In a recent SAFM radio interview about the high costs of life assurance retirement annuity products, I mentioned that there is no real intent on behalf of the life assurance industry to protect your best interests, and that the only way to protect your best interests is for good practice to be legislated.
I was referring particularly to the practice of paying commissions on life assurance products over the first two years of the policy. In the unit trust industry, commission is paid as and when you pay premiums.
To make my point about how policyholders' best interests are not being protected, I said the life industry's S-reference system, to ban undesirable people from the industry for up to five years, is only used to ban intermediaries involved in fraud.
Gerhard Joubert, the executive director of the Life Offices' Association (LOA), which represents most life companies in South Africa, says I am wrong about this.
According to Joubert, "the S-reference system looks at matters from the perspective of whether the intermediary is 'fit and proper', not whether fraud has been committed. If your readers are of the view that their advisers are not fit and proper for whatever reason, such as giving improper/inappropriate advice or being negligent in the handling of their affairs, they can report this to the product provider concerned and request that an S-reference recommendation be considered".
I did not know this, and I find it surprising that I have yet to see a financial adviser S-referenced for giving inappropriate advice, particularly commission-driven advice.
I have received many hundreds of letters from Personal Finance readers over the past nine years, providing evidence of inappropriate advice and I have not heard of life assurance companies taking action against the financial advisers concerned.
We publish the lists of S-referenced financial advisers on a regular basis and every one I can recall involved fraud of one type or another.
Joubert admits that not a single intermediary has been S-referenced for giving bad advice, but there has been one for "gross negligence where an adviser allowed sub-agents to do whatever they wanted".
Lack of commitment
The lack of commitment from the life assurance industry to use the S-reference system to take action against financial advisers who have given inappropriate advice is further confirmed by the facts that:
- When an independent financial adviser has given inappropriate advice, the life assurance industry claims it can not take action against that adviser because the adviser is your agent and not the life company's. Yet the life industry created the commission structures and pays commissions directly to advisers.
- The Ombudsman for Long-Term Insurance cannot hear complaints against a financial adviser unless the adviser agrees to be subject to the ombudsman's decisions.
- One of the reasons the Financial Advisory and Intermediary Services (FAIS) Act has been put in place is because the financial services industry, including the life assurance industry, has done little to protect us from bad financial advisers. Unfortunately FAIS only applies from October 1 this year.
I am not going to dwell on why the life industry has never highlighted the fact that a financial adviser can be S-referenced for giving inappropriate advice. Rather, I will deal with what you should do with this information.
I think aggrieved policyholders should now use the system to get redress. If you were given bad advice before October 1 this year, and have suffered losses as a result, you should make sure that the financial adviser responsible is hauled before the LOA's disciplinary committee.
If you have been given bad advice since October 1, you will be better served by taking the issue up with Charles Pillai, the new financial services ombud. You can complain directly to him; he is independent; and he can order compensation.
But if you received bad advice before October 1 this year, take advantage of this LOA offer, particularly if you are one of the many pensioners who have been left destitute as a result of inappropriate investment and product advice.
If you succeed in getting an adviser S-referenced, it may also provide you with a base to sue the adviser.
A few catches
There are, however, a few catches.
1. You cannot report the miscreant financial adviser directly to the LOA. You must ask your life assurance company to ask the LOA to hold an S-reference hearing. Quite how successful you will be with this remains to be seen. After all, it is the life assurance industry that gave birth to and insists on maintaining the current practice of paying upfront commissions to financial advisers.
This practice is probably the biggest-single perverse incentive in the financial services industry for advisers to mis-sell life assurance products. The life industry also has a history of protecting advisers who give bad advice, particularly when the adviser sells a lot of policies.
2. The life assurance company will frame the complaint to the LOA on your behalf. You will have absolutely no say in the process. This is a very bad principle, I would suggest.
3. You cannot appeal any decision by the LOA S-reference panel and will not know how the decision was reached. You cannot attend the panel's hearing.
4. In order to get a financial adviser S-referenced, you need to show that the adviser is not "fit and proper". There is no definition of "fit and proper" in the LOA's S-reference Code of Conduct.
5. Inappropriate advice is not given a high priority by the LOA. In an annexure to the LOA's S-reference Code of Conduct concerning the circumstances for a financial adviser to be S-referenced, it is suggested that the only time inappropriate advice is an offence, for which an adviser can be S-referenced, is when you are inappropriately advised to switch from one life assurance product to another.
You should, however, not be deterred from complaining if you feel you have been given inappropriate advice. This is how you should go about taking up your complaint.
1. Write a letter of complaint to your life assurance company and request that the adviser be S-referenced.
Your letter must include a justification why you think the financial adviser is not "fit and proper". Since the LOA has no definition of "fit and proper", you should rely on the definitions in FAIS.
In terms of FAIS, an adviser must fulfil a number of criteria to meet the "fit and proper" requirements. These include:
- Competence. Advisers must meet minimum educational standards; and
- Honesty and integrity. The adviser should not have committed any offence over the past five years that has resulted in action being taken against him or her, either by the courts or an industry body.
The "fit and proper" requirements are not the end of the FAIS story.
As of October 1 this year, in terms of FAIS, a financial adviser is required to give you appropriate advice that is based on a financial needs analysis. If advisers fail to do so, they run the risk of having their licence to practice as an adviser revoked by the Financial Services Board.
So, if you can show that the advice you received was inappropriate and was not based on a financial needs analysis, your life assurance company and the LOA will be hard pressed not to take action.
2. If you do not get a satisfactory response from your life assurance company, take your complaint to the LOA and ask it to investigate why the complaint has not been dealt with to your satisfaction.
To contact the LOA, phone 021 421 2586 or email [email protected]
Finally, I suggest that every life assurance company point out to every dissatisfied policyholder that policyholders have the right to ask for an S-reference hearing if they think that they have been given inappropriate advice ... and this should be written into the LOA's Code of Conduct.
The ombud's contact details
If you have a complaint relating to financial advice you received after October 1, 2004, you can contact Charles Pillai, the Ombud for Financial Services Providers.
Telephone:
0860 324 766
Fax:
(012) 348 3447
Postal address:
P O Box 74571, Lynnwood Ridge, 0040