The Financial Intelligence Centre (FIC) has recently published the draft Public Compliance Communication No 38A (PCC 38A). The objective of this PCC is to provide guidance in relation to receiving and responding to requests, interventions and orders from FIC in terms of sections 27, 32, 34 and 35 of the FIC Act, specifically:
To read the full communication, click here.
Masthead believes that when introducing any regulation (whether new or revised) it should be (1) easy to implement, (2) easy to administer once implemented, (3) cost effective for users, and (4) easy to access, broad-based. We are also mindful of the need for legislation to accommodate and support small businesses which are well positioned to provide financial services to the broader population. Masthead will submit commentary to the FSB regarding the proposed changes to the GCOC with these principles in mind.
The FSB published proposed changes to the General Code of Conduct (GCOC) towards the end of 2017 and invited interested parties to comment before the end of February 2018. The GCOC applies to all authorised financial services providers (FSPs), KIs and Reps and any changes will therefore have a direct impact on FSPs.
The proposed amendments cover several areas, with the main reasons for the changes being to:
In this article we provide you with a brief overview of the proposed changes. Details of the proposals will be unpacked in later issues of our newsletter.
Up until now, neither the FAIS Act nor the GCOC specifically defined the types of transactions or changes to a product that constitute a replacement. The proposed amendments include a definition for replacements and variation.
The existing GCOC requires a provider to render a financial service honestly, etc. Essentially, this limited the requirement to those activities that are defined as a financial service, i.e. advice and intermediary services. The proposal expands on this, requiring an FSP, in general, to act in this manner which in turn will support the requirement to have a culture of treating customers fairly.
An FSP (or any person) cannot create an impression that it, its activities or its products are regulated or supervised by the FSB, when in fact this is not the case. For example, an authorised FSP (with a licence) that sells an unregulated product, must make it clear that the product is not approved or regulated. Clients have a right to know.
An FSP where any direct or indirect ownership interest exists with a product supplier or where there is an arrangement with a product supplier that constitutes a conflict of interest, will not be able to describe itself as ‘independent’. This supports the RDR proposals.
In terms of the conflict of interest requirements, an FSP cannot offer a Rep a financial interest for giving preference to quantity of business to the exclusion of quality. The proposed changes enhance this requirement to ensure a consistent interpretation of the Regulator’s expectation, which must include a measurement of the delivery of fair outcomes for customers when considering offering any financial interest to a Rep.
To promote and facilitate transformation in the financial services industry, it is proposed that the conflict of interest requirements be changed to allow for contributions to qualifying beneficiaries, which are currently prohibited.
Advisors will have to disclose their remuneration to clients “prior to the conclusion of any transaction” which is a change from disclosing this “at the earliest reasonable opportunity”. It makes sense that this information is available to the client beforehand, so that they can take this into consideration before making a final decision. Advisors will also have to provide the client with details of what services will be provided in exchange for such payment and their rights and the consequences of termination. The agreement reached with a client in relation to remuneration should be included in a written agreement. This prepares the way for standards for advice fees in the RDR proposals.
An advisor will have to consider the needs and circumstances of underlying members or employees when giving advice to an employer, pension fund, medical scheme, friendly society or other entity. This will mean that FSPs that offer employee benefits, for instance, will have to review their advice process to ensure that this requirement is met.
The proposed amendments make it very clear that when an advisor is unable to identify or offer a suitable product to meet the needs and circumstances of a client, the advisor must decline to make a recommendation and suggest to the client that advice be sought from another FSP. This situation may arise where an advisor is limited in what they are able to offer, either in terms of the FAIS Act or due to any contractual arrangement.
This amendment recognises that the extent of a suitability analysis may vary depending on what has been explicitly agreed with a client, the specific request of a client, the surrounding circumstances which may only require a specific focus or where a client has explicitly declined to provide the information requested by the advisor. However, when an analysis is performed in these situations it may be limited, and the client must therefore be warned that the advice is limited and the client will need to ensure that the product suits the needs and objectives that were not considered in this process. Although very similar to the existing requirements, there are some differences which advisors must take into consideration.
The proposals include a provision which will enable the Registrar to prescribe what must be included in the record of advice as well as the format. The FSB’s view is that this may improve the quality of these records and may reduce costs.
Direct marketers will no longer have a separate set of disclosure requirements and will have to disclose information to clients to the same extent as any other FSP. Information about a financial service must also take place prior to conclusion of a transaction so that a client can make an informed decision. The definition of a ‘direct marketer’ has also been aligned to the Policyholder Protection Rules in the Long-term and Short-term Insurance Acts.
The advertising and complaints requirements have been extended and aligned to the requirements set out in the Long-term and Short-term Insurance Policyholder Protection Rules. The objective is to raise the standards for advertising and marketing to ensure good outcomes for customers and to ensure a transparent and fair complaints process is followed by FSPs.
