The Office of the Ombud for Financial Services Providers (FAIS Ombud) published its 2020/2021 Annual Report in December 2021. The Report provides insight on topics such as the settlements agreed to, a summary of complaints received for the reporting period, various statistics, financial information, governance risk and compliance and human resources information.
The FAIS Ombud has seen an increase of more than 19% in complaints received at 10 552 for the reporting period, compared to 8 835 for the 2019/2020 financial year. This is also the first time the Office received more than 10 000 complaints since the 2016/2017 financial year. Of the complaints received, 66% fell within the Ombud’s mandate, which resulted in 6 975 complaints being referred to the Case Management Department for investigation, which is the highest number of complaints, since the inception of the FAIS Ombud.
In the section below, we take a closer look at some the trends that the Report has identified as instances where FSPs were in violation of the provisions of the FAIS General Code of Conduct, as well as the Treating Customers Fairly (TCF) Outcomes.
Increase in complaints relating to Crypto assets
The Office has seen a significant increase in the number of complaints received in respect of investments made into cryptocurrencies during the reporting period.
Currently, there is no specific legislation or regulation that exists in South Africa for the use of crypto assets, which means that there is no legal protection or recourse offered to users of, or investors in, crypto assets. Furthermore, crypto assets are not classified as a ‘financial product’, meaning that the product falls outside of the Ombud’s jurisdiction.
However, in June 2021, the Intergovernmental Fintech Working Group (IFWG), through the Crypto Asset Regulatory Working Group (CAR WG), published a Position Paper on Crypto Assets. The paper made 25 recommendations on how to bring crypto assets into the South Africa regulatory environment, as well as provided confirmation that crypto assets will be brought into the South African Regulatory purview in a phased and structured manner. With one of the short-term objectives being that crypto assets be declared as a ‘financial product’ by the Financial Sector Conduct Authority (FSCA). This will be an interim measure providing the FSCA with the statutory power to regulate the advisory and intermediary component of crypto assets, as financial advice, and intermediary services in respect of crypto assets will be dealt with under the Conduct of Financial Institutions Bill (COFI), once enacted. This will mean that the FAIS Ombud would be allowed to investigate complaints received in this respect.
It is important to remember that, even though crypto assets have become extremely popular and used by many across the globe, these are still not regulated and classified as a financial product in South Africa. An FSP may not in any manner refer to its authorisation or name the FSCA as its Regulator in any advertisement relating to crypto asset-related products or services in such a manner to create the impression that the FSP’s authorisation extends to crypto assets and related services, or that the provision of crypto assets or related services are regulated by the FSCA.
The Office noted an ongoing trend in complaints received in respect of homeowners’ insurance claims related to damage caused by acts by nature. Though the complaints received by the Office are related to insurer’s rejecting claims, the complaints specifically highlighted the dissatisfaction with the insurer to reject the claim based on wear and tear and/or defective workmanship.
Due to there being no decline in the number of complaints in this regard, taking into consideration previous complaints statistics, the Office stated that many clients do not know or understand the material terms and conditions contained in their policy documents and that, despite the number of complaints, it appears that FSPs are not making any effort to improve the way these policies are sold to clients.
The Office referred to the TCF Framework, in particular Outcome 3, which states that FSPs must ensure that clients are provided with clear information and are kept appropriately informed before, during and after the point of sale. The Office also referred to Section 7(1)(a) and 7(1)(c)(vii) of the FAIS General Code of Conduct (GCOC), which states that FSPs are required to provide a reasonable and appropriate explanation of the nature and material terms of the relevant contract or transaction to a client and make full and frank disclosure of any information that would be expected to enable a client to make an informed decision. FSPs have a duty to ensure that, where applicable, concise details of, among others, exclusions of liability and/or circumstances in which benefits will not be provided, are clearly disclosed to clients, at the earliest opportunity.
It is also important to note that the Office stated that it would interrogate the disclosures made when the financial service was rendered and warned that where it is found that no effort is being made to improve the sales process of these products, referrals shall be made to the FSCA for further investigation.
