CR193 Misselling – was advice by agent appropriate – was the investor’s decision informed?

CR193

Misselling – was advice by agent appropriate – was the investor’s decision informed?

Background
The policyholder, the complainant in this matter, was invested in a smooth bonus portfolio with an insurer when he was approached by an agent of the insurer on turning 55.

His investment of R1 201 771 was moved into an off-shore equity portfolio on the advice of the insurer’s agent.

A full analysis was not done but the agent obviously knew that this money was earmarked for retirement as it was in a retirement annuity fund. It appeared that the agent also knew that the policyholder proposed to use his then maximum R750 000 foreign exchange allowance to invest other monies off-shore.

The policyholder was given the following motivation by the adviser on 30 January 2001 before he moved his money:
o past performance figures of smoothed bonus and off-shore portfolios. An explanation of why the last mentioned returns were superior to the current portfolio;
o against that background a suggestion was made that the full combined accumulated value of his RA should be moved off-shore;
o a statement was made in writing that the investment would be “effectively preserving your retirement capital” with access to a different portfolio.
In fact there was no capital guarantee of any kind in the new portfolio.

Discussion
To our question whether the motivation did not constitute incorrect information, the branch office at which the agent was located responded as follows:
“The capital was excellently preserved during the 1st year by giving a return of 20,67%. Mr M was sent a report detailing performance and by having R750k directly offshore would have an idea of how the rand was performing. Any investment needs to be reviewed, and my adviser was not given the opportunity, as he did with other clients, of reviewing the portfolio and making changes. He could not do this as the client had “fired” him and appointed a broker as his agent.”
The branch also pointed out that the policyholder had invested off-shore in a number of other endowment policies and stated the following:
“This is clearly a client who was very bullish about off-shore funds, and had previous experience.”
In our view the policyholder had not made an informed decision. He was advised by the intermediary that the investment would be “effectively preserving your retirement capital.” That statement in our view was incorrect and could not be read to mean anything other than that the capital was not at risk of reducing. The actual risk which attached to this investment was therefore not appreciated by the policyholder. This was a material fact and with this kind of misinformation it could not be said that the policyholder was properly informed. This was of particular concern in the light of the fact that the policyholder had been in a sure profit portfolio prior to the move where he had more security than in his new portfolio.

The insurer’s branch office made the point that the policyholder had also invested other monies off-shore, to bolster their stance that the advice was appropriate. In fact it did the opposite. If the policyholder already had a substantial amount of money off-shore then the advice that an even larger portion of his money which he earmarked for retirement should also be moved off-shore made the advice even less appropriate.

Result
In our view the insurer had not raised any points of substance to counter the allegation by the complainant that the policy had been based on inappropriate advice. In the circumstances we made a preliminary ruling in favour of the policyholder. The insurer then made an offer of R235 602,87 to the policyholder to put him in the position he would have been had his capital in fact been guaranteed. The complainant accepted the offer and the case was closed.
JP
November 2006

CR194 Misselling – client not needing RA proceeds at age 70

CR194

Misselling – client not needing RA proceeds at age 70 – adviser recommending two annuities, one funding life cover, the other a 15 year endowment

Background

When the policyholder reached the age of 70 he did not need the income from his retirement annuity policy. He was still working and also received the income from another annuity. He was, however, obliged to retire from the retirement annuity because of his age.

There was a factual dispute as to whether the policyholder had stated to the intermediary, who was an agent of the insurer, that he would never need the income or whether he merely stated that he did not need the income at that time.

The adviser sold him two compulsory annuities for the full retirement annuity amount (i.e. no lump sum was taken). The one annuity fed a policy with life cover of the initial retirement amount (R377 149) and the other annuity funded a 15 year endowment. The policyholder did not actually receive any cash.

The policyholder complained to us when he had to pay additional tax to SARS on the two annuities. (Although he did not receive the annuities they accrued to him. The tax which the insurer had deducted from the annuities had not been sufficient to cover the tax liability in respect of these two annuities).

He had in the interim also been approached by another intermediary who pointed out to him that the obvious solution for his situation would have been a linked annuity in terms of which he could withdraw the minimum of 5%. The intermediary also pointed out that the current arrangement would have maximised commission and would also have incurred more costs.

The insurer’s agent and branch manager responded that a linked annuity had been discussed with the policyholder but that he had wanted no risk, that he was unwilling to provide his tax details to the adviser and that he had approved of the idea that the “inheritance” of the endowment could be postponed through a beneficiary appointment for ownership.

Discussion
We advised the insurer that we were concerned that a 15 year endowment had been part of the package. We had not been provided with any convincing reasons why a term of 15 years would be appropriate. There was no answer as to how this would be funded and what the implications would be if they were not funded. We pointed out that if a five year policy had been issued it could presumably have been extended after the term, if required.