The changes mentioned above are proposals at this stage, as the FSB must first consider input from industry and interested parties. However, while there may be some changes to the final version, this draft provides FSPs with a good idea of what is to come so that they can plan ahead and be prepared when the time comes.
As regulators increasingly focus on treating customers fairly, it is important to treat clients fairly in all aspects of your business, including if they complain.
Dealing with client complaints is already part of regulatory compliance for FSPs. The objective of TCF Outcome 6 is that clients should not face unreasonable post-sale barriers to change a product, switch provider, submit a claim or lodge a complaint. The Outcome implies that you need to follow a proper process when dealing with client complaints to ensure clients are treated fairly.
The General Code of Conduct for Authorised FSPs and Representatives (GCOC) requires you to try to resolve all customer complaints and to document the resolution process as proof of the process that was followed.
Section 17 states:
A provider, excluding a representative, must maintain an internal complaint resolution system and procedures based on the following:
(a) Maintenance of a comprehensive complaints policy outlining the provider’s commitment to, and system and procedures for, internal resolution of complaints;
(b) transparency and visibility: ensuring that clients have full knowledge of the procedures for resolution of their complaints;
(c) accessibility of facilities: ensuring the existence of easy access to such procedures at any office or branch of the provider open to clients, or through ancillary postal, fax, telephone or electronic helpdesk support; and
(d) fairness: ensuring resolution of a complaint can during and by means of the resolution process be effected which is fair to both clients and the provider and its staff.
The Rules on Proceedings of the Office of the Ombud for Financial Services Providers, published in 2003, also seek a fair outcome for both complainants and respondents.
Section 19(1)(d)(iii) of the GCOC states that a provider’s internal complaint resolution system and procedures must have arrangements to forward complaints to the relevant staff to consider a resolution and to inform clients of the results. If an outcome is not favourable to a client, he or she should be given written reasons for the outcome and be advised that he or she may pursue the complaint with the Ombud within six months.
Direct approach to the Ombud
In many instances, clients complain directly to the Ombud without informing their FSP of their intention to lodge a complaint. The Ombud acknowledges receipt of a complaint within 7 days and a case manager is appointed to the case for preliminary assessment. The Ombud evaluates if a complaint has merit before informing an FSP, which usually has 30 days to respond from receipt of the complaint.
Your complaints manager or Key Individual should deal with official complaints such as these. While the complaints manager or Key Individual is ultimately responsible for compiling the response to the Ombud, he or she may nominate a suitable senior person to investigate, draft a response and collate attachments.
Rule 6(d) states that a respondent may submit any fact, information or documentation in relation to the complaint and must disclose relevant information or documentation to the Ombud. Responses must be submitted within the stipulated turn-around time.
The Ombud will reply with a recommendation letter in terms of Section 27(4), and your complaints manager or Key Individual has two weeks to respond. The case manager then has another 30 days to consider your response.
If you are notified of a complaint, you should inform your Professional Indemnity Cover provider, as non-disclosure of a complaint could result in cancellation of your cover or dismissal of a claim relating to the complaint. In many instances, Professional Indemnity Cover providers also assist and support FSPs during the complaints process.
Proposed regulatory amendments
To align FSPs’ complaints management and recordkeeping requirements with the desired outcomes of the TCF framework, the FSB has proposed amendments to the GCOC and the Code of Conduct for authorised FSPs and Representatives conducting Short-term Deposits Business.
The proposed amendments seek to improve the current requirements and aim to ensure that FSPs’ complaint processes are straightforward, transparent and fair to consumers. They also aim to give effect to some of the RDR proposals.
Significant changes are proposed to Part XI of the General Code, which relates to complaints management. New definitions have been proposed for the concepts ‘client query’, ‘compensation payment’, ‘goodwill payment’, ‘member’, ‘rejected’, ‘reportable complaint’ and ‘upheld’ in Section 16. Revised definitions have also been proposed for the terms ‘complainant’ and ‘complaint’.
Proposed changes to Section 17 prescribe the procedures to establish a Complaints Management Framework and its requirements, allocation of responsibilities, categorisation of complaints, complaints escalation and review process, decisions relating to complaints, recordkeeping, monitoring and analysis of complaints, and communication with complainants.
Section 18 proposes changes that govern engagement with the Ombud and reporting, while Section 19 focuses on reporting complaints information.
When you embrace fairness in all aspects of your business, you will more easily reduce the risk of the dispute escalating. Your client will feel engaged and it will be easier to convert those negative moments into positive experiences.
The Financial Intelligence Centre (FIC) has published a document to inform the public about different types of online scams and ways to avoid becoming a victim of cybercrime.
