Low premiums trumping advice – ombud

Financial advice involves taking your personal circumstances into account. According to the financial advice ombud’s latest annual report, this is still not happening in many instances, writes WHEN BAD ADVICE COSTS YOU

Short-term insurers and their representatives, among others in the financial services industry, continue to flout the Financial Advisory and Intermediary Services (FAIS) Act by not ensuring that your needs are met or that you understand the contractual terms and conditions of the products you buy. This is the conclusion of Noluntu Bam, the Ombud for Financial Services Providers (also known as the FAIS ombud) in her 2015/16 annual report, which was released yesterday.

In the report, which covers the financial year ended March 31, 2016, shortterm insurance was the category with the highest number of complaints, at 3 161, followed by long-term insurance (2 627), investments (1 307) and retirement savings (497). The ombud’s office received a total of 4 263 valid complaints during the financial year, up from 3 699 the previous year.

During the year, the ombud’s office referred 4 706 complaints either back to financial services providers concerned (2 053), or to other ombudsmen and regulators, such as the ombudsmen for shortterm and long-term insurance and the National Credit Regulator.

Of the 4 583 cases it resolved, including cases carried over from the previous year, 3 409 were dismissed, 1 150 were resolved through a settlement between the complainant and the financial services provider, and 24 were resolved through determinations.

In the report, Bam says a big problem with short-term insurance is that those selling the policies remain focused on simply giving you the lowest premium, “without any regard for what may or may not be in the client’s interests”.

In other words, although you may pay a low premium, you may not have sufficient cover in the event of a loss.

An adviser’s failure to obtain relevant information from the client is what ultimately leads to the rejection of claims for both domestic and commercial insurance policies, as policies presented by advisers are not suitable to your specific needs, Bam says. This, together with a lack of understanding on the part of advisers of the intricacies of the policy wording, often results in a crippling effect for individuals and small businesses in the event of a significant loss, she says.

Bam says there still appears to be a misconception in the financial services industry that the FAIS Act does not apply to short-term insurance, which “could not be further from the truth”.

Other concerns raised in the report are unregulated internet-based foreign exchange trading schemes entrapping unwary investors, funeral policies being sold by unlicensed operators, the indiscriminate selling of credit life assurance, where the benefits do not match your needs, and cellphone insurance, where you are regularly not informed about the often restrictive terms and conditions of such policies.

Bam says many complaints involve consumers not being properly informed about the contractual terms of a specific product. She singles out a case in which a woman sold her property and put the proceeds in the bank while she looked for a smaller home. After finding one within three months, the woman signed an offer to purchase and went to the bank to retrieve her money, “only to be told that she was bound by the contract she had signed, which effectively saw her money being invested in an insurance product for 10 years”.

“She was made to sign forms acceding to heavy penalties, after which the remainder was paid into her account. The bank employee she was dealing with did not direct her to the FAIS ombud, because the consumer was ‘in breach of the contract’.

“It was the consumer’s persistence to see justice done that led her to the FAIS ombud. Following a review of the complaint and subsequent decision by this office, the bank had to pay back the penalties confiscated from the woman’s investment,” Bam says in her report. Complaints to the financial advice ombud, Noluntu Bam, often make financial services companies realise that they gave you bad advice and they settle your loss before the ombud can make a determination.

Personal Finance reports on the ombud’s key determinations, which carry the weight of a High Court order, during the year. But there are also lessons for you in the cases in which settlements were reached that were highlighted in the ombud’s annual report for 2015/16.

In one case, a couple were not made aware by their bank of the limitations of a credit life assurance policy they took out.

The couple, Mr and Mrs C, took out a home loan and were then offered a policy known as a home loan protection plan by the bank’s representative. This covers the payments on your home loan in the event of death, disability or retrenchment.

When Mrs C’s husband died, she was shocked to receive a payout that was less than the outstanding loan amount. The couple had been under the impression that the policy would cover the entire amount owed on the loan.

The bank, in its response to the complaint, claimed that its representative was a member of its home loan department and, as a result, was not required to provide advice. It said the representative had provided Mr and Mrs C with all the factual information they needed about the product.

In her report, Bam says her office maintained the view that a financial services provider cannot recommend such a policy without providing the required advice, the least of which would have been to ensure that the policy provided the level of cover required to meet the clients’ needs – in this instance, the outstanding loan amount.

The bank subsequently settled the matter with Mrs C to the maximum amount in terms of the ombud’s jurisdiction, which was R800 000.

NO INCOME FOR WIDOW

Another case illustrates how ignorance of a financial product can drastically affect outcomes for you or your loved ones, and for this reason it is imperative that whoever sells you the product ensures you fully understand it.

Mr D approached a representative of a life assurance company for advice on a pension. He bought a single-life annuity, which guaranteed him an income for life.

When Mr D died, the policy terminated and his widow’s income abruptly ceased. Mr D’s widow approached the ombud asking to be placed in the position she would have been in if her husband had been correctly advised about the annuity.

A guaranteed life annuity, Bam explains in the annual report, secures a predetermined income for life. The one major concern with these annuities, she says, is that the policy dies with the life assured, so dependants do not inherit anything. “This can be remedied by purchasing a guaranteed-term or a jointlife annuity, which ceases on the death of the last-surviving spouse.”

The life assurer’s response to the complaint was that Mr D had made insufficient provision for retirement and that the funds had to be utilised in a manner that maximised his income. A joint-life annuity would have resulted in a lower income. It also argued that its client had been Mr D, not his wife, and that it had no obligation towards her.

The ombud’s office held that any recommendation made to a client, particularly during retirement, has to take into account the client’s circumstances as a whole, which include the well-being of the spouse. The assurer’s offer of R44 614 in full and final settlement was accepted by Mr D’s widow.

If you have a complaint about financial advice, call the ombud’s office on 012 762 5000, fax 012 348 3447 or email info@faisombud.co.za