We also questioned the insurer as to what would happen if the policyholder stopped working and was in need of income. This would then leave the endowment and life policy unfunded from the annuity. One would assume that the policyholder could eventually be in a position where he could not continue to work.

The other problem we raised was the one relating to the tax, namely that the policyholder would not be in receipt of income but would have to possibly fund the tax through other income. We were of the opinion that the adviser should have made the policyholder aware of the possible implications of his tax situation when the two annuities were taken out and accrued to him.

Result
With the lack of motivation from the insurer as to the reasons for this most unusual arrangement, we upheld the complainant’s complaint that the policies had been “mis-sold” to him. We invited the insurer to offer some alternatives to the complainant more appropriate to his circumstances. The complainant chose one of these alternatives, without any loss to him, and the case was closed.
JP
November 2006

CR148 Misselling

CR148

Misselling – complainant alleges that she could never qualify for one of the benefits provided under the contract and that the policy was therefore incorrectly sold to her.

Background

The complainant effected a five-year credit assurance contract with the insurance company in November 2003. The contract, which featured the standard 30 day cooling off qualification, provided death cover, both temporary and permanent disability benefits, a dread disease benefit and a retrenchment benefit. The policy attracted a single premium of R2400. The policy was sold as a package and the various benefits could not be sold separately.

The complainant reached the age of 60 on 18 January 2004 which meant that she could never qualify for the retrenchment benefit as 60 was the limiting age and there was a three months waiting period for this particular benefit.

The policyholder was retrenched early in 2006. She submitted a claim for retrenchment benefit which seemingly was declined, not because of the age restriction but because she did not meet the terms and conditions of the retrenchment benefit. She had accepted a voluntary retrenchment which was specifically excluded. At the time of the claim the complainant read the policy conditions in some detail and discovered that she would in fact never have qualified for the retrenchment benefit. She demanded a refund of the entire single premium.

Assessment

It was the Ombudsman’s opinion that both parties were to some extent to blame; the complainant for not reading the contract when it was issued, resulting in her not taking advantage of the cooling off period, and the life assurer for accepting a risk where they would have known in advance that part of cover would not have been available to the policyholder. It was the Ombudsman’s view that the insurer had a responsibility to alert the policyholder to this situation.

Result

The premium relating to the retrenchment benefit was refunded together with interest and a modest compensatory award. The policy remained in force providing cover for death and disability.
DM
April 2006

CR149 Misseling – onvanpaste advies – belegging – lewende annuïteit – appèl.

CR149

Misseling – onvanpaste advies – belegging – lewende annuïteit – appèl.

Agtergrond

Mnr H was ‘n kliënt van A M Makelaars (AM) wat ‘n deelnemende lid van ons skema is. Mnr H het gedurende 1998 so ongeveer R700 000 op advies van AM aangewend om ‘n lewende annuïteit aan te koop. 60% daarvan is in aandele belê, 11% in “bonds” en 29% in kontant. Hy het op ‘n maandelikse inkomste van R6 000, oftewel 9.2%, besluit. In Augustus 1998 vanweë ‘n ineenstorting op die effektebeurs was die waarde van sy belegging slegs R500 000. Sy vrou het op daardie stadium ook met behulp van AM ‘n verdere R400 000 in ‘n lewende annuïteit in twee gebalanseerde fondse belê. Haar maandelikse onttrekking het 16% geloop.

AM het mnr & mev H daarop gewys dat as hulle sou voortgaan om maandeliks soveel te trek, ‘n groter deel van die belegging in aandele sou moes wees om hul kapitaal te beskerm. Oorsese beleggings is aanbeveel.

‘n Jaar later het AM die gesamentlike portefeulje hersien en mnr en mev H weereens daarop gewys dat hul maandelikse onttrekkings te hoog was. Bowendien het die oorsese mark op daardie stadium nie goed presteer nie. Dit het vir ‘n verdere verlies van R150 000 getoon. Mnr H wou egter nie gehoor gee aan AM se advies om na ‘n ander, minder riskante, fonds te skuif nie. Sy standpunt was dat die bestaande fonds ‘n langtermyn groeifonds was waarmee hy tevrede was.

Toe die mark egter steeds swakker presteer, het mnr H by ons kantoor kom kla dat AM hom op ‘n nalatige wyse ten opsigte van sy beleggings geadviseer het ten gevolge waarvan hy die verliese gely het.

Toe die kantoor na ‘n verwisseling van stukke egter teen hom beslis, het hy appèl aangeteken, onder meer op grond daarvan dat ons kantoor nie onpartydig was en sy klagte nie na behore oorweeg het nie.

