Professional Indemnity (PI) claims have been increasing in recent years, however, there are steps that you as an independent financial advisor can take to avoid claiming from your PI scheme.
One of the reasons that there are more claims being submitted, is that there is greater client awareness due to FAIS and the Consumer Protection Act, says Inus Marais, director at Snyman & Van Der Vyver, administrator of the Masthead PI scheme.
“Clients are becoming savvier about complaining,” he says. “Unhappy clients may see the advisor as a scapegoat; also, there is no fee to lodge complaints with the FAIS Ombud.”
Many high profile Ombud cases where advisors are at fault, are reported in the press. But the Ombud’s report also reflects that many claims are rejected for various reasons. In some instances, a product provider, rather than the advisor, may be at fault. Other claims are dismissed because the advisor followed all the correct FAIS procedures when dealing with the client.
Marais says claims reported on the PI Scheme can generally be grouped into three main categories: administration errors, an issue during the advice process and general negligence. Short-term advisors, especially, make mistakes on administration. They may incorrectly record the details of a client’s assets or inaccurately update a policy. At claim stage, when an insurer rejects a claim and the client suffers a loss, the advisor is generally at fault and has to fall back on PI cover.
Investment advisors are more likely to experience advice-related complaints. Clients may argue that their advisor didn’t show or tell them something, or invested their funds in an unregistered financial scheme which subsequently went under, and this resulted in their loss.
The third reason, general negligence, can affect all advisors and usually happens in the business processes. There are many examples of negligent behaviour. An advisor may neglect to inform a client about a key aspect in a policy’s terms and conditions, or fails to submit a client’s policy changes. The advisor may not uncover a key aspect of a client’s situation in the advice process, or invests the client’s money across funds in the wrong proportions. These are all genuine errors, and they create opportunities for a client to experience a financial loss.
To avoid making mistakes, Marais suggests that advisors follow a few basic steps. Firstly, it is important to do only the business that your FAIS licence permits you to do. By staying within your area of expertise, you are less likely to make mistakes. Place business with reputable companies and investments in regulated funds.
Take a thorough look at your processes. Does somebody check and approve the documents that are to be submitted on behalf of clients? Do you follow the FAIS process to the letter? Do you keep a full record of your interaction with a client, complete with recordings of client conversations?
Ultimately, if you are requested to state your case to the Ombud, it is your word against the client’s word. For a complaint to be dismissed, you need to prove you have done everything that is legally required of you when you provided service to the client. Having all documents and recordings available will help considerably in this regard.
How much cover should you have? To calculate the value, analyse your business and evaluate the exposure, the potential for mistakes and the likely value of mistakes. Also include in your calculation provision for legal costs, claims preparation, cost of recovery and other related expenses, which can amount to several hundreds of thousands of rand. In Marais’ view, advisors should have at least R2m in PI cover to protect themselves in their personal capacity.
If you do everything possible to avoid making mistakes, but end up being liable to cover a client’s loss, it’s good to know you have the financial safety net of PI cover. And you can enjoy the level of cover you need at an affordable cost, thanks to the preferential premiums of Masthead’s PI scheme.
To find out more about the Masthead PI scheme or to attend our seminars, which focus on business practices and staff training to help you avoid claims against your PI scheme, please contact your nearest Masthead Regional Office.