The Financial Services Board (FSB) is reviewing the practice of financial services companies paying establishment and restraint fees to attract agents to sell its products, Caroline da Silva, the deputy registrar at the Financial Services Board for Financial Advisory and Intermediary Services (FAIS), says.
This practice recently led Old Mutual to sequestrate two financial advisers whose advice allegedly caused their clients to suffer large losses. The clients, Old Mutual and any other creditors will now share in the proceeds of the advisers’ sequestrated estates.
Old Mutual imposed large penalties on the clients’ investments and has refused to reverse these, because the advisers were not its agents when they sold the policies.
The penalties were imposed when the investors made withdrawals from the investments, terminated them, or stopped or reduced their contributions during the contract period.
One investor, a pensioner, complained to the Ombud for Financial Services Providers, who last month ruled that the adviser, Alwyn Smit, must pay back R211 000 the pensioner lost as a result of Smit’s advice. In 2008 Smit advised the pensioner to terminate three policies and take out a new policy with high annual increases that he subsequently could not afford.
Personal Finance recently reported that the other adviser, James Stern, faces a claim of millions of rands in the Port Elizabeth High Court. The claim has been lodged against Stern, his co-director and his brokerage, Quantum Investments, by the Charles Stretch Family Trust and James Pearce.
Old Mutual imposed penalties of R32 million on eight contracts that Stern sold to them in 2007.
The trust and Pearce’s High Court claim alleges that Stern falsified the policy application forms using copies of their signatures on other documents.
The trust and Pearce want Old Mutual to reverse the penalties and return their investments worth over R100 million. They have lodged an alternative claim against Old Mutual arguing that Old Mutual has a duty to treat its customers fairly.
Old Mutual has confirmed that it will defend the claim, but declined to comment further on the grounds that the matter is sub judice.
The FSB has appointed an inspection under the Inspection of Institutions Act into how Old Mutual dealt with the Stretch trust and Pearce, as well as into penalties Sanlam imposed on policies sold by Stern, Da Silva has confirmed.
The inspection is taking place in light of the Treating Customers Fairly principles that the regulator has adopted, and it extends to the nature of the Old Mutual investment contracts entered into with the Stretch family trust and Pearce.
Although Smit and Stern gave the advice that has led to the claims against them while they were independent advisers, they were both subsequently employed as agents by Old Mutual.
While Smit and Stern were agents of Old Mutual, the company found they were unfit to be advisers, had them debarred and took action to recover the fees it paid them to set themselves up as its agents. When they were unable to pay, Old Mutual sequestrated them.
Advisers who are debarred under the FAIS Act can no longer practice as advisers and are therefore unable to fulfil contracts to be agents.
Old Mutual says the sequestration of the advisers is “the best outcome for all the creditors”.
Court papers for the sequestration of Stern reveal that Old Mutual paid R1.7 million as an establishment and restraint fee to Stern when he was appointed as an agent in November 2012.
Lee Nakan, the executive general manager at Old Mutual’s Broker Division, says its mandated agents distribute Old Mutual and other approved products. Unlike an employed agent, a mandated agent sets up his or her own office and is paid establishment fees to do so. The fee compensates agents for giving up their independent brokerage and the contracts they had with various financial services companies.
The restraint fee is to ensure that an agent remains an Old Mutual representative for a certain period, Nakan says.
If an agent fails to see out his or her contractual term, Old Mutual will claim back the fees.
Nakan says that before Old Mutual appoints a mandated agent, it checks the adviser’s criminal record, credit record and registration under FAIS. Then it checks the lapse and surrender ratios of the policies the adviser has written for clients.
In the case of both Smit and Stern, there was no indication of any problems, he says.
Old Mutual is looking into the matter and will compensate clients who were given bad advice by both Stern and Smit while they were its mandated agents, Nakan says.
However, Old Mutual does not regard itself as liable for advice given by independent advisers who sell its products, he says, and the company is unable to check the advice given by these advisers, because it is not privy to the investors’ needs and circumstances.
Kobus Vlok, the chief executive of SPF Distribution at Sanlam, says Stern was never a Sanlam agent but placed business with Sanlam through Quantum.
He says Sanlam has investigated the Sanlam products sold to other clients by Quantum and found no similarities with the Stretch trust and Pearce transactions.
Stern’s wife, Tara, was employed as a broker consultant at Sanlam, but she left Sanlam’s employ in March 2012, and Sanlam’s investigation found that she was not implicated in the Stern matter, Vlok says.
Nedbank compensation
Nedbank says it has compensated all its clients who were affected by bad advice given by a financial adviser who was in its employ.
Its investigations into the advisers’ actions led to him being dismissed and a criminal case that went to court in Cape Town this week.
The Cape Times reported this week that Andrew Charles van Reenen is charged with stealing more than R1.47 million from four clients over three years from 2010.
Four clients who invested on Van Reenen’s advice were then advised to disinvest, and Van Reenen transferred the money into his own accounts.
The employer of an agent may be held liable for the agent’s actions if you did not know that the agent was acting in his or her personal capacity when the agent advised you. This principle has been established by the courts and the Ombud for Financial Services Providers.
But you will not be able to recover your money from a financial services company if, at the time the advice was given, you knew that the representative was on “a frolic of his own”, and that his or her dealings with you were outside the course and scope of his employment contract with the company.
If your financial adviser is independent, your claim will have to be against the adviser and his or her company. You can complain to the ombud (for losses up to R800 000) or lodge a claim in court.
Independent adviser or tied agent?
In future, financial advisers are likely to have to tell you if they are independent (have no supplier allegiance), are multi-tied agents (representing a small range of product providers) or are tied agents (representing one product provider).
The Financial Services Board (FSB) is reviewing how financial products are distributed to consumers and how advisers are remunerated for distributing these products. This “retail distribution review” is expected to include a proposal that advisers classify themselves as one of these three types of adviser.
As it is, in terms of the code of conduct under the Financial Advisory and Intermediary Services (FAIS) Act, advisers are expected to inform you of the nature of their contractual relationships with the providers of financial products.
They must also tell you whether, during the preceding 12 months, they received more than 30 percent of their total remuneration, including commission, from a single product supplier.
But Caroline da Silva, the deputy registrar at the FSB for FAIS, says the existing disclosure requirements are not enough to ensure that you know when an adviser is an agent or independent.
The FSB’s retail distribution review will propose that advisers are forced to disclose whether they are tied agents, multi-tied agents or independents.
The FSB is also considering whether a tied agent should be allowed to sell a limited number of another product supplier’s products.
Finding a good financial adviser
A financial adviser who has the Certified Financial Planner accreditation has a top-level qualification and belongs to the Financial Planning Institute (FPI). The FPI has a code of ethics and a disciplinary process for planners who contravene the code. To find an accredited adviser, use the search function at www.fpi.co.za