It is often said that many of the requirements in the General Code of Conduct are really meant for investment-type business, but are contorted to apply to short-term and healthcare businesses, particularly in terms of establishing the client’s needs and the products to address those needs.
It is indeed the reality that Section 7 of the Code, which deals with “Information about financial service”, lays down general conditions, followed by specific requirements which are applicable only to investments.
But this does not exempt short-term and healthcare advisors from the general conditions. The solution is to extract the information pertaining to short-term and healthcare businesses, in order to understand the requirement better.
The need for analysis
Section 8 deals with the furnishing of advice.
“8. (1) A provider other than a direct marketer, must, prior to providing a client with advice-
(a) take reasonable steps to seek from the client appropriate and available information regarding the client’s financial situation, financial product experience and objectives to enable the provider to provide the client with appropriate advice;
(b) conduct an analysis, for purposes of the advice, based on the information obtained;
(c) identify the financial product or products that will be appropriate to the client’s risk profile and financial needs, subject to the limitations imposed on the provider under the Act or any contractual arrangement…”
From this it is evident that there are no hard and fast rules in terms of what needs to be done. The three aspects listed under section (a) make it clear that there is no one-size-fits-all solution to financial advice.
The extent to which an analysis will need to be conducted as required in section (b) will obviously be determined with what was gleaned in section (a), the first step of the process. The final step in the advice process - recommending a solution to the client’s identified needs - then becomes a logical conclusion to what happened before.
Formalising the process
Most FSPs will find that they are already doing all of the above – how else would you get to the recommendation stage without at least uncovering the basic needs of the client?
FSPs must now, however, be able to prove that they did not just assume what the client’s needs were, but that they actually followed a process. In order to prove this, an FSP needs to reduce the process to writing and get the client to sign it.
Policy replacements
Directly below this section of the code appears details of the requirements that must be complied with when replacing an existing product.
A recent determination by the Ombud clearly showed that these requirements do not only apply to investment business, and that merely citing price as the reason for the replacement is not acceptable.
“8. (d) 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 compared to those in respect of the terminated 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 compared to those applicable to the terminated product;
(iii) in the case of an insurance product, the impact of age and health changes on the premium payable;
(vi) penalties or unrecovered expenses deductible or payable due to termination of the terminated product;
(viii) vested rights, minimum guaranteed benefits or other guarantees or benefits which will be lost as a result of the replacement; and
(ix) any incentive, remuneration, consideration, commission, fee or brokerages received, directly or indirectly, by the provider on the terminated product and any incentive, remuneration, consideration, commission, fee or brokerages payable, directly or indirectly, to the provider on the replacement product where the provider rendered financial services on both the terminated and replacement product."
(e) take reasonable steps to establish whether the financial product identified is wholly or partially a replacement for an existing financial product of the client and if it is such a replacement, the provider must comply with subparagraph (d)."
The conditions which may only apply to investment type business have not been included in the extract above. Even so, these requirements still place a substantial burden on FSPs to demonstrate to the client why the replacement is to his/her benefit. This becomes even more relevant to healthcare or short-term businesses when an entire book is moved.
Mind shift required
Perhaps a bigger challenge than compliance is the mind shift required to move away from the comfort zone we have become so accustomed to. Ignoring FAIS will not make it go away. As David Shore said: “Only two things you ignore: things that aren't important and things you wish weren't important, and wishing never works.”
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