Secondary

And you thought Compliance was expensive?

The latest determination by the FAIS Ombud provides clear proof that non-compliance with one’s obligations under the FAIS Act and the General Code of Conduct can be a very costly affair.

The information below was largely copied and pasted from the Ombud’s determination. I took the liberty of removing the names of the parties concerned.

The Insurer’s Investigation

In July 2011, an insurer received information from a client, alleging that his short-term advisor stole his money after requesting him to pay an annual premium on his policy into her bank account.

The insurer instituted an investigation and discovered that there were a number of clients who paid money to the advisor after she requested them to pay annual premiums on their policies. It is alleged that the advisor made use of fabricated tax invoices and policy schedules to deceive clients into thinking that they were insured.

According to the report neither the advisor, nor her key individual had a mandate to collect premiums on behalf of the insurer. Further evidence uncovered raised suspicions of various other acts of dishonesty that might have been committed by the advisor acting as a representative for the brokerage.

The insurer opened a fraud case against her and reported the matter to the Registrar.

Action by the Registrar

The Registrar confirmed that, following receipt of the insurer’s report, it entered into a settlement agreement with the key individual. In terms of the agreement, the key individual was ordered to pay an administrative penalty of R150 000 for the following contraventions:-

  1.       i.        Section 13(3) of the FAIS Act – Failure to maintain a register of representatives, and key individuals of such representatives, which must be regularly updated and be available to the registrar for reference or inspection purposes;
  2.      ii.        Section 17(1)(a) of the FAIS Act – Failure to appoint a compliance officer to monitor compliance with the Act by the provider or its representatives, particularly in accordance with the procedures contemplated in subsection (3), and to take responsibility for liaison with the Registrar.
  3.     iii.        Section 2 of the Code – Failure to act with due skill, care and diligence, and in the interest of clients and the integrity of the financial services industry.
  4.    iv.        Section 11 of the Code – Failure to efficiently employ resources, procedures and appropriate technological systems that can reasonably be expected to eliminate as far as reasonably possible, the risks that clients, product suppliers and other providers or representatives will suffer financial loss through fraud, theft, other dishonest acts, poor administration, negligence, professional misconduct or culpable omissions.

The Ombud’s Determination

Having found that the representative caused the client to suffer financial loss, the Ombud addressed the issue of liability.

“It is not in dispute that the key individual allowed the representative to render financial services to the public whilst not being registered at the Registrar as his representative in terms of Section 13 of the FAIS Act. In other words, she was not licensed to render financial services. In simple terms, the representative had no business rendering financial services to the public and both the key individual and the representative were fully aware that they were violating the law in this regard.”

“She also did not have the requisite qualifications to render financial services without supervision. On the key individual’s own admission, since 2005, he conducted audits on the representative’s client files only once a year and visited her every six to eight weeks to discuss pending and finalised claims. The key individual was obliged to enter into a supervisory agreement with the representative that detailed the procedures regarding the rendering of services under supervision. The key individual was also required to ensure that the representative was supervised at all times when executing her duties, which included the observation of selected meetings of the representative and her clients as well as the assessment of advice given by her.”

“Apart from his obligation to have properly supervised the representative, the key individual was also required to have taken reasonable steps to ensure that she complied with the Code and to have efficiently employed resources, procedures and technological systems to eliminate as far as reasonably possible, the risk that clients might suffer financial loss.”

“The key individual failed to discharge these obligations. The key individual basically left the representative to her own devices to do what she pleased to the detriment of the public. When the representative rendered financial services to the public she did so for and on behalf of the key individual. The representative was employed to inter alia sell short-term insurance on behalf of her employer (The key individual). Whilst acting in the course and scope of her employment, the representative misappropriated insurance premiums paid to her by the client. For all of these reasons, I am compelled to not only hold 1st respondent, but also the 2nd respondent liable for the losses suffered by the complainant.”

They were ordered to pay, jointly and severally, the one paying the other to be absolved, the sum of R12 088.11.

Several questions arise from the above:

  • Will further complaints from other clients lead to more findings against the key individual and the representative?
  • Will his professional indemnity cover such losses?
  • What will the obligations be for a new owner, should the business be sold?

There are possibly many similar informal relationships where advisors, who opted out of the industry in terms of their licence agreements, still solicit business for registered FSPs. Please heed this timely warning it can backfire badly.

You can click here to download the full determination.

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