Ombud’s report underlines importance of good advice

LAST week, the Office of the Ombud for Financial Services Providers, better known as the FAIS Ombud (after the Financial Advisory and Intermediary Services Act, under which the ombud operates), released its annual report for the 2021/22 financial year. The report holds lessons for consumers and advisers, but first a few numbers.

In the period covered in the report (April 1, 2021 to March 31, 2022), the office received 11 827 complaints. This is not only higher than the 10 552 complaints received in the 2020/21 financial year, but the highest number received by the office since it was established two decades ago.

The Acting Ombud, Nonku Tshombe, says in the report:

“This was seen as a positive development, testifying to the efforts to expand the awareness and understanding of [our] existence, as well as the services provided by the ombud’s office. However, it also placed a strain on existing resources during a period that continued to see uncertainty in a post-pandemic environment.”

Overall, including complaints carried over from the previous year, the total number of complaints resolved was 12 089; more than ever resolved by the office in a single year.

The breakdown is as follows: 6 314 (52%) complaints were dismissed; 3 947 (33%) referred to other ombud schemes; and the remaining 15% settled partially or fully in favour of the complainants through settlements with the financial services providers concerned (1 823) or determinations (5). The overall settlement value was R69 979 324, the highest amount returned to consumers in a financial year.

Note that the above figures do not include ongoing property syndication cases, which have dragged on since the late 2000s and which form a category on their own.

So which types of financial products (or, more correctly, the advice thereon) were most problematic for consumers? Life (long-term) insurance tops the list at 37.04% of complaints received. Then comes shortterm insurance (21.63%), investment (8,25%), retirement-related products (4.15%), , banking (3.35%), and health insurance, excluding medical aid (1.32%).

The introduction of the FAIS Act in 2002 was an important milestone for consumer protection in South Africa. It required advisers, intermediaries and insurance brokers, whether independent or tied to a product provider, to have certain minimum levels of financial and product knowledge, and to adhere to a code of conduct that put their clients’ interests above their own. They were required to keep a record of advice on client meetings, which had to show that the products sold to the client were appropriate to that particular client, taking into account the client’s circumstances and risk profile.

Despite this and subsequent developments, including the Treating Customers Fairly legislative framework, many advisers continue to skirt their obligations to you, the consumer.

Here’s a good example of how casual some intermediaries are with their clients’ details and how quickly they might bend the rules to acquire a sale. It’s one of the five determinations the ombud’s office made during the period in question.

Underwriting mix-up

In December 2017, Mr A applied on behalf of his son, Mr B, for comprehensive insurance on a 1998 BMW 316. He was assisted by a broker, which interacted with the insurance company. During the underwriting process, the broker told the insurer that Mr A’s son, Mr B, aged 24, was the regular driver of the vehicle. The broker said that Mr B held a C1 driving licence, issued when Mr B was 20 years old.

On the basis of this information, the insurer quoted a monthly premium of R1 689. Concerned that the premium was too high, the broker asked that the details of the driver’s licence be changed from C1 to EB, which allows for a light motor vehicle drawing a trailer, and that Mr A be recorded as the regular driver in place of his son, Mr B.

The insurer recalculated the premium, which decreased to R673. The broker accepted the cover, with the decreased premium, on Mr A’s behalf.

Barely two months later, on February 20, 2018, Mr A’s daughter contacted the insurer to report an accident involving the insured vehicle and to lodge a claim. She said the vehicle had been driven by a family friend and it had collided with an oncoming vehicle after the driver swerved to avoid hitting a pedestrian.

On investigating, the insurer found it had been given incorrect information during the underwriting process and rejected the claim on the basis of material misrepresentation.

Mr A lodged a complaint with the Ombudsman for Short Term Insurance, but it soon became apparent that the complaint was advice-related, and Mr A turned to the FAIS Ombud. He said the broker was instructed to apply for an open driver policy and was never instructed to put his name as the regular driver of the vehicle.

In response, the broker did not deal to the ombud’s satisfaction with the misrepresentation, arguing that it had acted on the information provided by Mr A, but not producing evidence to support this including the record of advice. On other allegations, the broker’s responses amounted to bare denials.

In the determination, the ombud was particularly concerned that the broker had not been able to furnish the record of advice. In the absence of any evidence to the contrary, the ombud found that the loss suffered by the complainants was caused by the broker. After establishing the damages from the insurer, the ombud ordered the broker to pay the complainants R52 100 plus interest from the date of determination to the date of payment.