10 years of FAIS ombud

This year marks the 10th anniversary of the financial advice ombud’s office. In her annual report, ombud Noluntu Bam reflects on how much has changed over the past decade. The report lists the following benefits flowing from the establishment of her office:

The Financial Advice and Intermediary Services (FAIS) Ombud provides an informal, cost-effective, independent and impartial forum to which you, as a consumer of financial services, can lodge your disputes;

Determinations by the ombud can be challenged through an open, transparent and cost-effective process;

Whether you are a sophisticated or a vulnerable consumer, you require no legal representation to lodge a complaint;

You can be assisted without having to worry about how well your story is told; and

As shown by the substantial number of settlements, providers of financial services have embraced the FAIS Act.

INVESTMENT COSTS

In her annual report, Bam says the costs investors pay on their investments is a growing source of complaints to her office. These complaints relate to undisclosed commissions on financial products, trail commissions (ongoing fees charged as a percentage of the investment) and penalties for ter minating investment contracts early.

“Many complaints point to trail fees, and complainants ask why they are paying such fees when, in some instances, they last heard from the adviser on the day they purchased the investment. Almost all of these complainants claim they were not aware they were paying these costs. Some complain that they discovered they were paying trail commission only when they called the product provider, only to learn that the financial adviser left years ago.”

Consumers complain at having to pay termination costs. These are levied when you want to withdraw from, stop or reduce payments on a contractual savings investment, such as a retirement annuity (RA). This may happen when your circumstances suddenly change. The penalties are usually substantial.

REPLACEMENT POLICIES

Bam’s annual report suggests that replacement policies – when your adviser replaces one financial product with a new one – are a bone of contention between her office and financial services providers (FSPs).

“We argue with FSPs every day about this. The argument is that the complainant knew what the cost implications were [of replacing one policy with another]. When we ask the FSP to demonstrate that the replacement is in the client’s interest, the matter gets settled.”

Bam says that when her office obtains proof of the disclosure of the cost implications of replacing the policy, it often finds there isn’t full disclosure of all the costs.

Complaints about a life policy being cancelled before a new policy has been approved are also common.

RETIREMENT PRODUCTS

Retirement products also attract numerous complaints.

“It is not unusual to see complaints from people who had committed to pay premiums of R15 000 and more a month for more than 20 years on an RA.”

One consumer was invested in an endowment policy and was committed to a monthly premium of R25 000 for 15 years.

“When we asked the provider why a compulsory savings [product was recommended to the consumer], as opposed to a flexible one with no penalties, no rational answer was provided,” Bam says.

Consumers also complain about fraudulent and improper conduct. Bam’s report notes that it is a breach of the FAIS Act for you to be asked to sign incomplete documentation or for documents to be altered after you have signed them.

It is also fraudulent or improper for an adviser to entice you to sign documents under false pretences. Some advisers do this to surrender your policy and earn commission on another, or sign you up for a policy you had no intention of purchasing.

“There are still large numbers of people who have no knowledge that they are paying premiums for life policies with the beneficiaries unknown to them.”

OTHER PROBLEMS

Assistance business – typically funeral policies – is fraught with problems, mostly fraud, Bam says.

Hedge funds and similar arrangements are proving to be a problem, too, she says.

Bam says disability and dread disease policies remain complex, “especially because the insured event may arise years after the product was purchased”. She notes in her report that:

There is often lack of clarity about what is covered;

Definitions are complex, making it impossible for the provider to understand which product is suitable and for what circumstances;

Complainants complain that they paid premiums for many years and later realised that the product they bought was useless to them.

“We believe that unless there is legislative intervention, the problems in this area are unlikely to be solved,” Bam’s report says.