Non-Disclosure What is the broker’s responsibility?

There is strong evidence that many brokers in the financial services industry still do not comply with the FAIS Act, especially the minimum disclosure requirements imposed by the General Code of Conduct.

The FAIS Act sets minimum standards for all brokers offering financial products, which includes short and long term insurance policies, health service benefits, pension fund benefits and investments.

Minimum disclosures

The General Code of Conduct requires brokers to make certain minimum disclosures to clients at the initial contact stage. These initial disclosures include:
(i) concise details of the broker’s legal and contractual status.
(ii) details of product suppliers and the broker’s contractual relationships with these product suppliers.
(iii) if applicable, details of any substantial financial interest a broker might have in any product supplier.
(iv) if applicable, details of the broker having received more than 30% of total remuneration from a specific product supplier during the preceding 12 month period.
(v) details of the broker’s licensed product categories for which it is authorised to render financial services.
(vi) details of whether the broker holds guarantees or professional indemnity or fidelity insurance cover or not.

This information about a broker’s relationship with product suppliers gives clients an idea of the range of financial products the broker has access to and any potential bias to any specific product supplier.

Product disclosures

Probably the most important disclosure requirements are imposed by Section 7 of the General Code of Conduct, i.e. disclosures around information of the financial service and financial products offered by the brokers. These product disclosures include:
(i) explanation of the nature and material terms of the relevant contract.
(ii) name, class or type of financial product concerned.
(iii) nature and extend of benefits to be provided.
(iv) if applicable, details of rebate and platform fee arrangements.
(v) anticipated or contractual escalations and increases.
(vi) nature and extend and frequency of any incentives, remuneration, consideration, commission, fees.
(vii) concise details of any special terms or conditions, exclusions, waiting periods, penalties, excesses, restrictions.
(viii) material tax considerations.
(ix) if applicable, procedures for the exercise of cooling off rights.

Product statement

A broker who is rendering ongoing financial services to the client in respect of one or more financial products, must at least once a year provide the client with a written product statement highlighting (i) any ongoing monetary obligations of the client in respect of the product(s) (ii) the main benefits provided by the product(s) (iii) in cases of investments, the value and accessibility of the investment(s) and (vi) any ongoing incentives, commission, fees.

Keeping it simple

It is often difficult for brokers to strike the right balance between providing all the required information to clients and complying with the requirement to present this information in a clear, concise and effective manner. This effectively means that extraneous information should not be given to clients if it results in the required disclosures not being clear, concise and effective.

The required information should be presented to clients in as brief a manner as reasonably possible, without compromising its accuracy. Legal and technical jargon should at all times be avoided, especially where advice is provided to ‘unsophisticated’ clients.

Complying with the FAIS Act, specifically the disclosure requirements imposed by the General Code of Conduct, is non-negotiable for all brokers. No broker wants to be faced with an almost certain unfavourable FAIS Ombud ruling and the reputational risks that comes with such a ruling for non-compliance with the disclosure requirements.