A recent settlement facilitated by the Ombud for Financial Services Providers underscores two recurring themes in retirement advice: consumers must understand the nature of the annuity they are purchasing, and advisers must ensure that recommended structures are appropriate to the client’s actual circumstances – not merely adequately disclosed.
The matter arose after a couple sought retirement advice in October 2020 because of the husband’s ill health and imminent retirement. A life annuity was recommended and implemented.
The annuitant died two years after inception of the annuity. The complainant was informed that, given the nature of the life annuity selected, income payments ceased on death and no residual value was payable to beneficiaries.
She stated that her husband wanted the full proceeds of his retirement benefit, but was required to purchase an annuity, and he did not understand the product terms or make an informed decision. She further argued that, given his health at the time, he would not have elected a structure under which payments terminated at death.
The complainant, who indicated that she was unemployed and financially dependent on her late husband, sought the FAIS Ombud assistance so that what she regarded as the remaining value of the annuity could be paid to her.
The respondent maintained that:
- All material disclosures were made at the point of sale.
- The client was expressly informed that no payments would be due to beneficiaries upon his death.
- Alternative solutions were presented to the client.
- The client selected the option that best suited his needs at the time.
- The financial planner could not reasonably have foreseen the client’s untimely death.
After the Office issued a notice in terms of section 27(4) of the Financial Advisory and Intermediary Services Act indicating that the complaint warranted investigation, the respondent reiterated its position. It nevertheless made a goodwill offer of R250 000 in full and final settlement. The complainant rejected the offer.
Ombud’s findings and settlement outcome
In assessing the matter, the Ombud referenced specific provisions of the General Code of Conduct for Authorised Financial Services Providers and Representatives:
Section 8(1)(a) requires that, prior to providing advice, a provider must obtain appropriate and available information regarding the client’s:
- financial situation,
- financial product experience and objectives, and
- risk profile and needs,
to enable the provider to provide appropriate advice.
Section 7(1)(a) requires that, prior to concluding a transaction, a provider must provide a client with full and appropriate information regarding the financial product, including:
- material terms and conditions,
- any restrictions, and
- risks associated with the product,
to enable the client to make an informed decision.
In addition, section 2 of the Code requires that a provider render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.
The Ombud found that the advice provided was not appropriate to the client’s circumstances, including the existence of a financially dependent spouse.
Although the disclosure obligations were addressed, the Ombud concluded that disclosure alone was insufficient to cure deficiencies in the advice process where the recommended product did not adequately reflect the client’s personal and financial position.
At the Office’s request, the respondent obtained actuarial calculations illustrating the net capital value payable to beneficiaries under different scenarios. The most accurate scenario indicated a benefit of R401 877.30 under a life annuity with a 10-year guaranteed term.
The Ombud recommended that the settlement amount be aligned to R401 877.30, representing the minimum position the complainant would have occupied if appropriate advice had been rendered. The respondent accepted the recommendation and provided a revised settlement offer, which the complainant accepted.
In its communication, the Ombud encouraged consumers to research the various annuity options available before signing, at least to enable them to ask advisers to explain the available alternatives.
Financial services providers were similarly advised to ensure compliance with their responsibilities under the Code to explain the different options and the advantages and disadvantages of each product.
