The Financial Advisory and Intermediary Services (Fais) Ombud has criticised financial service providers (FSPs) for marketing endowment policies as investments to consumers.
Acting Fais Ombud Nonku Tshombe has also expressed her disapproval of the “tickbox” approach of FSPs towards compliance with the record of advice provisions in the general code of conduct for authorised FSPs, stressing that this practice falls short of compliance with the code and detracts from the financial planning process.
Tshombe said the misleading component of endowment policies stems from the manner in which these policies are sold.
She stressed that these policies are in fact sold as investment solutions and savings products, utilising the term ‘investment’ as opposed to ‘policy’, without any emphasis on the fact that they are actually life assurance policies.
Tshombe said this has significant implications, since this description results in avoiding discussing how these life assurance products are structured and the various layers of costs involved, because the discussion then focuses on the investment horizon and illustrative returns.
She said more needs to be done to change the manner in which these products are marketed – perhaps resulting in further Treating Customers Fairly (TCF) outcomes – because they are not always suitable recommendations to the average client who is looking to invest funds for wealth creation or to save for a specific objective.
Tshombe said a majority of complaints to the Office of the Fais Ombud about endowment policies emanate from “causal effects”, such as a surrender penalty and the application of restriction periods.
These causal effects only become prevalent at the termination of the policy or when the policy matures, at which point the clients are suddenly faced with surrender penalties and fees that they were not informed of, she said.
“The main concern for the Fais Ombud Office is that in most instances the endowment policy was not appropriate to the client’s needs and circumstances in any event, and ought not to have been recommended in the first place.
“These inappropriate recommendations and the resulting inability to make an informed decision by clients is the focus of the Fais Ombud Office’s investigations,” she said.
Onus on the FSP
Speaking at the recent launch of the latest Fais Ombud annual report, Advocate Ismail Hussain SC, who is a Professor of Law at Nelson Mandela University, said the Fais code places the onus on the FSP to gather the information and to work out if that product is suitable for the client.
“The client doesn’t know what is suitable. They don’t know what information they should get. The onus is on the financial service provider to do that,” he said.
Hussain said the Treating Customers Fairly programme is about financial advice and not about financial sales.
“What we are seeing is selling, not advice, and that has to stop,” he said.
Tshombe added that there is a growing trend towards standard generic advice records that not only provide generic statements such as “I can confirm that all fees and charges were disclosed to me” or “I can confirm that all material terms and conditions of the policy were explained to me and that I was able to make an informed decision”.
But Tshombe said these records more often than not require the client to merely tick a box next to these generic statements.
Tshombe said the concern surrounding these records of advice is that while the complainant has signed or ticked in confirmation of the fact that aspects such as fees and charges were discussed or that material terms and conditions were disclosed, one cannot expect that the complainant would be able to confirm what was disclosed in regard to fees and charges, for example, or what was comprehensive or a correct representation that would have allowed the complainant to have made an informed decision.
Mechanism must be used better
She said the requirement that a FSP maintain a record of the advice is a mechanism to record the advice provided and the basis for the advice provided to demonstrate that the client was placed in a position to make an informed decision.
If used correctly, the record of advice will stimulate discussion about the important aspects of the financial planning process and ensure that the FSP covers all aspects required to assist the client in making an informed decision, she said.
“These generic records of advice, which appear to have been drafted to assist FSPs to automatically comply with the various sections of the code, do not assist in either of these two respects and in fact fall short of compliance with the code and detract from the financial planning process,” she said.
Tshombe added that these generic documents are “often grudgingly and apologetically” provided to the client for completion when finalising the application process, which merely pays lip service to the provisions of the code instead of utilising this process in the spirit for which it was intended: to enhance the financial planning process and provide a more holistic service to the benefit of all parties involved in the transaction.
She urged the financial services industry to embrace the importance of advice records and better equip their representatives and financial planners through training initiatives to know their clients so that they are better placed to identify the material terms that need to be disclosed to a specific client.