Avoid the trao of non-disclosure and misrepresentation
01 October 2013 | Magazine Archives FAnews & FAnuus | Life | Lizl Budhram, Old Mutual
The recent history of Ombudsman judgements clearly indicates that non-disclosure, or misrepresentation, allegations have been the downfall of many financial planners. What does this mean for diligent financial planners? What steps can they take during the advice process to avoid any potential future problems? To answer this question, it is important to firstly distinguish between two very different kinds of misrepresentation.
The first kind is where there has actually been willful or negligent misrepresentation by the financial planner. This is the case where a planner deliberately chooses not to disclose relevant information to a client, usually to protect or advance his or her own interest at the cost of the client’s interest.
This can also occur where the planner negligently omits to disclose relevant information or provides inaccurate information to the client, usually as a result of insufficient product or technical knowledge. In such cases the solutions are rather obvious:
• planners need to operate in integrity to avoid willful misrepresentation or
• knowledge and planning ability need improvement to avoid negligent misrepresentation.
Careful planning needed
The second kind is where a planner did act in a client’s best interest and had all the necessary knowledge and skill to provide advice and an appropriate financial plan, but is unable to provide evidence of this when confronted by allegations of misrepresentation in the future. The most important protection a planner can have against such allegations is a concise, yet comprehensive Client Advice Record or CAR document.
All diligent planners today are aware of the duty created in terms of the Financial Advisory and Intermediary Services (FAIS) Act’s Code of Conduct to keep record of advice provided.
Paragraph 9 of the Code of Conduct imposes the following duties on a financial planner:
"…which record, must reflect the basis on which the advice was given, and in particular a brief summary of the information and material on which the advice was based; the financial products which were considered; and the financial product or products recommended with an explanation of why the product or products selected, is or are likely to satisfy the client's identified needs."
Provided that such record of advice is only required to be maintained where, to the knowledge of the provider, a transaction or contract in respect of a financial product is concluded by or on behalf of the client as a result of the advice furnished to the client.
Different types of protection
A CAR document that merely ensures adherence to these legislative requirements is very different from a CAR document which will afford adequate protection against potential future misrepresentation allegations.
It is highly advisable for planners to view the CAR document as an evidentiary document, which will protect them against any unfounded allegations of misrepresentation or non-disclosure, instead of a document aimed at just adhering to the requirements of the FAIS Act and its Code of Conduct.
This means that the use of the CAR document should most definitely not be limited to cases where a transaction is concluded with the client, but should be compiled in all cases where advice is dispensed to the client, regardless of the outcome of the advice.
While it is not practical to record each conversation with a client in its entirety, it is vital for the planner to summarise and record the gist of the conversation, and the critical advice elements provided.
Many planners have had findings filed against them, simply because their CAR documents did not explicitly reflect an important element of the advice, which was actually provided to clients. A planner would do well to identify high risk advice areas and to ensure that adequate details are included in the record to avoid predictable pitfalls. This way the CAR document can become the ally of the diligent financial planner, instead of a mere exercise in compliance.
