This article was originally published by executiveview.com
Whilst ignorance of the law is no excuse for anyone engaging in a particular economic activity, it is much easier to cure that ignorance if you do not have to go trawling around in old authorities and case law to find the principles.
Therefore, since the enactment in 2002 of the South African Financial Advisory and Intermediary Services Act (FAIS Act), the basis of an intermediary's liability to the client is much better understood. This does mean, of course, that there are more claims against brokers and other financial intermediaries. The ability to claim has been made easier by the establishment of the FAIS Ombud where efficient low-cost relief can be sought.
The FAIS Act governs the conduct of anyone who gives advice in relation to a financial product such as an insurance policy or performs intermediary services in connection with policies.
Advice is advice of a financial nature in relation to a policy. A person is not considered to be giving advice if they merely give factual information regarding an insurance product or the method of entering into the policy, or if they display or distribute promotional material. It is recommendations, guidance or proposals of a financial nature that are governed by the FAIS Act. Even insurance companies themselves are governed by the Act if they give financial advice to clients in regard to their own products.
Intermediary services are selling and administering policies, collecting and accounting for premiums or receiving, submitting or processing claims (save where all this is done by the insurance company itself). The Act requires anyone performing intermediary services (other than the insurer) or giving financial advice to register as a financial services provider. Registrants have to meet the requirements of competence, integrity and financial capacity in order to be registered. Corporate intermediaries need a key individual registered to manage the company. Once registered, financial services providers can appoint representatives for whom they are responsible to do the work on their behalf. A comprehensive general Code of Conduct governs the behaviour of insurance advisors and intermediaries. There are detailed duties of disclosure in regard to the service provider itself and in regard to the product that is being sold or administered. Fiduciary responsibilities (that were previously found in the common law only) are spelt out in the Code. Extensive record-keeping is required of financial services providers.
If a financial services provider fails to keep proper records, the probabilities are that when faced with a claim they will fail to satisfy the Ombud that their version of the transaction is correct. The Ombud will, not surprisingly, take the attitude that if there had been exculpating information available at the time of the transaction, the broker would have made a comprehensive record of what was said in order to avoid future liability.
It has become common practice wherever there is a rejected claim by an insurer to look to the intermediary as an alternative source of compensation. The Ombud for Financial Services Providers placed ZAR33 million in the hands of consumers during the 2008-2009 year, which was 132% up on the previous year. Not all of this amount related to insurance complaints but that sector of the market is a substantial part of the disputes involved.
If you read the Ombud's determinations it becomes clear that many financial services providers are not properly acquainted with their obligations under the Code or are reluctant to spend the money and effort it requires in order to comply. This is a short-sighted attitude because proper disclosure and record keeping is a good shield against claims.
Unfortunately the General Code is a lengthy and wordy document. Something more accessible would have been good for the public and good for the industry. Professional indemnity insurers can play a major role in publishing simplified versions of the requirements including precedent documents. This will undoubtedly cut down the incidence of claims.
The other problem with the FAIS Act is that it sets the same standards for selling a simple funeral policy with a benefit of ZAR15,000 and a major investment of ZAR150 million. It has become much more difficult for someone to enter the market from the bottom up. The cost and complexity of FAIS compliance is a deterrent to entry or a deterrent to proper compliance. The cost of compliance is substantial and cannot always be borne by the new bottom-end entrant. South Africa is contemplating special micro-insurance legislation in the not too distant future. When this is put in place, provision will have to made for a lower level of intermediary compliance when selling micro insurance, but without compromising the rights of consumers.
Insurance companies are coping with the problems at the mass consumer policy level by appointing distributors of their products who do not give financial advice and do not perform intermediary services. All the distributors do is to give factual and promotional information regarding the product. The potential policyholder who wants more information is usually guided to a call centre that can give the necessary financial advice in recommending the product. The intermediary services of issuing policies and dealing with claims are performed by separate administration companies or the insurers themselves. Premium collection is universally done on bank debit orders which does mean that it is less easy for someone at the lower end of the market who is unbanked to sustain an insurance policy.
A great deal of thinking is being done about how to sell and maintain insurance via mobile telephones. The mobile telephone is one of the most important means of communication in Africa. Vast markets of consumers do not have ready access to computers or sophisticated mobile devices. Simple means of selling and maintaining insurance and dealing with premiums via mobile phones has become the challenge. Compliance with the FAIS Act is not easy when you are using a means of communication which is limited by the number of characters that can rationally be communicated to the insured person. The likelihood is that simply-worded products will be drafted and payment methods via bank automatic teller machines will be devised. The authorities will have to recognise that savings and insurance are important to everyone and that they should be encouraged. An understanding attitude to FAIS compliance and limited rules for micro-insurance need to be developed rapidly if everyone is going to benefit.
There are therefore a number of challenges and opportunities that have been slowly unfolding since the FAIS Act was first enacted in 2002. Everyone needs to ensure that complacency does not set in and that the Act is used positively. It is clear from what is to be found among the complaints to the FAIS Ombud that there is a great deal of work to do to ensure that the FAIS Act works for the general good as it was intended to do.
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