Failure to appropriately advise a client, as required by Section 8 of the FAIS General Code of Conduct (GCOC), can result in serious consequences for both you and the client.
In a 2016 Ombud Determination, a client alleged that her financial advisor had failed to appropriately advise her, despite having provided him with the necessary and available information. Due to the advisor’s ill advice, the client claimed she unknowingly accepted a later date as the date of inception of a life assurance contract that covered her and her husband.
The client concluded the contract on 23 March 2015, with the date of inception of the contract as 1 May 2015. On 18 April 2015, 13 days before the life cover incepted, the client’s husband died in a motor vehicle accident.
The client lodged a claim with the advisor, which was rejected. She then lodged a complaint with the Ombud’s Offices, claiming that she and her two minor children were left with no financial means of support. She also alleged the situation would not have arisen if the advisor had abided by the terms of the GCOC and appropriately advised her.
The advisor denied violating the GCOC. He claimed the client had the choice to object to the date during the conversation and afterwards. He claimed it was up to the client to select an earlier date, but she had not exercised that choice. Furthermore, he said he had done everything to put the client in a position to make an informed choice. In so doing, he had upheld the duty to act in the client’s interests.
Apart from making this claim, the advisor made no case as to how the client would have known these rights. The late date of inception was the advisor’s failure to take the client’s circumstances into account when providing advice. These circumstances included the client’s risk profile, financial circumstances and needs.
With regard to risk, the client and her late husband had no life cover at the time. They had never been covered before and had no experience of financial products. As such, they may not have been aware of the full implications of the risk they were facing. But they had the sensibility to seek the service of a professional, namely a financial advisor, to assist them. It was the advisor’s duty to consider that if anything were to happen to the husband, the client and her children would have had no financial means to carry on. The advisor had a duty to take that risk into account in selecting the date.
The problem arose, as the advisor did not apply his mind to the client’s circumstances or pay attention to the risk factors. The client and her husband may have seen the need for life cover, but were not alerted to the risk confronting them. As the expert, the advisor knew the urgency of the situation. He also knew how the product worked, and that the client and her husband would have no life cover until 1 May.
The client would not have had such knowledge unless she was appropriately advised. The advisor capitalised on the client’s ignorance, and his conduct in this regard undermined the spirit of the FAIS Act and the principles behind TCF.
Representations made and information provided to a client must be adequate and appropriate in the circumstances of the particular financial service. The client’s factually established or reasonably assumed level of knowledge should also be considered.
Clients who receive financial services must be able to make informed decisions. Their reasonable financial needs regarding financial products must be appropriately and suitably satisfied. In addition, authorised FSPs and their representatives must:
a) Act honestly and fairly, and with due skill, care and diligence, in the interests of clients and the integrity of the financial services industry;
b) Have and employ effectively the resources, procedures and appropriate technological systems for the proper performance of professional activities;
c) Seek from clients appropriate and available information regarding their financial situations, financial product experience and objectives in connection with the financial service required;
d) Act with circumspection and treat clients fairly in a situation of conflicting interests; and
e) comply with all applicable statutory or common law requirements applicable to the conduct of business.
As an FSP, the advisor was required to deliver the following six outcomes of TCF to his client:
- Customers can be confident they are dealing with firms where TCF is central to the corporate culture.
- Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly
- Customers are provided with clear information and kept appropriately informed before, during and after point of sale
- Where advice is given, it is suitable and takes into account clients’ circumstances
- Products perform as FSPs have led clients to expect, and service is of an acceptable standard and as they have been led to expect.
- Clients do not face unreasonable post-sale barriers imposed by FSPs to change product, switch providers, submit a claim or make a complaint.
The TCF principles aim to raise the standards of FSPs’ operations by introducing changes to benefit consumers and increase their confidence in the financial services industry. The principles also aim to help clients fully understand the features, benefits, risks and costs of the financial products they buy. In addition, they seek to minimise the sale of unsuitable products by encouraging best practice before, during and after the sale.
The question the Ombud considered was whether or not the advisor breached his statutory duty to appropriately and suitably advise the client, so she could make an informed decision about the advisor’s proposals. A further relevant question was whether the advisor discharged his duties with due skill, care and diligence, in the interests of his client and the integrity of the financial services industry.
The Ombud ruled that the client should have been advised that she and her husband would have no life cover until the policy incepted on the commencement date of 1 May 2015. Had it not been for the inappropriate advice rendered by the advisor, the client’s attention would have been drawn to the need to secure life cover at the earliest date. Thereafter, the client would have enjoyed cover of R2 million.
After the advisor had spoken to both the client and her late husband, who informed the advisor that they had no life cover, the client’s risk must have been foreseeable. Instead, the advisor failed to appropriately apply his mind to the circumstances and recommended a date that suited his administrative processes. As a result, the client accepted the later date that the advisor communicated.
The complaint was upheld.
Failure to appropriately advise a client of all material information can be detrimental to the advice process. Further to a client’s rights being prejudiced, you could meet dire consequences, which may have great reputational repercussions.