The requirements of section 8(4)(a) of the FAIS General Code of Conduct (the Code) apply when addressing a client’s specific need, however, an Ombud determination highlights the implied duties that are also required of you.
You can only avoid doing a full financial needs analysis if a client does not provide adequate information or if there is insufficient time. In these circumstances, you need to inform the client and ensure he or she understands a full financial needs analysis could not be conducted, so the appropriateness of the advice may be limited. The client must also be warned to consider if the advice is appropriate, considering his or her objectives, financial situation and particular needs.
Given the above and the common practice of ‘single need’ sales or advice, how should you act? The Financial Services Tribunal ruling in respect of PC Cronje Makelaars v CJ van Zyl and Another highlights how to address a single need requirement.
First and second respondents Carel and Hester van Zyl lodged a claim with the Ombud for Financial Services Providers against PC Makelaars, based on investment advice linked to Sharemax Investments and Propspec Investments.
Carel van Zyl initially approached PC Makelaars for a discussion, as he was dissatisfied with his current investment earnings and wanted higher returns. PC Makelaars assured the respondents that the investments they were proposing were safe and after attending a presentation by Sharemax and Propspec, the respondents invested in Sharemax and Propspec investments.
However, when Sharemax ceased to operate during the second half of 2010 and Propspec’s investment collapsed, the respondents’ investment capital was lost.
The Ombud upheld the complaints of inappropriate advice and found a sufficient link between inappropriate advice and the respondents’ loss. PC Makelaars was ordered to pay R337 000 to the first respondent and R412 000 to the second respondent.
The crux of the Ombud’s determination was based inter alia on the following:
After the initial determination, PC Makelaars referred back to the Ombud to reconsider the determination in terms of section 230 of the Financial Sector Regulation Act, and was granted leave to appeal. Some of the grounds on which its application was made included that the Ombud erred in:
The tribunal had to decide whether PC Makelaars had conducted itself negligently in providing the financial advice and was therefore in breach of the Code. The test used to determine whether an FSP/advisor acted negligently in rendering advice is based on a subjective matrix. Applying this, the tribunal observed:
– Cancellation of conducting financial analysis;
– Acceptance of the advice by the first respondent;
– lncome and/or capital growth for retirement;
– Cancellation of the part referring to investment capital guaranteed over the investment term.
The tribunal ruled that the respondents were aware of and understood the high-risk nature of the investments and that the respondents’ needs, namely a higher return, were met as they repeatedly invested more into Sharemax.
It was found that PC Makelaars had not acted negligently. The Ombud’s determination was set aside and referred back for further reconsideration.
The abovementioned case highlights advisors’ responsibilities to render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry at all times. This responsibility is envisaged in section 2 of the Code, and an FSP may not dispense with this duty even when addressing a client’s single need.
Even where a client agrees to dispense with a full financial needs analysis being conducted, and elects to receive limited information or advice, you will need to demonstrate that due skill, care and diligence was applied when entering into a mandate with the client. You may need to prove the due diligence measures taken for a recommended product and your steps taken to ensure all risks associated with the product were brought to the client’s attention.
You are also expected to take reasonable steps to seek appropriate and available information regarding clients’ financial situations, financial product experience and objectives, even where the requirements of section 8(4)(a) are met. This will enable you to conduct an analysis to provide clients with appropriate advice and alert them of any risk. You also need to advise clients to take particular care to consider if any product selected is appropriate to their needs, objectives and circumstance.
By acting with clients’ interests in mind at all times and keeping a record of all your interactions with your clients, you will be able to respond confidently in the event of a dispute with a client.
To read the full determination, click here.
The Council for Medical Schemes (CMS) recently published Circular 7 of 2020 which contains the details on the adjustment of fees payable to brokers. The Minister of Health has approved an increase on the maximum fee that is payable by medical schemes to brokers with effect from 1 January 2020. Regulation 28(2) published in terms of the Medical Schemes Act, now effectively states that the maximum fee is:
a) R98.85 plus value added tax (VAT) per month; or
b) 3% plus value added tax (VAT) of the contributions payable in respect of that member, whichever is the lesser.
FSPs licensed for Health Service Benefits are reminded to adjust the fees on all documentation which discloses this commission to clients.
Directive 5 of 2019 was published by the Financial Intelligence Centre (FIC) during March 2019. The Directive relates to the usage of an Automated Transaction Monitoring System (ATMS) for the detection and submission of regulatory reports to the Centre in terms of section 29 (Suspicious and Unusual Transactions) of the FIC Act. Directive 5 places certain obligations on accountable and reporting institutions and other persons (collectively referred to as reporters) who use an ATMS to enable them to monitor client transactions and activity in order to identify suspicious and unusual transactions.