Processes and procedures of product providers
Another trend that seems to have continued from previous reporting periods, is where FSPs do not implement adequate measures to mitigate the negative outcomes experienced by clients.
The example provided relates to a funeral benefit, where the FSP provides no assistance to the client where child dependents who turn 21 no longer qualify for child dependent status, unless they are full time students. The “child dependents” of the policy holder must essentially be noted as an extended family member or be provided for on a separate policy.
The Office found that in several matters investigated, the FSP did disclose this to the client at the policy’s inception, but that no further attempts were made to notify the client after the policy’s inception other than a brief mention in the annual renewal letter which, in many cases, only contains generic information and is sent to all clients.
The result is that once the child has reached the age of 21 and is not a full-time student, the policy continues as normal with premiums continuing to be collected, unless the client explicitly requests for the policy to be amended. Where no changes are made, it becomes an issue at claim stage.
The Office again referred to TCF Outcome 3, as well as section 11 of the FAIS GCOC, which states that FSPs must always have and effectively employ the resources, procedures, and appropriate technological systems to eliminate as far as reasonable possible, the risks that clients will suffer financial losses through, among others, poor administration, negligence, or professional misconduct.
Failure to make a recommendation
The Office found that in response to complaints received, where it questions the FSP as to why the product it recommended was deemed suitable or appropriate for the client, the FSP responded that the client was provided with a range of financial product options and selected the option provided, for example, the option that had the lowest premium with the most cover. Furthermore, FSPs responded that they merely provided the client with what the client had asked for.
The Ombud stated that this approach is contrary to the provisions in the FAIS GCOC and is not acceptable. It was further stated that “When a prospective client approaches an FSP, there is an expectation that they will receive advice that is appropriate to them; not for an FSP to simply leave it up to the client to make up his or her own mind, or to simply provide the client with what they request.”
In terms of section 8(1)(a)-(c) of the FAIS GCOC, an FSP is required to obtain appropriate information from a client to conduct a financial needs analysis to enable the FSP to recommend a suitable product for the client. Furthermore, in terms of section 8(4)(c), an FSP must, where a client elects to conclude a transaction that differs from that recommended by the FSP, or otherwise elects not to follow the advice provided, or elects to receive more limited advice, alert the client of the clear existence of any risk to the client and must advise the client to take particular care to consider whether the product selected is appropriate to the client’s circumstances, objectives and needs.
A warning against using risk analysis against complainants
The Ombud noted that many FSPs are still relying on generic risk profiling questionnaires to justify a selection of a specific portfolio when providing investment related financial products and services. While the Ombud does not necessarily have a problem with FSPs using these risk profiling questionnaires, the concern is that the answers to these questionnaires are used against those clients, in the event of a complaint. Furthermore, the results from the questionnaires are used to rationalise the product recommended to a client. The example provided by the Ombud is for instance, where the client selects four-to-seven years as the investment horizon, the FSP then recommends an endowment policy which has a restriction period of 5 years. The Ombud states that just because the client has a desire to save for four to seven years, is by no means an indication that the client wanted to be placed in a restrictive product or that the product is necessarily suitable for the client.
It was stated that, “Not only is this questionnaire positioned as a risk profiling exercise and not a fact-finding exercise, but the clients are never informed that any information provided during the risk profile questionnaire can be used against them in the event of any possible future complaint.” The Ombud again referred to the TCF Framework and stated that this is not considered to be in good faith and is not in line with the TCF principles.
Section 18 (1)(a)(v) of the FAIS GCOC places a duty on FSPs to monitor determinations, publications and guidance issued by any relevant ombud with a view to identifying failings or risks in their own policies, services or practices. The FAIS Ombud Annual Report is a valuable record in terms of understanding the trends and risks to which FSPs and financial advisors are exposed and should be included in the Complaints Management Framework review process by all FSPs.
To read the FAIS Ombud Annual Report 2020/21, click here.