Mnr H is ooreenkomstig Reglement 6.8.1 versoek om ‘n bedrag van R10 000 in die trustrekening van ‘n aangewese prokureur te stort om die koste van die appèl te help dek. Om die partye tot die geskil tegemoet te kom, het die kantoor ingestem dat die appèlverrigtinge in Johannesburg voor ‘n afgetrede regter sou geskied. Na aanhoor van getuienis van die drie werknemers van AM wat mnr H en sy vrou van advies bedien het, en van mnr H self, het die tribunaal beslis dat die advies wat aan hom en sy vrou gegee is nie onvanpas was nie en dat ons kantoor se optrede by die hantering van die klagte ook nie gekritiseer kon word nie. Dié appèl is gevolglik van die hand gewys.

Bespreking

In die loop van sy uitspraak het die regter hom soos volg uitgespreek:

Dit bring my dan by die appellant se twee klagtes. Wat die eerste een betref, dui die getuienis daarop dat dit nie onvanpas was om ‘n betekenisvolle gedeelte van die appellant se oorspronklike belegging in die aandele mark te belê om vir kapitale groei in sy portefeulje voorsiening te maak nie. Weens die aard van die doel van ‘n lewende annuïteit kan so ‘n beslissing, myns insiens, nie as onwys beskou word nie. Uit sy gesprekke met Mnr X was die appellant ook bewus van die feit dat daar ‘n belegging in die aandele mark sou wees. Hy het inderdaad, volgens sy eie getuienis, voorstelle gemaak van effektetrusts waarin daar belê kon word maar Mnr X het ander sulke trusts aanbeveel. Die appellant kla dat, om meer as 60% so te belê, nalatig was – veral op ‘n stadium toe die aandele mark op ‘n hoë vlak gestaan het. ‘n Daling in die mark, beweer hy, kon verwag word.

Dit is algemeen bekend dat die aandele mark onbestendig kan wees maar die algehele ineenstorting van die mark in Augustus 1998, ses maande nadat die fondse belê is, kon klaarblyklik nie verwag of voorspel word nie. Dat die instorting van die aandele mark die belegging nadelig geaffekteer het, is ongetwyfeld waar, maar kan, myns insiens, nie voor AM se deur gelê word nie.

Daar is in verskeie sake in Suid-Afrika oor die wisselvallighede van die aandele mark kommentaar gelewer. In Jowell v Bramwell-Jones 2000(3) SA 274 (SCA) sê Appèlregter Scott op bl 284:

“The vagaries of the share market are legion”.

Hy verwys met goedkeuring na wat Regter King in Kaapstad daaroor gesê het in Ex Parte Wagner N.O. 1988(1) SA 790 op bl. 791-792. Daar het die geleerde Regter hom soos volg uitgelaat (met verwysing na “the type of investment which by reason of the risk factor attaching to it is capable of producing capital appreciation to offset the deprivations of inflations” – en natuurlik ook inkomste onttrekkings):

“Every investment where the capital is not fixed has, in modern parlance, a downside potential. Even the most azure of blue-chip shares is unprotected against the vagaries of the financial market place, however remote these may seem with regard to particular shares at particular points in time.”

Daardie opmerkings is ook met goedkeuring aangehaal in Ex Parte Ewing N.O. 1995(4) SA 101 (D). Alhoewel ‘n adviseur soos AM dus kon voorsien dat daar ‘n daling in die aandele mark mag wees (asook, natuurlik, ‘n verbetering daarin) kon AM, na my mening, nie die algehele ineenstorting van die mark in Augustus 1998 redelikerwys voorsien het nie. Daar kan dus, in dié opsig, nie nalatigheid aan AM toegeskryf word nie.

Die saak van Crous v Imatu Staff Pension Fund and Others (2001) 4 BPLR 1817 (PFA) (aangehaal deur AM se regsverteenwoordiger) het as sulks geen betrekking op die huidige geval nie, maar daarin sê die Beregter vir Pensioenfondse:

‘The fact that markets all around the world, including the Johannesburg Stock Exchange ‘crashed’ in July/August 1998 resulting in the funds’ assets decreasing in value does not in itself imply that the assets were improperly invested.”

Daardie opmerking, waarmee ek eerbiediglik saamstem, is veral geldig insover dit die Mei 1998 belegging betref.

Dit word nou deur ons howe aanvaar dat ‘n ekonomiese verlies wat deur ‘n eiser gely word van ‘n verweerder verhaal kan word indien laasgenoemde nalatig was. In Abrahams & Gross v Cohen 1991(2) SA 301 (C) is daar soos volg beslis:

“A defendant may be held liable ex delicto for causing pure economic loss…. but before he is held liable it will have to be established that the possibility of loss of that kind was reasonably foreseen by him and that in all the circumstances of the case he was under a legal duty to prevent such loss occurring”.

Die toets of ‘n verweerder nalatig was, is of sy optrede in die besondere geval nie die optrede van ‘n redelike persoon was nie. In Sea Harvest Corporation v Duncan Dock Cold Storage (Pty) Ltd 2000(1) SA 827 (SCA) stel die Appèlhof dit so:

“The true criterion for determining negligence is whether in the particular circumstances the conduct complained of falls short of the standard of the reasonable person.”

