Martin Hesse

Pretoria News Weekend - - OPINION -

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 (see graph on the right). 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”.

The main con­cern with ad­vice on short-term in­surance is the per­sis­tent re­fusal by ad­vis­ers op­er­at­ing in this area to ob­tain all rel­e­vant and avail­able in­for­ma­tion from the client.

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.


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