The provisions contained in section 8 of the General Code of Conduct (GCoC) are not optional, which means you are responsible for the suitability of advice rendered to clients.
Section 2 of the GCoC indirectly highlights the importance of determining the suitability of advice:
“A provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.”
Strengthening section 2, section 8(1)(a), (b) and (c) contain the three steps in the advice process to assist advisors to determine suitability of advice with care, skill and diligence.
Section 8(1)(a): understand the client’s current financial position
To understand a client’s financial position implies a duty to gather both quantitative and qualitative information about the client’s current and future financial plans.
From a quantitative aspect, you will need to at least determine the client’s available capital to invest or spend (i.e. the client’s affordability), as well as their debt, emergency savings and income requirements. The client’s income, expenses, assets and liabilities may help identify the factors which can be used in an analysis in the next step.
Qualitative information refers to personal circumstances such as family history, marital status, number of dependents, retirement plans, concerns and objectives.
Section 8(1)(b): conduct a needs analysis
According to the GCoC, acting in the best interest of clients is a basic regulatory requirement. Confirming a client’s financial needs and objectives should be done with a needs analysis.
From a suitability aspect, the FAIS Ombud refers to the provider’s duty to do a needs analysis in accordance with section 8(1)(a) of the GCoC and the Ombud’s office always looks for proof that an analysis was performed. An absence of such evidence constitutes a breach of the Code.
If a breach was instrumental in providing inappropriate advice and a complainant suffered a financial loss as a result – in other words there is a link between the lack of analysis, inappropriate advice and the loss – the Ombud normally finds against the advisor.
Section 8(1)(c): identify appropriate financial products
The FAIS Ombud determinations frequently refer to section 8(1)(c), which requires the provider to identify the financial products that are appropriate to the client’s risk profile and financial needs. In 80% of the 25 determinations by the FAIS Ombud during 2018, the Ombud referred to suitability as a reason for finding against the advisor.
Below is an example of how the Ombud queried a complaint and addressed whether the advisor complied with Section 8:
‘’Section 8(1) of the Code requires that a provider must, prior to providing a client with advice, take reasonable steps to seek from the client appropriate and available information regarding the client’s financial situation, financial product experience and objectives to enable the provider to provide the client with appropriate advice.
Secondly, conduct an analysis, for purposes of the advice, based on the information obtained.
Thirdly, identify the financial product or products that will be appropriate to the client’s risk profile and financial needs, subject to the limitations imposed on the provider under the Act or any contractual arrangement.
A duty to provide us with any documentary evidence to demonstrate the appropriateness of the product to the complainant’s needs … is placed on you by … the General Code of Conduct for Authorised Financial Services Providers and Representatives (“the Code”); We request a demonstration that the final recommendation was reached in accordance with the requirements of section 8 of the FAIS Code of Conduct.
Please provide us with any documentary evidence to demonstrate the appropriateness of the product to the complainant’s needs … These records need to demonstrate … why the product was likely to satisfy the complainant’s needs and objectives. Our Rule 6(b) correspondence in essence raised suitability and appropriateness of the option recommended as the pertinent issue we sought to have addressed. We requested a demonstration that the final recommendation was reached in accordance with the requirements of section 8 of the FAIS Code of Conduct.’’
The Ombud’s office therefore clearly focuses on Section 8 of the GCoC and requires advisors to demonstrate compliance with the requirements of this section.
TCF Outcome 4 – “Where customers receive advice, the advice is suitable”
One always needs to think about treating customers fairly (TCF) when giving advice. Even though TCF is not a written rule in the FAIS Act, the principles flow through all legislation. Advisors need to adhere to these outcomes, as the client and Ombud can and will use them to reach a determination in the event of a complaint.
Taking cognisance of the provisions set out in section 8 of the GCoC and TCF Outcome 4, your advice should always suit a client’s needs. By conducting an analysis based on the relevant information for the purpose of the advice, you can identify the relevant product/s that will suit the client in relation to their risk profile and financial needs.
Take all reasonable and necessary steps to ensure that clients understand the advice given to them and can make an informed decision. By using this approach, you will also be able to defend yourself in the event of a client complaint.