Financial advisers and brokers who sell short-term insurance policies are still providing the worst advice to consumers.

This is according to the breakdown of complaints to the Ombud for Financial Services Providers, Noluntu Bam, between April 2016 and March 2017, as detailed in the ombud’s annual report for 2016/7, which was released yesterday. 

Bam is more widely known as the FAIS Ombud, as her office deals with transgressions of the Financial Advisory and Intermediary Services Act (FAIS), which applies to financial advisers.

Of the 7 971 complaints the ombud’s office received that were FAIS-related (2 875 of the 10 846 complaints were not FAIS-related), 3 215, or about 40%, concerned short-term insurance policies. Another 2 841 (about 36% of FAIS-related complaints) were in connection with long-term insurance policies, and 1 396 (about 18%) concerned investments.


Bam says in her report: “Despite the importance that short-term insurance plays in an individual’s financial planning, financial services providers who operate in the short-term insurance space still violate provisions of the FAIS Act and the [accompanying code of conduct].” Bam says they do this by trying to obtain the lowest insurance premiums for their clients, without considering the implications for the client, “who might only in the event of a claim find out what the true cost of the lower premium is”. 

She says this true cost “could include a reduction or exclusion in the cover provided or the numerous additional excesses payable”.

The main concern with advice on short-term insurance, Bam says in her report, “is the persistent refusal by advisers operating in this area to obtain all relevant and available information from the client, in violation of section 8 of the code”.

She says that the term “single need” is used by advisers as a way of circumventing the requirements of the code.

“By claiming that the client requires assistance only for a specific need, such as insurance for his new motor vehicle, advisers argue that there is no need to obtain all relevant and available information and, by extension, no need to conduct a needs analysis for the client.”

She also says there is a “disconnect” between the client’s understanding of comprehensive cover and the adviser’s understanding. By obtaining comprehensive cover for a vehicle, for example, the client may assume that everything is covered, including “extras” on the vehicle, such as a sound system or a bakkie canopy. But for many advisers, Bam says, comprehensive cover means cover up to the retail value of the vehicle, with extras not taken into account. Such extras are usually not covered unless specifically noted in the policy.

In another lapse of duty, advisers might ask clients whether or not they are paying off a loan on a vehicle, but “very rarely” offer or recommend top-up cover, “which often compromises clients if they make a claim in the early stages of the credit agreement”.

In the area of homeowners’ insurance, advisers and brokers tend to fail to disclose to clients the exclusions in their policies, Bam says in her report. 

Exclusions are items that are excluded from cover under a policy or sets of circumstances under which cover is not provided. For example, damage to the structure of a house because of subsidence is often excluded, or only partially covered, in these policies.

Bam says the rejection of a claim that may run into many thousands of rands would be particularly devastating for young first-time homeowners.

Another ongoing area of concern, Bam notes in her report, is advice on retirement planning.

“The decisions clients make at retirement are probably the most important financial-planning decisions they will ever have to make. The consequences of these decisions are, in most cases, permanent. For this reason, inappropriate advice can have disastrous effects on a client who is no longer economically active and is unable to make up any losses sustained,” the ombud says.

It is becoming more common, Bam says, for advisers to admit to shortcomings in the advice they provide, but then claim it is not possible to reverse the transaction. 

“The impossibility of a reversal stems from the adviser having no power to place the client in the position he would have been in prior to the advice provided. 

“Clients are told that reversing the transaction is impossible because of the unwillingness of the South African Revenue Service to cancel the tax directive. This explanation undermines the FAIS Act and the principle of Treating Customers Fairly,” Bam says.


SETTLEMENTS

In many cases, the FAIS Ombud reaches a settlement with a financial services provider (FSP) before a complaint gets to the determination stage. This is in the interests of the FSP, because its name is not made public, as in the case of a determination.

Below are three cases highlighted in the FAIS Ombud’s annual report in which a settlement was reached.

Failure to disclose the risk of under-insurance

After a fire in June 2015, Mr A lodged a claim with his insurer on his homeowner’s policy. The damage was assessed as being to the value of R261 000. The insurer offered to pay R141 000, stating that Mr A had been under-insured and that, as a result, it had applied the rule of average in determining the amount of the payout. (The rule of average is when an insurer decreases a payout in proportion to the degree of under-insurance.) Mr A claimed not to have been informed of the requirement to have the building insured for its replacement value. 

On taking up his case, the ombud asked the insurer to show it had complied with the code of conduct under the FAIS Act. Specifically, it had to provide proof that its representative had obtained all relevant and available information to ensure that the product was appropriate. 

The insurer was unable to provide any evidence to show it had complied with the code, and could only point to having sent Mr A policy schedules annually. The insurer maintained that it was Mr A’s responsibility to ensure that he was adequately covered. 

After the ombud’s office maintained its stance on the insurer’s failure to adequately provide for Mr A’s needs, the insurer offered an amount in settlement of the matter. 

Settlement: R120 000

Failure to disclose pre-existing condition clause

Mr B took out a life assurance policy that included an income-protection and a disability benefit. He was later declared medically unfit to work. 

When he submitted a claim with the life company in terms of the income-protection benefit, the claim was rejected on the grounds that it had been submitted during the waiting period. The assurer said the policy terms provided for a 24-month waiting period on pre-existing medical conditions, and the illness that had rendered Mr B unfit to perform his duties had arisen directly from such a pre-existing condition. 

In correspondence with the ombud’s office, the assurer said the product was suitable for Mr B, because it catered for the need that had been identified. Mr B knew of the exclusions, it said, because these had been disclosed in both the application form and the policy schedule. 

However, the ombud drew the life assurer’s attention to the fact that it had failed to advise Mr B of the blanket exclusion on the policy with regard to pre-existing conditions. In addition, it had failed to elicit information from the complainant pertaining to his medical history. This information was both relevant and available, and, if it had been requested, the unsuitability of the product would have been evident. 

The life company responded by making an offer that settled the matter in full.

Settlement: R563 581

Failure to take client's needs into account 

Mr C retired as a member of his employer’s pension fund. He was the sole provider for his family, supporting his wife and dependent child, who was a student. Mr C had sustained a significant amount of debt, which he had consolidated by taking out a loan shortly before he retired. This had been done in the knowledge that he would have access to one-third of his pension benefit, which he could use to settle the loan. 

On consulting an FSP, he was advised to buy an annuity, which resulted in his entire pension benefit being transferred into the annuity. When Mr C asked about taking a third of the pension benefit in the form of a lump sum, he was told that he was unable to access the money. 

Taking up his case, the ombud asked the FSP for evidence that it had obtained all available information about Mr B’s financial situation. It was established that the FSP had not kept a record of the advice and had failed to take Mr C’s circumstances into account. This failure had resulted in an outcome that was inappropriate to Mr C’s needs. The ombud recommended that the FSP pay Mr C an amount equal to one-third of his retirement benefit in a full and final settlement, which it did. 

Settlement: R570 994

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