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Beware of the bulldog

01 February 2009 FAnews

An analysis of recent FAIS Ombud determinations reveals the most common mistakes, and how to avoid these pitfalls.

If you're in the business of selling financial advice, the last place you want to end up in is the principal’s office, as a respondent in a case before the Ombudsman for Financial Services Providers.

Fortunately, it’s quite easy to keep your nose clean. The Financial Advisory & Intermediary Services (FAIS) Act and the accompanying Code of Good Practice clearly define what is expected of individuals and companies in the financial services provider space. If you abide by the regulations and your financial advice meets the ‘fit and proper’ requirement, you’ll have no problems. Let’s face it, apart from the cumbersome licensing requirements, the legislation merely documents the commonsense practices that any self-respecting financial advisor already applies.

Yet so many cases still make it to the FAIS Ombudsman for resolution. To determine why we examined a broad cross-section of determinations (going back to 2004) to identify some of the major sticking points. Before we look at some of the obscure considerations that these cases demand, let’s look at some of the obvious mistakes brokers make.

Documentation
Our first stop is the age-old documentation bugbear. The number of cases reaching the Ombudsman where product applications are partly completed is staggering. Too many financial advisors try to save time by getting their clients to sign blank forms and filling in the details at a later stage. Don’t do this - ever!

Appropriate advice
The second common thread that runs through FAIS Ombudsman determinations is the appropriateness of advice, particularly where product choice is concerned. Too many advisors fail to complete a proper risk assessment with their clients – and they exacerbate this error by not properly communicating the levels of risk inherent in the chosen product. The failure to provide a list of alternative investment options falls into this category too.

Needs analysis
The third theme we identified is a failure to listen to clients’ requirements. In a number of early FAIS Ombudsman determinations the financial consultants ignored their clients’ wishes and steered cash that was needed in the short-term into inappropriate investment products.

Each of the above mistakes can be avoided by ensuring administrative systems are in place and by completing a routine financial needs analysis and assessment with each client. With so many potential stumbling blocks we wonder why financial practices insist on tripping up on the most basic aspects of professional financial advice. There are enough ‘sticky’ areas to avoid, as the following cases prove.

Marketing unauthorised financial services
In the case of L J Esterhuyse vs Gavin Grobler the broker placed an amount of R250 000 with a forex company doing business out of Vereeniging, Fulcrum Forex International. The broker invested Esterhuyse’s funds with a promise of R9 000 per quarter in interest; but Fulcrum went into liquidation soon after the investment was made. The complainant won his case on the grounds of a contravention of FAIS Act regulation 879 of 2003 – which prohibits the "canvassing for and marketing or advertising of unauthorised financial services”.

Grobler made two mistakes. First, he recommended a financial product offered by an unauthorised financial services provider in return for a 3% commission. And second, he gave advice even though he wasn’t authorised to render financial services in forex investments.

Don’t make assumptions
It’s clear you’re going to lose if you contravene a section of the FAIS Act, but there’s more to learn from this case. During his lengthy determination the Ombudsman sent a clear warning to financial advisors to avoid making assumptions about your clients’ knowledge or financial position. For example, you cannot assume that because your client is an accountant he understands the risk in a foreign exchange product, nor can you assume that your client is prepared to lose R500 000 of risk capital just because he reveals that his net worth is R10 million. You have to ask the appropriate questions and inform every individual of the inherent risk in each product you recommend.

Unauthorised administrators
Another ‘mistake’ that financial services providers make is to rely on unauthorised individuals to handle aspects of administration that actually belong in the financial advice space. In the case of M Van Dorsen vs P A Zervas Brokers CC (trading as Bitline Brokers) the Ombudsman awarded for the complainant because the “key individual and representative of the financial services provider” failed to interact with the client “even at the stage of rendering the intermediary service”. The task was instead delegated to an employee hired to perform duties as a receptionist and administration clerk. It’s also important to avoid ambiguous communications with the client. In this case the client was “given the impression” that he was covered despite cover only vesting once certain documents were supplied.

Good administration
If you pay close attention to your clients’ correspondence you’ll avoid the difficulties outlined in the case of JJ Grove versus National Insurance Co-ordinators CC. In this case the insured sent two letters advising the insurance broker to add his son as a nominated driver to his short-term insurance policy. The Ombudsman wouldn’t have had to dedicate column inches to a discussion on the implications of the motor insurance terms ‘nominated’ versus ‘regular’ if the broker had spent some time on this client correspondence. Don’t just read the letter; but ask what it means in terms of the client and his policy. A simple: “Sir, unfortunately your policy document precludes you from nominating a driver younger than 26 years” would have saved the broker thousands of rand in this case.

The Ombudsman awarded damages to the complainant because the brokerage failed in its duty in relation to Part II clause 3 (IV) of the General Code of Conduct: “To provide information to a client timeously so as to afford the client reasonably sufficient time to make an informed decision about the proposed transaction”.

The case of Anthony Naidoo vs ABSA Brokers (Pty) Ltd is another example of failure due to poor administration. The Ombudsman determined that the respondent failed in his duty to the client by not adjusting the motor vehicle value on a short-term insurance policy on an annual basis. Although many argue that the short-term insurer is in a better position to make this annual policy change, the broker must ensure his clients’ best interests are served. That requires a frequent review of the policy along with any steps to ensure the policy premiums are kept as low as possible.

If you’ve taken the time to put efficient systems and administrative processes in place, we doubt you’ll ever have to answer a FAIS Ombudsman complaint. But if, despite your best efforts, you receive a request from the Ombudsman to respond to a complaint, prepare adequately. Many of the respondents in previous determinations were taken to task for poorly prepared ‘defences’. The more information and correspondence you provide to support your case, the better your chance of a successful hearing.

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