On 31 January 2020, the FIC published draft Public Compliance Communication (PCC) 107 which provides guidance to all reporters on the requirements set out in Directive 5 of 2019. Draft PCC 107 is currently open for public comment until 21 February 2020. Comments can be e-mailed to the FIC at Consult@fic.gov.za.
It is important to note that it is not mandatory for a reporter to use an ATMS. However, should the reporter opt to make use of an ATMS, they must do so in line with Directive 5.
Read our previous article, FIC Directive 5/2019, to learn more about the use of an ATMS ito Directive 5 of 2019.
A media release recently published on the website of the Ombud for Long-term Insurance stated that a new portal had been launched to assist complainants to lodge insurance related complaints. This portal was introduced shortly after the news that there would be a joint Ombudsman for both long-term and short-term insurance complaints with effect from 1 January 2020.
The Ombudsman for Long-term insurance, retired Judge McLaren, has in addition to his current role taken over the adjudicative role in the office of the Ombudsman for Short-term insurance. The joint Ombudsman is for the adjudication of long-term and short-term insurance complaints only. While the office of Ombudsman for Long-term insurance and the office of the Ombudsman for Short-term insurance remain in existence and continue to operate separately within their current defined jurisdictions.
Accordingly, the office of the Ombudsman for Long-Term Insurance will continue to have jurisdiction over complaints about long-term insurance products such as life insurance, funeral, long-term disability, credit life and health insurance policies while the office of the Ombudsman for Short-Term Insurance will continue to have jurisdiction over all types of short-term insurance products, including motor, house owners (buildings), householders (contents), cell phone, travel, disability and credit protection insurance, and commercial insurance for small businesses and sole proprietors.
The new portal for complaints will assist complainants who are uncertain at which office to lodge a complaint. The existing individual complaints portals for long-term insurance and short-term insurance will also continue to remain in effect.
The new portal provides complainants with the following contact points:
The Companies and Intellectual Property Commission (CIPC) previously announced that it is a mandatory requirement for all companies to submit a Compliance Checklist together with their Annual Return as of 1 January 2020. The checklist enables companies to declare their compliance status to specific sections of the Companies Act. CIPC will utilise the Checklist to monitor and regulate proper compliance with the Companies Act and if trends of non-compliance appear, to act accordingly.
Following the announcement of the Compliance Checklist, the CIPC published a media release on 4 February 2020 stating that it has come to the CIPC’s attention that there is confusion and misinformation with regard to the functionality of the Checklist and the applicability thereof in terms of CIPC’s mandate to monitor and enforce proper compliance with the Companies Act. The media release further states that the CIPC has introduced a Compliance Checklist service for companies to use as an educational and guidance tool regarding duties and responsibilities imposed in terms of the Companies Act.
The CIPC states that the Compliance Checklist is a useful tool in the corporate governance and compliance framework of each company and the completion of the checklist will ensure that the CIPC is equipped with reliable information for monitoring compliance of companies with the Companies Act.
The media statement also stated that the CIPC will be hosting webinars and Educational sessions on the Compliance Checklist in order to ensure that assistance is given to companies in this regard.
FSPs, Key Individuals and Representatives are reminded to ensure that any Class of Business Training that has been completed must be added to the Competence Register within 15 days after the training occurred and all information and documentation relating to the training must be retained for at least 5 years. The deadline for Class of Business training is 12 months from date of first appointment in respect of a particular financial product.
FSPs, Key Individuals and Representatives are reminded that they should be on track with achieving the required number of hours for CPD. The deadline to meet the minimum number of required CPD hours is 31 May 2020 and it is therefore advisable that steady progress is made towards achieving this.
Should you require more information on the various accredited CPD activities that Masthead offers, please get in touch with us or contact your Masthead Compliance Officer.
The latest version of the FSCA’s Preparation Guide for Regulatory Examinations (RE1 and RE5 Exams) has been published and can be downloaded here.
The FSCA publishes and regularly updates their RE Exam Preparation Guide which contains detailed information to help you prepare for your exam. This guide should be your starting point before you start studying the material, as it gives a summary of the exam format, how to study, what to expect when writing the exam and more.
Masthead can assist you in passing your RE 1 and RE 5 Exams. Learn more about our RE Mock Exams and RE 1 and RE 5 Training Seminar.