FAIS Ombud’s report identifies FSP ‘problem areas’

The Office of the FAIS Ombud released its 2021/22 annual report last week. The report includes a section in which the ombud identifies several “themes” related specifically to the way financial services are rendered. In this year’s report, these themes were:

• Delays with funeral policy claims;
• Inadequate advice to clients who purchase living annuities;
• The danger of assuming a client’s level of knowledge when amending a short-term insurance policy; and
• The need to inform policyholders of the implications of underinsurance, particularly in respect of household contents and homeowner’s insurance.

Read: FAIS Ombud’s office releases its 2021/22 report

Increase in complaints about funeral policy claims

The Office of the FAIS Ombud has experienced a significant increase in complaints about delays in the payment of funeral policy claims, the outgoing acting ombud, Advocate Nonku Tshombe, said.

She said the main reasons are the proliferation of funeral parlours and other providers of funeral policies that operate outside of the law by not being regulated in terms of the FAIS Act and provide long-term insurance benefits without having the scheme underwritten, in contravention of the Insurance Act.

Problems with paying claims occur even where providers are compliant and the schemes are underwritten, because of underwriters experiencing financial difficulties during and after the Covid-19 pandemic.

In these cases, the office must investigate both the provider and the insurer, to determine which entity is responsible.

Tshombe said the office was committed to finding an informal resolution to complaints about funeral policy claims, as opposed to issuing determinations. This is because, after a determination is finalised, the office is no longer involved, and complainants find themselves at the mercy of the expensive formal justice system. They struggle to get the determinations enforced and must fight any appeals lodged against the decision.

Sustainability of living annuities

The ombud acknowledged that the challenge when it comes to selecting an appropriate drawdown rate is that most individuals do not retire with sufficient capital to sustain their preferred standard of living in retirement. They try to overcome this by selecting a high drawdown rate.

Tshombe said some advisers provide clients with the level of income they need to meet their current standard of living, without taking into account whether the initial capital can sustain this income throughout retirement.

When clients who run out of capital complain to the ombud, and the office approaches advisers for a response, “these FSPs simply declare generic terms such a single need and try to blame the client, whose instructions they were executing. This approach illustrates that they failed to have the difficult discussions with their clients and to manage expectations from the beginning of the transaction,” she said.

Her second criticism was of FSPs who rely entirely on risk-profiling questionnaires when selecting a living annuity’s underlying portfolio.

To illustrate her point, Tshombe provided an example of a client who selects an income drawdown of 8%. After completing a risk-profiling questionnaire, the client’s risk profile is determined to be “conservative”, based on the scores from a generic set of questions. This conservative risk rating then forms the basis for selecting, for example, a money market fund to correspond with the client’s apparent risk-averse nature. A money market fund will not provide a return that will cater for an income drawdown of 8%, and over time the client will begin eating into their original capital and find themselves in a precarious situation in years to come.

The ombud said FSPs should conduct a detailed needs analysis to make an appropriate recommendation to clients.

Assuming a client’s level of knowledge

Tshombe said FSPs should not assume that clients have knowledge or experience of material terms and conditions when performing short-term insurance transactions.

She said the problem of inadequate disclosure was particularly acute where the FSP and the client have had a long-standing relationship and several transactions have been concluded in respect of the policy, and where many amendments changes have been effected. In these situations, “a certain level of familiarity develops”, and although it is not unusual for an FSP to develop a good relationship with their clients, “it often comes at the expense of the FSP’s adherence to the provisions of the General Code.”

The addition and/or replacement of items on the policy becomes very informal and is conducted via email, where only the basic details are required to add, for example, a motor vehicle to the policy.

“The FSP almost assumes the role of simply actioning the client’s instructions without making the required disclosures, such as the requirement for a tracking device. When the newly added motor vehicle is stolen, the claim is rejected, as the vehicle does not comply with the minimum security requirements,” Tshombe said.

When the office approaches FSPs for a response, they often state it was not the first motor vehicle that the complainant had insured with the FSP. It was a standard term and condition of the policy and all the complainant’s previous vehicles had been fitted with a tracking device, so the complainant should have known that the new vehicle required the same security device.

She said many short-term insurance provisions were handled in the same way.

FSPs should not make assumptions about clients’ prior knowledge of material terms and conditions. Every transaction that involves the addition of an item to the policy must conform to the requirements of the General Code.

Section 7(1)(c)(vii) provides that concise details of any special terms, warranties, exclusions or instances where cover will not be provided must be made to the client. This is to ensure that the client can make an informed decision and to ensure that he or she complies with the requirements of the policy. These requirements could be the installation of a tracking device in a certain type of vehicle or in a vehicle whose value exceeds a certain amount, or where that vehicle is kept in a specific area, Tshombe said.

Section 3(a)(viii) of the General Code provides that when an FSP renders a financial service, the representations made and the information provided does not have to be duplicated or repeated to the same client unless material or significant changes affecting that client occur, she said.

If the financial service renders it necessary, a disclosure of the changes to the policy must be made to the client without delay. The addition of an item to the insurance policy, particularly a motor vehicle, which most consumers consider a significant asset, is a financial service that renders it necessary for the FSP to repeat the need for a tracking device as a minimum-security requirement, Tshombe said.

Dangers of underinsurance

The ombud addressed complaints from policyholders who are paid out only a proportion of their claims (insurers have applied averaging), because they are underinsured.

In response to their complaints, FSPs state the client provided the specific value. FSPs point out they are not assessors, and they have no business questioning the value provided by the client or even recommending an alternative value.

The FAIS Ombud’s office agreed. It does not expect any FSP to value a client’s belongings or make any suggestions as to what level of cover would be appropriate to result in a positive claim.

However, Tshombe said the office expects FSPs to comply with section 7(1)(c)(vii) of the General Code, which requires a provider to provide concise details of any special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided.

Clients must be appropriately advised of the need to ensure their belongings for replacement value, what replacement value entails, and the consequences of not doing so (averaging). By doing this, FSPs can place the client in a position to make an informed decision as to the appropriate level of cover, Tshombe said.