An FSP agreed to top up, by some R100 000, the maturity value an investor received from an investment plan after the FAIS Ombud found that the client had not been properly advised.
The FAIS Ombud drew attention to the complaint and its outcome in the Office’s latest newsletter.
The investor complained to the Ombud after he invested R700 000 in an investment plan with income in 2017 but received about R470 000 when the investment matured in 2022. He claimed he should have received another R230 000.
An investment plan with income consists of two portions: a five-year endowment policy and a guaranteed annuity. There are two types of plans, depending on whether the growth in the endowment is guaranteed.
A guaranteed investment plan, as the name suggests, guarantees the growth in the endowment – investors can be assured that they will get back their original capital. In the case of investment plans without a guarantee, the growth depends on market fluctuations. Investors may, at the end of the five years, earn a return that exceeds their original capital, but they also run the risk of capital loss.
Crucially, if the investor opts for a capital guarantee, the annuity income will be lower, whereas investors will receive a higher annuity if they forego the guarantee.
As the Ombud points out, this means prospective investors face an important decision: should they take a higher income with an uncertain investment outcome or a lower income with a guaranteed investment outcome?
FSP: investor did not suffer a loss
The FSP responded to the FAIS Ombud as follows:
- The record of advice showed that the complainant wanted to invest R700 000 for five years and earn a monthly income from this capital investment.
- The risk profile analysis indicated that the complainant was a “conservative” investor.
- Various products were recommended, and the complainant elected to invest R700 000 in the Income Investment Series.
- Of the R700 000, R428 175.67 would be invested, and the balance of R265 355.07 would be used to pay a regular monthly income of R4 544.64.
- The market risk of the investment was explained to the complainant, and he fully understood his decision.
- No guarantee was recorded in any documentation signed by the complainant.
The FSP said the complainant had not suffered a loss because he received a total of R793 673.91 from his capital investment of R700 000.
The R793 673.91 was the sum of:
- the maturity value of R470 661.67;
- total income payments of R303 012.24 (there was some annual indexing of the income, so the payments exceeded R272 678.40 [R4 544.64 a month for 5 years]); plus
- a withdrawal of R20 000 in 2020.
Investor’s circumstances were not considered
The Ombud’s Office was not satisfied with how the investor had been advised and recommended that the FSP resolve the matter with the complainant.
The complainant was 51 years old at the policy’s inception, and the source of the invested funds had been his retrenchment benefit. The complainant was unemployed, and the invested funds were his only means of generating an income.
The Office said, light of this, it was essential to secure the complainant’s capital going forward because his employment prospects at the time were uncertain, and he only had limited funds available.
Therefore, the Office said it would have expected the FSP’s representative to recommend a product that may have provided the complainant with a lower annuity income but would have enabled him to retain his capital investment after five years.
The Office was of the view that the representative had not considered the complaint’s circumstances and made a recommendation appropriate to his needs.
The FSP’s representative “merely provided the complainant with the highest income possible, and there is no indication that there was any discussion as to the pros and cons of the product selected and how this may affect the complainant in the future”.
There was, therefore, no indication that the FSP had complied with section 8(1) of the General Code of Conduct or that the complainant had been placed in a position to make an informed decision, per section 7(1)(a) of the code.
The Office rejected the FSP’s argument that, considering the total income and the maturity value, the complainant had profited from the investment.
It said the complainant had been under the impression that the income he was receiving was interest or a return on his investment. He was unaware he was paying himself the income from his capital invested.
The complainant now has a lower capital amount with which to generate an income, which, in addition to the effects of inflation, has left him in a precarious situation, the Ombud’s Office said.
In response to the Office’s recommendation, the FSP entered an agreement with the complainant, who accepted R103 301.89 in full and final settlement of the complaint.
