Compliance is no longer about “Ticking the Box”

FAIS Newsletter 19 contains an article on this subject:

During November 2015, the Registrar imposed a fine of R150 000 against a FSP for failure to observe section 2 of the Code.

The FSP kept records of advice on some of its clients’ files detailing the nature of advice that had been given to its clients. The proper interpretation of this leads one to think that a Needs Analysis had been conducted.

The Registrar’s investigations revealed that the same advice had been given to different clients who had totally different circumstances. In fact, the clients on whose files records of advice were recorded had not even been consulted by the FSP, nor were proper needs analyses conducted. The keeping of records of advice created a deceptive impression that clients were consulted and that their circumstances had been taken into account before a specific product was recommended. It further created a deceptive impression that the FSP complied with the law, that they were “ticking all the boxes”.

Although the Registrar had not received any complaints from the clients on the nature of the “advice” given to them, a fact which was considered when the penalty was imposed, this conduct had the potential of prejudice to clients. (My emphasis).

A reading of the actual determination by the Enforcement Committee (EC) provides more perspective. The FSP had an arrangement with a third party to provide life and disability cover to truck drivers who required this as part of the credit agreement.

  • The FSPs records were misleading, as it did not provide advice to the clients
  • It did not “…take reasonable steps to seek appropriate and available information from the clients…” to ensure that the products suited their needs and circumstances
  • The FSP conducted financial services with the third party who was not an authorised FSP

The following information appears under “Mitigating Circumstances”:

3.1.1. The Respondent admitted the contravention and acted promptly by rectifying the non-compliance after becoming aware of it;
3.1.2. The contravention was due to a bona fide misunderstanding of the applicable law. The Respondent believed that since the clients had a defined single need which was to obtain insurance cover for purposes of the credit arrangements there was no need to give advice and to conduct a full suitability analysis.
3.1.3. The Respondent regrets his actions and warrants that he did not intend to prejudice his clients nor to conduct himself in a manner that was inconsistent with the FAIS Act and the Code;
3.1.4. The penalty imposed on the Respondent includes a disgorgement of the profits he derived from the aforementioned policies (and the EC costs – editor); and
3.1.5. The Respondent has not been found by the Enforcement Committee to have contravened any of the laws administered by the Financial Services Board (FSB) prior to this matter.

There is a valuable lesson to be learnt from this. At the 2015 Insurance Seminar, the FSB spoke about “An incremental approach to the implementation of Treating Customers Fairly” (TCF).

What does “incremental implementation” mean?

  • Challenging TCF commitment when investigating concerns
  • Testing of TCF commitment and culture – focus on effectiveness of operational implementation
  • Identifying market conduct risk indicators
  • Specific thematic supervisory initiatives testing risks to fair customer outcomes
  • Structured reporting on market conduct risk indicators
  • Reviewing existing regulatory frameworks to test whether they support fair customer outcomes
  • Introducing TCF principles into existing regulation
  • Reflecting TCF principles into overarching Twin Peaks regulatory framework

It is becoming increasingly important to move away from ticking the boxes and incorporating a TCF ethos to address the potential of prejudice to clients.

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