Cliffe Dekker Hofmeyr (CDH) has highlighted growing regulatory scrutiny of replacement policy advice, pointing to recent determinations by the FAIS Ombud and decisions of the Financial Services Tribunal (FST).
This scrutiny, CDH says, underscores the importance of compliance with the General Code of Conduct and the Policyholder Protection Rules (PPRs).
A replacement policy arises where a financial services provider recommends that a policyholder terminate or vary an existing policy to take out a new policy, whether with the same or a different insurer. This may materially affect the policyholder’s rights and benefits, CDH says.
As a result, the firm notes that the FAIS regulatory framework imposes heightened disclosure, advice and record-keeping obligations on FSPs in such cases. These obligations operate alongside the Insurance Act by imposing complementary, or “dovetailed”, duties on FSPs and insurers to ensure policyholder protection.
With the aim of ensuring that policyholders understand the risks associated with a replacement policy and can provide informed consent, CDH says the General Code of Conduct imposes compliance obligations on FSPs, including the obligation to:
- Act honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.
- Provide policyholders with appropriate and adequate information, including disclosure of all material risks, obligations and limitations associated with a financial product.
- Disclose the actual and potential financial implications of the replacement policy, including costs and front-end charges, as well as differences in cover (including exclusions, waiting periods, excesses and retroactive dates) and any circumstances in which benefits may not be provided.
- Ensure that the advice given is appropriate to each policyholder’s specific financial needs and objectives, based on accurate and complete information.
- Provide a documented comparison of the terminated product and the replacement product, including other requisite information.
- Maintain a proper record of advice provided to the policyholder.
In addition, CDH says PPR Rule 19 obliges insurers to establish procedures to identify replacement transactions and to obtain confirmation that FSPs followed appropriate disclosure and advice processes.
CDH notes that a failure by an FSP to disclose that a transaction constitutes a replacement policy may trigger reporting obligations and potential scrutiny by the FAIS Ombud and other supervisory authorities. It adds that, in certain instances, an insurer may be exempted from the provisions of PPR Rule 19.
Lessons from the Ombud and Tribunal
CDH says complaints recently settled by the FAIS Ombud illustrate the implications of non-compliance with the General Code of Conduct in the context of replacement policies.
According to CDH, recurring issues identified in these matters include failures by FSPs to:
- exercise reasonable care, skill and diligence, and act in the interests of the policyholder when providing financial services;
- explain the benefits that would be lost upon cancellation of the existing policy, and/or disclose exclusions, waiting periods or other restrictions in respect of the recommended policy;
- properly assess the policyholder’s circumstances and needs;
- maintain an adequate and consistent record of advice; and/or
- produce documentary proof that the required disclosures were made and understood by the policyholder.
CDH says these principles were reinforced in the recent decision of Dube v Accolade Financial Planning Services (Pty) Ltd, in which the Tribunal addressed FSPs’ obligations to:
- act with honesty and integrity, including not acting with a commission-driven intent or misrepresenting a client’s financial position;
- obtain appropriate information about a client’s financial situation and assess affordability, for example by obtaining proof of income; and
- conduct an analysis based on that information before providing advice, to assess the sustainability of the policy.
CDH advises FSPs to take heed of the pronouncements issued by the FAIS Ombud and the Tribunal and to ensure compliance with their obligations.
