An article in Sunday’s Rapport (15/7/2012) discusses the upcoming High Court case where a broker is disputing the jurisdiction of the FAIS Ombud. What is of particular interest to our readers, is the discussion of PI cover exclusions.
In essence, the FAIS Ombud ruled that the broker, Deeb Risk, contravened the FAIS Act when he placed client funds in property syndications. Five determinations against Deeb Risk decreed that he refund over three million rand in total to the investors who followed his advice.
A Santam affiliate, Stalker, Hutchison and Admiral, who arranged Risk’s professional indemnity cover, is assisting Risk in challenging the Ombud’s authority.
The first point to note is that, according to Santam’s spokesperson, the insurer is obliged to provide cover for an insured’s legal costs. The financial media chose to portray this as the industry using its financial muscle against the man in the street, which is, of course, a totally warped perception. It is a condition of the insurance contract.
The first exclusion referred to in the article concerns the provision that a financial advisor is not covered in instances where he did not comply with the terms, conditions and restrictions applicable to his licence. This applies equally where a client suffers loss as a result of the sale of an unsuitable (“ontoepaslike”) product.
The second exclusion concerns “… any investment, investment advice or administration of moneys which, in any manner, is a contravention of the Bank Act.” (my translation). According to the article, the Reserve Bank found that the way in which Sharemax obtained investments was contrary to the Bank Act.
Space does not allow discussion of the five determinations against Risk, nor is it the purpose of this article. I read a few of the determinations before writing this article, and the Ombud made it very clear that she was convinced of contraventions of a number of key requirements of the FAIS Act and General Code of Conduct.
All FSPs are obliged to have PI cover, with certain minimums laid down by law.
As an advisor, you are required to ensure that your clients understand exactly what they purchased. Surely this same obligation applies to you?
Please make a point of reading the fine print of your own PI cover policy very carefully. As in most disputes, the problems do not stem from what is covered, but rather the applicable exclusions.
While you are busy with this, make sure that the minimum cover required is in fact adequate for your needs. Multiple claims, as in the case referred to above, can be a rude awakening if you based your need on the maximum fine of R800,000 which the Ombud can impose.