As technology evolves and improves the lives of users, it also paves the way for criminals. Criminals use online scams to obtain your information. Examples of these include:
The FIC provides cautioning advice in this document and offers tips to stay informed and be alert. Click here to read the document.
Effective protection against cybercrime can be achieved by educating all staff on the risks inherent in cyberspace and the fundamental rules that make financial transactions and social media activity safer. Masthead’s Cybercrime Online Course is designed to equip you with the know-how to protect yourself and your FSP from cybercrime on a day-to-day basis. For more information about the course, click here.
Ending a client relationship can be unsettling, especially if a relationship spans many years or you believe the client is always right. You may be torn between the desire to maintain a client relationship and the difficulties it creates for your business. Whether it’s difficult or non-profitable clients or whether you need to make operational changes, rather terminate the relationship, as this will help your business in the long run.
Despite the discomfort this process may cause, there are many reasons to assess your client base from time to time and terminate certain relationships. You may be planning to retire and want to down-size your business, or you may be unable to service some clients due to operational constraints. Alternatively, you might have too many clients to service them all effectively, treat them all fairly or fulfil all your regulatory obligations. Some clients might be unprofitable or are so unpleasant that you decide the relationship must be terminated even though they are profitable.
Understand your clients
Before deciding which client relationships to terminate, you need to thoroughly understand your clients and how they influence your business. To start, sort and prioritise your clients. Use a segmentation model to segment your client list and identify both the client segments that produce 80% of your profit and their profiles. Top clients typically provide your most profitable work. You receive referrals from them, increasingly provide services to them and you enjoy working and interacting with each other, both professionally and personally. These clients are probably also responsive, use similar technology to you, are open to recommendations that suit their financial needs and objectives, and rarely query your financial planning fee.
Secondly, identify clients where the cost of doing business with them outweighs the benefits. Less profitable clients can harm your business, for example, when the amount of time spent per client exceeds the return on your investment.
Also identify clients who are difficult to deal with or with whom you do not have good relationships. These clients may be a good source of revenue, however, the time they take up and their manner of interaction with your business are neither good nor a productive use of time. Terminating these relationships could improve staff productivity, as your employees do not have to deal with time-consuming problems. It can also improve morale, as your staff members do not have to interact with unpleasant people in general. It may be more important that employees find their workplace positive and rewarding than it is to get revenue from difficult clients.
Consider how you could better spend your time. You could find new clients, spend more time with top segmented clients and cultivate referrals from them, or expand your services to fulfil another financial need.
Meet your obligations
Ensure that you understand your duties in terms of the FAIS General Code of Conduct for Authorised FSPs and Representatives. Also check if you have met the contractual obligations (both business and compliance) of your Service Level Agreement. Ask yourself if you and your office have dealt with the client appropriately, responded promptly to correspondence and competently handled complaints and queries.
Before proceeding, it is important to terminate relationships without causing clients distress or burning bridges, even when relationships are strained. To leave clients’ dignity in place, maintain your integrity and client confidentiality, and take a professional approach.
Let clients go with dignity
One way to let clients go in a graceful manner is to ‘graduate’ them to become self-directed. Tell clients how you helped them over the years when they needed financial advice and that they are now ready to do this on their own. Clients will feel good about what they have accomplished with you. This strategy is good for especially smaller clients who have been with you for a long time. It should only be followed if you believe they can assess their own situation.
You could also refer clients to a more suitable FSP. Advise clients that you have assisted them as far as you can and that you want to refer them to another FSP that might be a better fit. Identify and discuss the referrals with the FSP. Make sure it is suitable for your clients and there is a process in place to secure your clients a space with this business. The FSP must be able to value and look after your referred clients.
Another alternative is to sell the details of non-profitable clients to another FSP, if there is economic value in the client list for the other FSP. Be fair in terms of what you charge for these clients, as the main goal is to be fair to both the clients and the proposed FSP.
With RDR on the horizon, you could also start positioning financial planning fees. You could say you are instituting a new service for your clients, but to deliver this service effectively to the level that is fair to clients and effective for the business, there is a minimum annual fee. Communicate a date from when this fee will be charged.
Another option is to charge fees for doing unproductive work and where no previous commission or ongoing fees have been or are being received.
When terminating client relationships, FSPs must make sure that they follow the correct compliance process set out in the General Code of Conduct. This must include:
FSPs must also make sure that none of the clients’ information is given to another FSP or third party without written authority from the client to do so. It is a good idea to make sure that your staff are properly trained on the process so that you safeguard your business against any possible regulatory action or complaint.
By following your documented business procedure and taking a step-by-step approach to terminate relationships with clients in a gracious way, you can part ways ensuring their dignity is maintained. Keep a written document that sets out the process and reasons for each termination. When the process is complete, your business will be on a path to greater sustainability.