal that issues around surety regularly feature in their case list and are often decided in favour of the complainant.
We can identify two major concerns with the bank's handling of suretyship. The first is mentioned in the Ombudsman for Banking Services 2006 Annual Report and deals with the extent and treatment of surety. "It has long been a lament of the scheme that the banks unnecessarily call for universal (unlimited) suretyships, instead of limiting the suretyship to the amount of the loan required. The danger of this is that the bank may claim from the surety (the person who stands as guarantor for the debt or obligations of another) debts of any size and entirely different from those to which the suretyship was originally attached."
We have heard numerous horror stories about the impact of such unlimited surety The good news is that the National Credit Act will put a stop to this practice. "The NCA will change this as it accords credit guarantors the same status and protection as it does credit consumers (debtors/borrowers)."
The second major issue involves banks taking security cessions on insurance policies. When bank clients default the banks exercise their rights on the securities they hold. The result is that banks tend to surrender the policies by default, without consulting the client or making any attempt to determine whether a better financial outcome would be achieved by reselling the policy.
Exercise due care before simply surrendering a policy
One of FAnews Onlines readers put the following question to Anderson. "Banks currently just surrender the policies they hold [as surety]. Are they not unfairly prejudicing their client by surrendering and not selling, where potentially a great deal more value could be released? What are the rules regarding how the banks should act in these instances and would a client have a claim should a policy be surrendered for less than it could have been sold for?"
Anderson responded: "As with regards to your question about security cessions to banks, I wish to briefly state that a client would have a valid complaint to either the banking ombudsman or the FAIS Ombud should a bank surrender his or her policy for less than it could have been sold for..."
The banks are thus obliged to act in the best interest of their clients and should they fail to do so clients have recourse to the various industry regulators and the courts.
Legal precedent already established
In support of this view, Anderson mentions a case from the Eastern Cape division of the High Court, Colleen Estelle Poultney versus Absa Insurance Brokers (Pty) Ltd. Mrs Poultney ceded a whole life reversionary bonus policy with Old Mutual to ABSA Bank. In May 1997 it was mutually agreed that the policy would be sold. The bank's broker sold the policy to a policy trader for a little more than its surrender value of R463, 000. Within a month, the policy was resold two times the second time for more than a million rand...
Mrs Poultney's view was that the difference between the amount she was paid originally and the final purchase price of just more than a million rand was her money and issued summons against ABSA Brokers for damages due to bad advice, alleging that the bank broker failed her in its duty of care. On 29 May 2002 Justice Frank Kroon, sitting in the Grahamstown High Court, found that ABSA Brokers were indeed liable and instructed them to pay Mrs Poultney some R560, 000.
As an aside, reversionary bonus policies are highly sought after because they include terminal bonuses which are only paid out when the final policy payout is made. This amount is often significant and should be factored in when determining a resale value on such policy.
The legal precedent discussed here was set prior to the FAIS Act and other related regulatory interventions. Banks and brokers should thus take note of the implications before summarily surrendering insurance policies ceded to them.
Editor's thoughts:
The market for second hand endowment policies is open to numerous abuses. This article does not explore the numerous pitfalls that lie in wait for the unwary policyholder who enters this market. Should brokers be advising (and assisting) their clients to resell endowment policies, or is it safer to simply accept the surrender value from the life insurance company? Send your comments to gareth@fanews.co.za
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