Secondary

Comment on “Material terms and Conditions”

In response to an article: “Disclosure of Material Terms” we published last week, a reader responded as follows:

Dear Paul,

No broker can possibly explain every single clause in a multi-page legal contract to the client, and even if they did (over the course of a month or two), the client would simply deny it. The likes of Moonstone and FIA should be taking them (the FAIS Ombud) to task and challenging their decisions.

The point we made in the article was that one is not expected to explain each and every clause, only those that are material in helping the client determine whether it is the right product for their needs. This was also clearly stated by the Ombud in the relevant determination.

What is “Material”?

The challenge for advisors is to identify which aspects of the contract is “material.” The client may elect any clause and say that this was not explained to him, and the advisor has very little to defend himself, unless he draws up a document listing all material terms, and then gets the client to sign acknowledgment that it was explained to him, and that he or she understood it.

A major contributor to this problem stems from the days of “sales aids” which were designed to sell products, and mostly contained information aimed at getting the client to sign on the dotted line, rather than to assist him to make an informed decision.

The so-called “Key Information Documents” which the FSB is busy designing, in consultation with industry experts, will eliminate this problem to a large extent, once it is in place. These are standard documents containing all material aspects of the contract, which the product providers will be obliged to produce to assist the broker. Failure to cover any important aspect may then become the provider’s problem, not that of the financial advisor.

This is in line with the view expressed in the RDR discussion document that product providers should share a bigger responsibility in the distribution of their products than is currently the case.

Assistance to Intermediaries

Concerning the view that the FIA and Moonstone should become involved, one needs to understand the following:

Moonstone is not a representative body. We provide our compliance clients with advice and assistance in the event of a complaint, but are not in a position to assist non-clients in the same manner as we have no mandate to act on their behalf.

Our approach has always been one of consultation, rather than confrontation. We have found this to be far more effective in addressing issues with those able to fix it. Confrontation usually elicits aggression or defence, neither of which is conducive to achieving a win-win outcome where neither party feels aggrieved.

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