Companies must build the Treating Customers Fairly ideas into their practices, but as consumers, we need to know our rights and understand what our responsibilities are in order to take control of our money
Do you know how much you are paying for your investment policy? Could you state exactly how much of your monthly contribution is paid in commission or product fees?
The truth is few people really understand what they are invested in, let alone how much they are paying for their investment products.
A reader wrote to City Press to highlight his personal experience, where his adviser had charged significantly higher fees on his retirement annuity policy than was agreed on.
The client had trusted the adviser to deliver on the agreed fees and failed to check the final documentation issued by the product house, which stated the actual fee his adviser was receiving.
It was only a few years later, when he questioned his returns, that he discovered his adviser had received more than R50 000 in commission, as opposed to the R5 000 that had been agreed on.
The client was able to prove what had been agreed on thanks to the records of the meetings held with the adviser – documents which are required under the Financial Advisory and Intermediary Services Act.
In this particular case, Momentum, which issued the annuity, was able to reverse the commission, as the adviser worked for the company. The adviser has been dismissed and was reported to the Financial Services Board (FSB).
Legislation is there to protect the consumer, but the problem is that the consumer needs to know that it exists.
Who carries the responsibility?
1 Product houses certainly have a level of responsibility to ensure that the people they employ are above reproach. They also need to have systems in place that can identify irregular behaviour. The act requires that any fees or commissions must be clearly stated and fully transparent.
It is just as much a client’s responsibility to understand what they are signing for and to check the documentation as soon as it is issued. Not only could a fraudulent adviser change the commission, but there are also instances where clients are not invested in the product they agreed to.
Although there is legislation to protect consumers, a product house can still create complicated contracts that clients struggle to fully understand.
Salient information can be buried in pages of legalese. Although the current act stipulates that commission and fees be stated not only in percentages but also in rand values, this information is often buried on page five or six of the contract.
Treating Customers Fairly
2 Leanne Jackson, who heads up the Treating Customers Fairly project at the FSB, plans to change all this to make contracts more equitable for clients, starting with having salient information, such as costs, provided to you in a clear, short format before you enter into a contract.
The project’s task teams are in the process of developing standardised templates with key information that will make it easier for individuals to compare products.
These templates will specify the information you need to see before you choose a product, and will specify where the information has to be displayed. Once the decision has been made to invest in a specific product, there will also be tighter rules for product suppliers to improve the quality of specific product information.
These templates are in advanced stages of development and are currently being tested in consumer focus groups to ensure they provide consumers with the correct information to make informed choices.
“What we do know is that people respond better to layered information. They want to see the key facts upfront and then drill down to the details later in the document,” says Jackson. This also prevents companies from hiding salient information deep in the document.
The project was started by the FSB more than two years ago and aims to change the mind-set of the financial industry to move from working within the letter of the law to applying it.
As Jackson says, the project will impose not only rules but also fair treatment principles, so companies now not only have to stick to specific rules, but also be able to demonstrate why they honestly believe that what they are doing is fair for their customer and whether fair customer treatment forms part of their strategic plans.
Changes to advice fees
3 Two years ago, Treating Customers Fairly issued a road map detailing its initiatives and goals, which encompass a wide range of reforms within the industry. As part of the project’s broader framework, the FSB is also reviewing remuneration. Several proposals have already been made by the FSB and it is likely that South Africa will follow the route of separating the fee for advice from the selling of the product.
Jackson says that what is clear is the issues around remuneration are not just about intermediaries, but also about how products are designed and how fees are often hidden in those designs. One of the challenges has been the issue of responsibility across the value chain, as the industry currently works in silos.
“What becomes apparent is that the more complex the value chain, the more people think the customer’s interests are someone else’s responsibility,” says Jackson.
Our reader’s experience highlights this exact issue: is a financial services company responsible for an independent adviser that mis-sells its products or for the level of advice given?
“Clearly, product houses cannot be responsible for independent advice. But that does not mean a product supplier can abdicate all responsibility
for a distribution channel they have chosen to use,” says Jackson.
Institutions rely heavily on their distribution channels to sell products and have, in the past, created products and fees with the distribution channel, rather than the client, in mind.
If commissions are banned and the fee for advice is something negotiated between the customer and adviser, then the product house’s responsibility is to ensure that it sells products that are fair to the consumer, and to ensure that advisers are fully trained and understand the intricacies of the product.
4 Jackson says another challenge is finding ways for affordable access to products. Currently, gaining access to many products for the lower end of the market is very expensive and therefore not appropriate.
“We need to have access to products that meets needs and affordability, and delivers on expectations created,” says Jackson, who adds that the FSB is looking closely at the overall framework of distribution, especially for lower-income earners, where the cost of advice is often unaffordable.
Overall, Jackson believes the industry is starting to take action.
“The industry associations have all got active task teams helping to shape the (Treating Customers Fairly project). I am often called to meet with the executive committees of larger players.
“There is a strong sense of commitment to get involved in the process, although there is still a varying degree of readiness,” says Jackson, who adds that the rules are needed but these are simply there to underpin the principles.
“We will challenge people on the principle and not only the rule,” concludes Jackson.
Powered by WPeMatico