A recent case was brought to the attention of the Ombudsman for Financial Advisors and Intermediary Services following the apparent failure of a financial services provider or broker to update the sum insured under the business interruption section of a client’s short-term insurance policy , once again highlighting the importance for all insurance brokers to keep a proper record of all written and verbal communication with clients.
The Financial Advisory and Intermediary Services (FAIS) Act states that all companies and individuals who are registered to give advice in terms of the Act have to ensure that they comply with the specific sections of the Act and the General Code of Conduct for Authorised Financial Services Providers and Representatives (the Code).
Brokers and advisors should familiarise themselves with the provisions of the FAIS Act and Code of Conduct and ensure that they understand what is expected fo them when it comes to assessing a client’s needs/insurance requirements, providing comprehensive advice of all relevant/required insurances and keeping a proper record of all the advice given and all other communications with their clients. A record of advice is not only important for the client, but it will also go a long way in proving that the advice was sufficient and appropriate, should any allegations of non-compliance or negligence be made against the advisor.
Many determinations have been made by the FAIS Ombud, the regulator of financial advisors and intermediaries, against advisors due to the lack of proper records of advice which could have substantiated the fact that adequate advice was provided or that that the recommendations by the advisor were not taken up by the client.
Should advisors not provide adequate advice or not be able to provide proper records of advice, orders for compensation awarded against the advisor by the office of the FAIS Ombud could reach as much as R800 000 and even more if an order is made by a court. This happens most often when a client’s claim is rejected by an insurer and the uninsured loss is large enough to justify the client lodging a complaint against the advisor with the Ombud. It is important to remember that the Ombud’s mandate is to ensure the fair treatment of clients based on considerations of fairness and equity, so it is vital that advisers are able to prove that they complied with all of their FAIS obligations.
In addition, every determination made by the Ombud is published on the FAIS Ombud’s website
thereby making the FAIS transgressions of advisors publicly available which could have potentially harmful effects on the advisor’s reputation.
Insurers and underwriting managers ,such as SHA, are usually not registered to offer advice as they rely on brokers and financial advisors to provide this service to clients when selling or distributing their products. However, brokers are required to comply with every aspect of the FAIS Act and General Code and are held to very high standards in this regard. Brokers are expected to advise their clients on every pertinent aspect of insurance the client may possibly require and must therefore be able to prove that they met these standards when they were advising the client.
It is imperative for brokers to have a proper system in place that also records telephone conversations, which often seems to be overlooked by many brokers as communications such as emails are easier to store and retrieve than telephone conversations. This in turn could result in a gap in the broker’s record of advice which could prove detrimental to the broker’s defence should a complaint be lodged with the FAIS Ombud.
At SHA we have developed the Pocket Underwriter as a tool that assists brokers to keep a proper electronic record of advice, which can be stored on the broker’s IT systems. The tool also allows the broker to better understand the types of insurance cover that SHA offers and provides guidance to brokers on the products that should be recommended to a client in a specific industry like manufacturing, hospitality, retail etc.
Brokers should also educate themselves about the various tools available that can assist in tracking and storing a trail of communication. These tools should preferably be able to provide the broker and client with a full record of every aspect of advice that was given to the client as well as a record of the relevant product information which enabled the client to make an informed decision about the specific products they should purchase, with all the advice stored in a safe record-keeping system. This will not only ensure compliance with the regulations, but also enable a broker to render comprehensive professional services to their clients.
The specific sections of the Code that are particularly relevant when it comes to giving and recording advice includes;
- Section 3(2)(a) requires the advisor to record verbal and written communications regarding advice and these records have to be stored, retrieved and kept safe from destruction.
- Section 7(1)(a) requires that a reasonable and appropriate general explanation of the nature and material terms of the relevant product is given to a client, along with any information that would enable the client to make an informed decision.
- Sections 8(1)(a) to (c) requires the advisor to obtain information from the client regarding financial position, product experience and objectives, to conduct an analysis of the information and identify financial products that are appropriate for the client’s risk profile and financial needs.
- Section 8(2) requires that the advisor ensures that the client understands the advice and is in a position to make an informed decision.
Section 9(1) requires the advisor to maintain a record of the advice given that reflects the information/material based on which advice was given, records the financial products considered and those that were recommended for the client’s needs (along with an explanation as to why the products are recommended) – this record is however only required to be kept/stored where a transaction/contract was concluded as a result of the advice – a copy of the record of advice must also be provided to the client.