Using plain language to communicate conflicts to clients

Low levels of literacy – and even lower levels of financial literacy – make it difficult to implement sufficient disclosures in the South African financial services environment. It is clear that disclosures have limited effect where low financial literacy prevails.

It is therefore important at the outset to establish the client’s level of knowledge (this topic was covered in FAnews August 2012) as well as including the client’s level of financial literacy. The Code stipulates clearly that advisers must establish a client’s financial product experience and that they should take reasonable steps to ensure that clients understand the advice and are in a position to make informed decisions.

This can be done by ensuring that both presentations and written information provided to clients are in plain language. Plain and simple language eliminates uncertainty and confusion per Section 3 of the Code.

The Code continues in Section 7 stating that financial services providers should provide reasonable and appropriate explanations of the material terms of the relevant contracts or transaction to their clients.

This concept is expanded upon in the Treating Customers Fairly (TCF) regime. To ensure the fair treatment of a consumer both the product provider and financial services provider (FSP) must use language they are likely to understand and avoid the use of technical jargon.

TCF Outcome 3 is even more specific when it states that consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. It also declares that good practice will include the use of jargon free communication that clearly sets out what is being offered.

If we expand our horizons beyond the realm of financial services regulations we encounter similar provisions in the Consumer Protection Act (CPA). The CPA stipulates that the producer of a notice, document or visual representation must produce, provide or display that notice, document or visual representation in plain language!

A communication satisfies the "plain language” requirement – and this is a bit of a mouthful – if it is reasonable to conclude that an ordinary consumer of the class of persons for whom the notice, document or visual representation is intended, with average literacy skills and minimal experience as a consumer of the relevant goods or services, could be expected to understand the content, significance and importance of the document or visual representation without undue effort.

Over the past few years the FAIS Ombud has made a number of determinations where disclosures made and information given to the client at point of sale were not in plain language, as prescribed in the Code. Even the Pension Fund Adjudicator determined in cases that benefit statements are not prepared in a way that makes it easy (if even possible in some instances) for the average pension member to understand.

The failure to disclose and provide information in plain language is therefore a serious compliance risk for FSPs. What should financial intermediaries do to avoid stumbling on the simple language provisions?

One lesson is that you cannot tick the compliance box by simply adjusting your processes to reflect previous determinations on disclosures. Instead you must focus on how the disclosure is made – and more specifically – whether plain language was used.

Over and above that the average person must understand the disclosure made to them given their unique level of financial literacy. The bottom line is that there is no value in your advice and disclosures if it is not clearly communicated to and understood by your clients.