Good communication is at the heart of financial advice. If you sign up for a product or make changes to an existing product, the adviser or representative you deal with must make you aware of all the terms and conditions of the agreement and disclose all costs, so that you fully understand what you are committing to.
This must be detailed in the record of advice, which advisers are legally bound to maintain and which may serve as evidence in a dispute.
Making you aware of a product’s terms and conditions involves more than handing or emailing you a fact sheet or policy schedule.
In the case of investment products, you must be told about, among other things:
• All costs, including any upfront and ongoing commissions to the adviser;
• The contractual term of the product, if there is one; and
• Any penalties you will incur if you stop contributing or exit the product before the contractual term has expired.
In the case of insurance products you must be told about, among other things:
• Exclusions – conditions under which you are not covered; and
• The consequences of non-disclosure – withholding information from the insurer that would affect its risk assessment and pricing.
The Ombud for Financial Services Providers, widely known as the Fais Ombud (after the Financial Advice and Intermediary Services, or Fais, Act) offers recourse for consumers against advisers and providers who deviate from the Act’s code of conduct or take shortcuts in order to make a sale.
The recently released Fais Ombud’s annual report for 2022/23 contains case studies in which the ombud intervened on behalf of a complainant to reach a settlement with the financial services provider.
Case study 1
In March 2017, Ms A, who was 50 years old at the time, was advised to transfer her funds in a paid-up retirement annuity (RA) into an RA offered by Company X for a fixed term of five years. This was accomplished through a transfer in accordance with the Pension Funds Act.
Five years later, in 2022, Ms A approached Company X to withdraw the funds. She was informed that the policy had been implemented for a period of 15 years and should she withdraw the money before the maturity date, penalties of roughly R47 000 would be imposed.
Ms A complained to the ombud’s office, which noted that the investment period of 15 years did not appear to be appropriate for her requirements at the time.
Company X was asked to provide reasons why the period of 15 years was recommended as appropriate for her circumstances. The company was also asked to provide evidence that Ms A had been informed of the consequences of a 15-year term.
The company undertook to resolve the matter with Ms A, which it did. An amount of R107 718 invested in the RA had increased in value to R138 279, and this was paid in full to Ms A.
Case study 2
In 2012, Ms B applied for an endowment policy with Company Y, which commenced in January 2013 for a period of 10 years. In 2019, Ms B requested to increase her monthly premiums on the policy. However, when she sought to access her investment in 2022, the year it was supposed to have matured, she was told that the policy had entered a new five-year restriction period, and the funds would now be available only in December 2024. This was because the premiums had increased by more than 20%.
Ms B complained to the ombud, saying she had not been made aware of the consequences of increasing her premium.
The ombud’s office asked Company Y to provide evidence that it had followed the code of conduct in making Ms B aware of the extended term.
In response, Company Y amended the restriction end date and allowed the withdrawal.
Case study 3
Mr C insured his Toyota Fortuner in September 2021. In April 2022, the vehicle was stolen, and he filed a claim under his short-term insurance policy. The insurer rejected the claim on the basis that Mr C had not complied with the minimum security requirements in the policy, which included that the vehicle be fitted with a tracking device.
Mr C claimed that he had never been informed of the security requirements for his vehicle or that non-compliance would result in the loss of cover.
It turned out that the tracking-device requirement had been instituted only after Mr C had taken out the policy. The insurer said it had submitted a revised policy schedule containing the new requirement to Mr C via return email in September 2021.
While admitting that the new security requirements had not been highlighted, the insurer was of the view that the policy schedule and wording sent to Mr C’s email address were sufficient to ensure that he was aware of the requirement for a tracking device.
The ombud’s office disagreed. It said the insurer had not taken reasonable and diligent steps to alert Mr C to the tracking device requirements.
“Merely sending the policy wording to a layperson and expecting that person to appreciate the implications of any material terms does not constitute compliance with the Fais Code of Conduct, especially if those material terms had not even been raised by the provider during its interactions prior to the conclusion of the transaction. The ability to make an informed decision can only be made prior to the conclusion of the transaction and can never be made afterwards,” the office said.
It recommended that the insurer resolve the matter with Mr C. The insurer paid out a sum of R644 000, which Mr C accepted.