Rising number of funeral policy providers operating outside the law, warns Fais Ombud

There has been a proliferation of funeral parlours and other providers of funeral policies who operate outside of the law, the Office of the Ombud for Financial Services Providers (Fais) has warned.

They operate outside of the law by not being regulated in terms of the Financial Advisory and Intermediary Services Act No. 37 of 2002 (Fais Act) and by providing long-term insurance benefits without having the scheme underwritten in contravention of the Insurance Act No. 18 of 2017.

This, according to the Fais Ombud 2021/2022 annual report, is the reason for the significant rise in complaints against funeral policy providers for not complying with Section 2A.8.1 of the Policyholder Protection Rules (PPRs).

These rules provide that an insurer must assess and decide whether the submitted claim is valid within two business days after all required documents in respect of a claim under a funeral policy have been received.

If the claim is valid, payment must be authorised; alternatively, the claim must be repudiated.

If the claim is disputed, the claimant must be advised of the dispute.

Released on Friday, the annual report and its contents reflect the period when Advocate Nonku Tshombe was acting ombud. Advocate John Simpson was appointed Fais Ombud effective from 1 November 2022.

Licensed, but struggling

Tshombe said there are schemes where the provider is appropriately licensed in terms of the Fais Act and complies with prevailing legislation by having its schemes underwritten, but struggles to get its members’ claims paid because to financial difficulties experienced by the underwriter – in turn due to economic struggles experienced during and post the Covid-19 pandemic.

Read: FSCA slams high premium increases on funeral policies [Aug 2021]

In such instances, Tshombe said her office has to investigate both the provider and the insurer in an attempt to determine which entity is the responsible party.

Tshombe said complaints such as this – and those against smaller funeral parlours operating in rural areas, who more often than not are unlicensed – tend to take longer to resolve.

She said her office is committed to finding an informal resolution to these matters as opposed to proceeding to a formal ruling in the form of a determination.

“After a determination is finalised, this office is no longer involved and the complainants, most of whom are without the requisite means, find themselves at the mercy of the expensive formal justice system,” she said.

“They struggle to get the determinations enforced and fight any appeals lodged against the decision. Therefore, this office spends more time to find a positive informal resolution.”

FSPs called out over living annuities

Turning to living annuities, Tshombe said in the previous annual report her office bemoaned the failure of certain financial service providers (FSPs) to make a recommendation as provided for by Section 8(1)(c) of the General Code of Conduct for Authorised Financial Services Providers and Representatives.

Tshombe said certain FSPs often simply provide the prospective client with the level of income they require to meet their current standard of living, regardless of whether sufficient provision has been made and to the detriment of the client.

She said this will result in the client’s initial capital invested reducing over time, leaving them destitute in later years.

Tshombe said that when these FSPs are approached by her office for a response, they simply declare generic terms such as a single need and try to blame the client, whose instructions they were executing.

“This approach illustrates that they failed to have the difficult discussions with their clients and to manage expectations from the beginning of the transaction,” she said.

“Certain FSP’s indeed address the client’s failure to have made sufficient provision for retirement and caution the client as to the consequences and implications of drawing an income that is unsustainable.

“However, then the FSP fails to act with the required skill, care and diligence. In this regard, we refer to the FSP’s total reliance on the risk profiling questionnaire and its outcome, at the expense of what is in the client’s best interests.”

Impact

Tshombe cited the example of a client who has selected an income drawdown of 8% but from their completed risk profiling questionnaire, the client’s risk profile is determined to be ‘conservative’.

She said this conservative risk rating then forms the basis for selecting, for example, a money market fund to correspond with the client’s apparent risk-averse nature.

But Tshombe said this selection will never provide a return that will cater for an income drawdown of 8%.

Over time the client will begin eating into their original capital “and find themselves in a precarious situation in years to come”.

“Add the effects of inflation … and one can appreciate the responsibility the FSPs have in ensuring they conduct a detailed needs analysis to ensure they know their client.

“This will enable them to make an appropriate recommendation to the client and make all material disclosures for the client to make an informed decision.

“These are the cornerstones of not only the financial planning profession, but the General Code as well,” she said.

Complaints summary

The Office of the Fais Ombud received a total of 11 827 new complaints in its 2021/22 financial year – the highest number received since the office was established and 10.78% higher than the 2020/21 financial year.

Tshombe said 8 011 or 68% of all complaints received fell within the mandate of the ombud’s office, also the most since the inception of the office.

In keeping with the ombud’s legislative mandate to resolve complaints in an expeditious manner, 82.14% of complaints were resolved within three months, 88.6% within six months and 94.23% within nine months of being received.

Of the total 11 827 complaints received, 4 957 were dismissed, 3 791 were referred to alternative fora, and 1 269 were settled in favour of the complainant.

Tshombe said including determinations, a total of 1 823 complaints were settled during 2021/22 financial year.

The overall settlement value for the year was R69 979 324 – the highest value returned to consumers by the office during a financial year.