The Ombudsman for Short Term Insurance has issued the latest issue of the OSTI Briefcase for 2016. We take a look at two case studies in this issue which relates to clear information not being provided. We highlight the importance of understanding what is expected of financial advisors when providing clients with information about a financial product.
Case Study 1 – Motor Vehicle Inspection not done as per requirement of policy schedule
The client sought assistance from the Ombud after her claim for damages to her vehicle was rejected by her insurer. The reason for this rejection was two-fold. Firstly, the client had not had the vehicle inspected at inception of cover. The policy states that should the insured fail to do so, the insurer will be entitled to limit the scope of the cover to third party cover only. In addition, the client informed the insurer at inception of the policy that the vehicle was brand new which was, in fact not the case.
The Ombud investigated the complaint and found that the client was informed of the inspection requirement and was made aware of the consequences of non-compliance. The policy schedule was also sent to the insured which contained the special condition of the inspection. The Ombudsman found that the insurer was entitled to reject her claim as she provided them with incorrect information.
Case Study 2 – Failure to disclose all Previous Incidents and Claims
The client’s claim was rejected by the insurer after fire damages occurred to his house. The insurer rejected the claim because at underwriting stage, the client did not fully disclose losses previously suffered. The client’s defence was that the insurer should have conducted a background check on him at inception of the policy. The insurer defended itself upon finding that during the validation of the claim, it learnt that the client had eight previous claims prior to inception of the policy, however he only disclosed one. The insurer advised that had the previous claims been disclosed, it would not have accepted the client as a risk based on his claims history.
The Ombud found that the client provided the insurer with incorrect information and did not fully disclose all of his previous claims or losses when he was requested to do so. The client was provided with all of the policy schedule documents within the 30 days of inception of the policy which created an obligation for the client to acquaint himself with the information.
The Ombud upheld the insurer’s rejection of the claim as well as the voidance of the policy and all premiums paid by the client were refunded to him.
Key Learning Points:
Both of the cases discussed above highlight the importance of providing clear information. In both cases the clients’ complaints were rejected owing to them not providing honest and clear information to the insurer.
Although these complaints were referred to the Short Term Insurance Ombud, we think that there are some lessons that financial advisors can take out of these cases. There have been instances where a client first seeks recourse through the Short Term Insurance Ombud and, when unsuccessful, then looks to the FAIS Ombud for recourse against the financial advisor for inappropriate advice or lack of information provided.
The General Code of Conduct (Section 7) is very clear about the type of information which a client must be given about a financial product before making a decision to enter into any form of contractual agreement for cover, investment, etc. It also sets out the duty of a financial advisor to fully inform a client about what is required in order to execute or complete a transaction. The principles of Treating Customers Fairly also deal with the requirement to give clients information in a way that that they can understand so that it is clear to them how the product works and what their duties and obligations are to ensure that when they require the product to perform, for example at claim stage, that this is successful and in line with their expectations. Although the cases described above deal with Short Term Insurance, the principles can be extrapolated across all the different types of financial products.
Information about the Product
Many advisors rely on the quote, fund fact sheet, brochure or other information document of the product supplier as evidence that information about the product was given to a client. It is, however, important for advisors to make sure that they understand the extent of the disclosure requirements set out in Section 7, which are the following:
- Reasonable and appropriate explanation of the nature and material terms of the contract or transaction, and generally made full and frank disclosure of any information that a client will need to make an informed decision. These terms are fairly broad, but at the end of the day, when making a purchase of any kind we all expect to be given enough information about the product so that we can consider our options and decide whether or not to purchase the product. Financial products can be complex in nature and often the benefits are only derived at some time in the future. Advisors need to consider the level of education and experience of their clients and make sure that the type of product is suitable and explained in a way that the client can understand.
- Name, class, type of financial product, the nature and extent of benefits to be provided including the details about how those benefits are derived or calculated, will accrue or be paid. Although we live in a busy world where time is often limited, making sure that clients understand a product and its important features is paramount, not only to protect the financial advisor but also to make sure that a client sees how the product can fit into their long terms goals and what they can expect. When a client needs to make a claim or perhaps withdraw funds, advisors need to be confident that the client fully understood the mechanics or workings of that product. Part of this is managing expectations. Affordability very often restricts the type of services that we can afford. If a person buys an economy class air ticket there is no expectation of silver cutlery, linen serviettes or any other form of special service. That is because an economy class ticket holder knows what to expect. In the same way, advisors need to make sure that clients understand the limitations of the financial product taken up. This should be documented and recorded so that there can be no debate that the client understood the level of cover, service or investment return that they could expect.
- Fees or charges which will be levied against the product. Can you confidently say that your clients understand the amount and frequency of such charges, who will receive these, the particular services which the client will receive for each fee or charge that they will pay, do they understand how any performance fees will work if these are applicable or how the fees on any underlying fund or other financial product will affect the ultimate performance of their investment. When dealing with an investment there is also additional information which clients must be informed of such as rebates, past investment performance, platform fee arrangement etc. Advisors need to ask themselves whether their clients have been clearly informed. Answering truthfully will enable an advisor to identify any risk or deficiency in their process and take appropriate remedial actions.
- Do your clients fully comprehend the nature and extent of their monetary obligations towards the product supplier and to you as an authorised financial services provider?
- If commissions, incentives, remunerations, brokerages are due, have your clients explicitly agreed to these?
- Many products, in fact almost all of them, have some type of special terms, conditions, exclusions, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided. Advisors need to make sure that they keep a record of how they made the client aware of this “special” type of information including any actions which a client must take in order to ensure that the product will perform as expected. We see this most often in Short Term Insurance complaints where the complainant alleges to “NOT” have been informed of their duties in terms of the contract. Although clients also have an obligation to ensure that they understand what they have bought, there is enough evidence emanating from the office of the FAIS Ombud making it clear that advisors need to be able to prove that they have specifically highlighted this important information to a client. From experience, failure by advisors to keep a record of this particular requirement is often the reason for the FAIS Ombud finding in favour of a client. Advisors should pay special attention to this aspect not only to avoid complaints but also to be fair to their clients.
Inform clients of the consequences of non-disclosure
In the cases discussed above, the clients had not voluntarily disclosed the necessary information to the insurers. The Code requires that advisors “fully inform a client in regard to the completion or submission of any transaction requirement – that all material facts must be accurately and properly disclosed, and that the accuracy and completeness of all answers, statement or other information provided by or on behalf of the client, are the client’s own responsibility.” Part of this is about client education. Advisors must make sure that client’s understand the implications of any form of non-disclosure. Advisors are expected to know what must be given to a product supplier in order for them to accurately assess the risk, where applicable, of a client. Inaccurate information may have a devastating effect on a client at claim stage. Make sure that your discussions with your client are documented and recorded.
We have not dealt with every aspect of Section 7 as it is lengthy and applies across all types of financial products. However, these sections of the Code creates an obligation on advisors to give clients enough information at the earliest possible time and to highlight the client’s own responsibilities. If an advisor does not do this and only relies on the product provider to provide the client with such information, they will not be able to show that clients are being fairly treated and will expose themselves to risk, particularly in the event of a client complaint.