The importance of Effective Oversight

The latest determination by the Ombud contains several important pointers for advisors, particularly from a record keeping and oversight perspective.

The Van Vuuren couple, at the respective ages of 66 and 69, effected two pure endowment policies for R2 000 and R5 000 on the advice of a representative. The term of both contracts was 15 years.

During the first visit, the representative was accompanied by her key individual. According to the latter, they discussed three options: a money market investment, a retirement annuity with a four year term and a 10-year term investment plan. They agreed that the latter would serve the clients’ needs best. According to the KI, the clients were warned about possible penalties payable on early withdrawals and terminations.

Subsequent to this discussion, and unbeknown to the key individual, the representative changed the term to 15 years. The complainants signed investment quotations, as well as the Record of Advice (ROA) in which they confirmed that they understood the “results of disinvestments, cancellations and premium reductions”.

The Ombud found that the ROA did not reflect the products allegedly considered, nor an explanation as to why the recommended products would satisfy the complainants’ needs and objectives.

A further issue raised concerns the disclosure of potential penalties. The determination states:

Given the fact that potential penalties payable on the products were of such a material consideration, respondent was duty bound to make full and frank disclosure. The only document in the respondent’s records that alludes to early termination penalties is the ROA. However, it merely stipulates that costs are applicable in the event of early termination. It is silent on the investment term of the contracts which has a direct correlation to the severity of penalties payable should the contracts be prematurely cancelled. I could also not find any record of disclosure of the extent of withdrawal penalties and penalties payable on the reduction of premiums. I am convinced had complainants been made aware of the severe consequences of altering the contractual commitments they would not have purchased this product.

As will become evident later, not even the product provider got these figures right, so how a FSP can be expected to disclose this, is beyond my comprehension.

The determination goes on to state that the FSP failed to provide proof that the commission was disclosed to the complainants, nor proof that a needs analysis was conducted. I find this  strange, because quotations normally contain commission details.

Although the representative was responsible for the loss, the FSP was held accountable. The Ombud ruled thus as she felt that there were insufficient control measures and risk management structures.

A most interesting aspect of the determination concerns the penalties levied by the Ombud.

The Office subsequently requested the product provider to confirm the correctness of the penalties levied. There was a concern that the complainants might have been double charged penalties (a practice commonly referred to as double dipping).

When initially approached, the product provider indicated that the total penalties levied amounted to R62 738.04. In response to the request for confirmation, the product provider indicated that the actual “Plan Amendment Charges” which should have been charged came to only R21 746.79. The product house then refunded a total amount of R40 991.25 plus interest to the clients.

The occurrence of “double dipping” is a serious concern for the Regulator, and we await the final version of a discussion document on this issue.

The FSP was instructed to refund an amount R18 246.79 to the complainants, in addition to the R3 500 she had already paid to them.

To download a copy of the determination, please click here.

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