Section 8(1)(c) of the General Code of Conduct (GCOC) for Authorised Financial Services Providers (FSP) and their Representatives requires that any FSP, other than a direct marketer, prior to providing a client with advice, identify the financial product(s) that will be appropriate to the client’s risk profile and financial need(s).
The determination of an appropriate financial product or products, must therefore be subject to an analysis of information obtained from a client. The legislator’s intention with regards to this provision is clearly that every client should be given advice regarding financial product(s), based on their individual needs.
Should a complaint be referred to the FAIS Ombud, the onus will be on the FSP to prove on a balance of probabilities that the product(s) recommended meet the needs of the client.
The question arising from this is: What is considered sufficient proof that the financial product(s) identified, is appropriate to the financial needs and risk profile of a client?
When will an FSP fulfil its obligations in terms of Section 8(1)(c) of the GCOC? The requirement created in the said section is two-fold, i.e. –
- the gathering of information regarding a client’s financial situation, and
- the analysis part.
Practically this is problematic since Section 8(1) regulates the process prior to rendering suitable advice. The question therefore is when will an FSP be able to comply with the requirements of Section 8(1)?
Section 8(1) requires an FSP to evaluate the financial needs and risk profile of a client. Before FSPs may render advice, a thorough assessment must be done to determine which product(s) would be the most suitable with regards to each individual client’s needs.
- Neglecting to do this could have dire consequences for FSPs, as can be seen in many of the FAIS Ombud determinations. In Ludewig and Ludewig v Van der Merwe and Another, the Ombud determined that the Respondent’s conduct clearly violated Section 8(1)(c) of the GCOC, because there was no case or basis made in the documents for recommending the product. The Ombud ordered the Respondent to pay to the Complainant the amount of R450 000, as well as the Ombud’s costs.
- In a later matter of Peens v Huis van Oranje Finansiële Dienste, the Ombud determined that a pro-forma advice record signed by a client without making the necessary enquiries, does not meet the FSP’s legal responsibilities in terms of Section 8(1). The Ombud further determined that FSPs must apply their minds to their clients’ circumstances.
- In Botha and Botha v R&S Walsh Investment Consultants CC and Others, the Ombud determined that the Respondents are liable for the damages suffered by the complainants because the Respondents had failed to consider the circumstances of the clients.
Taking the abovementioned matters into account, as well as many similar matters, it is clear that many FSPs fail to consider suitable product(s) and that the Ombud will deal with these matters in a serious manner. It is also clear that many FSPs are not aware of the importance of Section 8(1)(a)-(c) of the GCOC.
What should FSPs do
- An FSP must always consider the appropriateness of product(s), based on the client’s risk profile and financial needs. There is a general duty on FSPs to act honestly, fairly with due skill, care and diligence in the interest of clients and the integrity of the Financial Services Industry when giving advice and this should act as context when interpreting Section 8(1)(a)-(c).
- Each individual client should be advised in terms of his/her own unique circumstances and it is therefore also preferable to consider a variety of products and to advise him/her on the most appropriate product for his/her needs. The GCOC does not prescribe the number of products that must be considered, but should the matter be heard by the FAIS Ombud, the FSP must be able to motivate the advice given and the appropriateness thereof.
- It is recommended that an FSP review its processes and implement a minimum standard of information to be obtained from a client before providing advice, e.g. current short-term schedule, Astute profile, assets/liabilities, income/expenses, etc. In conjunction with proposed minimum information requirements, also utilise a comprehensive checklist to ensure that all relevant information is obtained from a client prior to furnishing advice.
- FSPs should have sound product knowledge based on proper product training in order to advise the client on the most appropriate financial product(s) based on their financial objectives.
In summary, an FSP should be able to motivate its advice without any difficulty. This implies that when an FSP considers a product it should be certain that the recommended product(s) meets the needs of the specific client.
Keeping a record of the different products considered may be time consuming, but it’s a small price to pay when considering the complaints and consequences that have already been successfully instituted against FSPs.