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TCF and Causal Event Charges

The Pension Fund Adjudicator (PFA) recently ruled on an investor’s complaint regarding the excessive causal event charges.

The PFA found in favour of the product house, but was rather scathing in her comments on the current system when weighed up against the expected Treating Customers Fairly (TCF) outcomes.

She stressed the urgency for finalisation and enactment of the TCF principles.

The complainant’s value in the fund was R219 606.97. The client was quoted a causal event charge of R48 313.53, which is 22% of the fund value. According to the product provider, this amount is within the limits prescribed by legislation as well as the rules of the fund.

The PFA appointed an independent actuary to review the calculation.

The actuary found that as the policy has been in force for 9 years out of 38 years and the large extra increases in premiums, the proposed causal event charge in the amount of R48 313.53 that will be imposed if the complainant transfers his membership to another institution amounts to 22% of the total fund and is also fair and reasonable. Therefore, this Tribunal finds that the causal event that will be imposed if the complainant transfers his membership to another institution is fair and reasonable.

The PFA then expresses the following views on the issue of causal event charges and TCF:

This Tribunal notes with concern the weaknesses in regulations in the retirement sector when viewed in light of the six TCF principles. This is due to the fact that most retirement annuity products fails four of the TCF principles in that the products and services sold are not designed to meet the specific needs of the customers. In the event that a customer fall on hard times, drastic termination fees are imposed, customers are not given clear information before and after contracting of causal event charges, the advice provided is not suitable and customers faces serious post-sale barriers in trying to change investment products.

… the complainant submitted that he was not aware of the penalties to be charged when he transfers his membership to another institution, which falls short of the openness required by the TCF principles with which the respondents associate themselves. It is on this basis that the TCF principles need to be finalised and enacted into law in order to avoid complaints of this nature.

However, until such time that the TCF Principles are enacted into law, the complainant is bound by the signature on his annuity contract. In terms of the caveat subscripto rule, when a party to a written contract signs it, he is presumed to be aware of all the terms and conditions of the contract, and is bound thereby.

Disclosure documentation underwent radical change after the FAIS Act became law. The problem is that full disclosure at the point of advice (please note, not point of sale) is virtually impossible. More importantly, transmission of insufficient information is laid at the door of the advisor.

The solution proposed by the Regulator is to make sure that products are designed in such a manner that it conforms to Outcome 5 of TCF:

  • Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect;

The problem is that we sit with a legacy of products which will only be phased out over many years.

The PFA also stressed the importance of Outcome 6:

  • Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

As we pointed out on Monday, a review of the agreement regarding causal event charges is long overdue. The statement of intent was signed in 2005, and in October last year, the FSB issued a draft Directive to guide insurers on the correct application of the agreed penalties.

Now is a good time to review these charges, considering the current imbalance in the risk carried by the three parties to the contract: the client, the advisor and the product provider.

Please click here to download the relevant determination.

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