Why the Fais Ombud finds against financial advisors

Five sections in the Financial Advisory and Intermediary Services (Fais) Act’s Code of Conduct were instrumental in 95% to 99% of determinations against financial services providers (FSPs) by the Fais Ombud, an industry expert has warned.

Speaking at The Financial Intermediaries Association of Southern Africa’s (FIA’s) Broker Power Session, Anton Swanepoel, director and chair of FIA’s Financial Planning Exco, said more than ten years after the Fais Act was implemented it seemed “ridiculous” to ask whether businesses were “Fais fit”, but Ombud decisions confirmed that the industry had not learned all its lessons.

Swanepoel warned that while it required hundreds if not thousands of meetings and clients to build a successful business, one complaint had the potential to ruin a business.

“If that is true – that one client, one complaint can ruin 20 years of hard work – should we not pay more attention to the risk side of our business?”

Although the first Fais Ombud, Charles Pillai, warned years ago that poor recordkeeping was at the centre of determinations against FSPs, it is still the case. More than ten years ago, Pillai indicated that cases were won or lost based on facts. If FSPs gave the Ombud’s office the right evidence, chances were slim that it would find against them, Swanepoel said.

“I question whether our industry is actually keeping accurate records of these transactions as required by Fais,” Swanepoel added.

He said the former deputy Ombud David Davidson previously echoed these sentiments at an insurance conference at Sun City where he gave FSPs going through the complaints process a mark of 3/10 for the quality of their recordkeeping.

“This is a message loud and clear. We still, as an industry, fall short when it comes to quality recordkeeping.”

Swanepoel stressed that a record of advice was an essential part of a “Fais fit” practice. Highlighting the product suppliers the business was associated with was a “good-to-have” on the disclosure notice while a colourful website and brochure for marketing purposes were “nice-to-haves”.

“We must differentiate between essential records to present to the Ombud, the good-to-haves and the nice-to-haves.”

The five sections tripping up FSPs

Section 2 of the Code of Conduct requires FSPs to render services honestly, fairly, with skill, care and diligence in the interests of clients.

This was a catch-all phrase, Swanepoel said.

In more than 80% of determinations against FSPs the Ombud alleged that the FSP did not demonstrate that he or she acted in the interest of clients – with care, skill and diligence while treating customers fairly.

Section 3, which dealt with communication with clients, required FSPs to ensure that information sent to clients was factually correct and sufficient to help them make an informed decision.

Section 8, which required FSPs to do a suitability analysis, was effectively a no-brainer, Swanepoel said. It makes perfect sense for clients to expect that their advisors obtain all the relevant information to ensure that products meet their needs.

Section 7 covered the disclosures necessary to help clients make an informed decision. Amongst others, it required FSPs to inform clients what their premiums were, what the terms and conditions entailed, what exclusions were applicable and if any waiting periods were in place (to name a few).

“If you were the client, that is the information you would need in order to make an informed decision.”

Swanepoel said if a client ever approached the Fais Ombud with a complaint, the Ombud would send a standard letter to the FSP and ask the FSP for his or her disclosure document. In such instances, the Ombud wants to see how the FSP presented himself to the client, and on what information the advice was based – how the product that was recommended matched the needs of the client and how the terms, conditions, exclusions, tax implications and risks were conveyed.

Section 9 dealt with the record of advice.

Swanepoel said the record of advice covered three areas. The first was the information the advice was based on.

“What were the needs of the client – a brief summary.”

Secondly, which insurers or investment products the FSP considered and from which product suppliers. The options that were presented to the client had to be disclosed. Lastly, the FSP would also have to explain why he or she recommended the product.

Swanepoel said considering the thousands of financial products available to choose from, there had to be a reason why a FSP chose a particular product.

“To this day when I’m confronted with complaints, I battle to see that the industry is actually keeping accurate records of those transactions.”

He urged FSPs to reconsider the quality of their recordkeeping.

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