In a case study written by Ian Middleton, Managing Director of Masthead, the FSB noted that an FSP did transactions in terms of s8(4)(a) of the General Code of Conduct where no analysis was conducted and asked the FSP for steps which will be taken to reduce or stop these transactions. We take a look at the FSB’s approach, what the law says and some of the issues around single need sales.
A Case Study:s8(4)(a) of the General Code of Conduct
Many financial advisors have used section 8(4)(a) of the General Code whereby they get their clients to sign a declaration that acts as a ‘waiver’ when they have not conducted a financial needs analysis (FNA). We recently worked with a financial services provider (FSP) who received a letter from the FSB after they reviewed his FSB audit that was submitted. Specifically, they focused on his response to Question 9.5 of the FSB audit template, which reads:
Did the FSP conclude any transactions in terms of section 8(4)(a) of the General Code of Conduct during the reporting period?
The FSB noted that the FSP did transactions in terms of s8(4)(a) of the General Code of Conduct. They wanted to know what steps he will take to reduce or stop these transactions. They also wanted him to specify the percentage of new financial transactions where he had used the s8(4)(a) declaration.
The regulators are concerned that advisors are using s8(4) declarations to avoid the need to do an FNA. To Masthead, the FSB’s approach, indicates a focus on ensuring that customers are being treated fairly. It questions whether customers have in fact waived their rights to have their circumstances considered when advice is given and a product sold. To add to this, we have seen examples from the office of the FAIS Ombud overriding s8(4) declarations signed by the client and finding against advisors.
In terms of the General Code of Conduct [s8(1)] advisors, must do an analysis of their clients’ situations, needs and objectives before they provide advice. However, where clients cannot provide all the information, or they really do not have the time to give the necessary information after it has been requested, advisors can ask those clients to sign a declaration in terms of s8(4) of the Code.
This effectively means the advisor is telling their client that they are providing advice based on limited information and/or the advice is based on no analysis being done.
If advisors want to rely on s8(4), advisors will also have to set out the implications of this to their clients and make sure they understand that:
- a full analysis was not done,
- the appropriateness of the advice might be limited, and
- the client must effectively take the responsibility to consider whether the advice is appropriate for
It is important to note that s8(4) is intended only for a situation where a client cannot provide all the information that an advisor requests or the client really does not have the time to provide the necessary information.
Single Need Sales
Masthead has seen situations where advisors get clients to sign the s8(4) declaration in so-called ‘single need sales’ (e.g. a life policy to cover a bond). Even single need sales should be backed up by an analysis of the client’s needs. Because the need is limited (single) the analysis may be simpler, but advisors still have to ask the client questions and then make sure the product meets the client’s need.
Similar to the point above, s8(4) declarations are not designed to be signed by clients just because they have a single need.
s8(4) declarations should only come into play after advisors have asked the client for the required information and the client could not provide it all or does not have the time to provide it. Therefore, it should really only be used as an exception. Where it is used, advisors should keep a record and specify the reason why the FNA could not be done. That way, the advisor has an audit trail in the event of an investigation by the FSB or a complaint by the client.