(Kyk ook Neethling, Potgieter en Visser : Delict, 2de uitgawe, bl. 280.) Van der Walt en Midgley: Principles of Delict, 3de uitgawe, bl. 185 sê dan ook:

“Foreseeability is the cornerstone of the test for negligence.”

Die redelike persoon is ‘n persoon van redelike intelligensie wat die norme en standaarde van die gewone persoon, oftewel die man op straat, handhaaf. Soos dit in een Appèlhof-saak gestel is:

“Ons maatstaf is die van die wyse huisvader nie van die kroniese pessimis nie wat altyd die ergste vrees.”

Die redelike persoon kan dan ook na gelang van omstandighede verander. Die maatstaf van die deskundige op ‘n besondere gebied is anders as dié van die gewone man in die straat. Dit is ook so deur ons howe erken:

“The diligens paterfamilias (die gewone redelike persoon) is replaced by the reasonable expert.”

‘n Redelike deskundige sal ‘n beleggingsadviseur insluit (sien Durr v Absa Bank 1997(3) SA 448 (A)).

Die appellant betoog dat AM se optrede nie dié van ‘n redelike deskundige op die gebied van beleggingsadvies was nie. Hy argumenteer dat, wat sy oorspronklike belegging van Mei 1998 betref hulle ‘n daling in die aandele mark moes voorsien het. AM se advies om in die Z Trust te belê, was ook volgens hom nalatig, want hulle kon voorsien het dat dit te riskant was om daarin te belê. Wat laasgenoemde betref, is die appellant se standpunt bondig die volgende: AM het my geadviseer om in die Z Trust te belê; ek het daardie advies gevolg; ek het daarna ‘n aansienlike verlies in die belegging gely; derhalwe is AM teenoor my vir daardie verlies aanspreeklik.

Dit is ongelukkig nie die regsposisie nie. As dit so was, sou geen beleggingsadviseur sy werksaamhede kon voortsit nie, want elke keer as die aandele mark daal of daar ander omstandighede intree wat daartoe lei dat die belegger ‘n verlies ly, sou die adviseur vir die verlies aanspreeklik wees. Dit kan nie die geval wees nie.

In Durr v Absa Bank sê Appèlregter Schutz op bl 470:

“An investment advisor is not as such the guarantor of what he recommends.”

Die redelike persoon kan ook nie verwag word om teen elke moontlik teenslag te waak nie. Aldus is in S v Borchris Investment (Pty) Ltd & Anor 1998(1) SA op bl. 866-867 deur die Appèlhof gesê:

“The reasonable person is not a prophet and is not required to foresee the probability of harm to another but only to recognize a possibility real enough to warrant preventive measures.”

En in Broom & Another v Administrator Natal 1966(3) SA op bl 516, sê Regter Harcourt dat dit nie van hom verwag word dat hy “the foresight of a Hebrew prophet” moet hê nie.

Ons howe het ook by heelwat geleenthede die waarskuwing uitgespreek dat om die redelike voorsienbaarheid van ‘n geval te bepaal daar teen wysheid agterna (“hindsight”) gewaak moet word. In Durr v Absa Bank sê Appèlregter Schutz:

“Courts should guard against using ex post facto knowledge and employing the benefit of hindsight for what is obvious afterwards might not have appeared so at the time.”

Dit geld, myns insiens, vir beide die besluit om 65% van die appellant se fondse in Mei 1998 in die aandele mark te belê, asook die besluit om sy fondse in 2000 in die Z Trust te belê.

Daar is ‘n verdere aspek wat nie uit die oog verloor moet word nie. In Honey & Blankenberg v Law 1966(2) SA 43 (aangehaal in Van der Walt en Midgley op bl 188) sê die Hof:

“a reasonable error of judgment will exclude the implication of negligence. The deciding factor is whether or not the error of judgment was bona fide and reasonable in all the circumstances. If a reasonable person in the same situation acting could have made the same error of judgment, the error is not negligent.” (Ek onderstreep die word “could”.)

Na my mening was die advies om in die Z Trust te belê hoogstens ‘n ”error of judgment” wat ander beleggings adviseurs “kon” (“could”) gemaak het en in alle waarskynlikhede inderdaad gemaak het.

Wat ek hierbo uiteengesit het word bondig soos volg opgesom in die aanhaling deur AM se regsverteenwoordiger uit die Amerikaanse saak van Stark v United States Trust Company of New York:

“A trustee’s performance is not judged by success or failure, ie right or wrong and while negligence may result in liability, a mere error of judgment will not. Prophecy…. is (not) expected of trustees and their performance must not be judged by hindsight but by facts which existed at the time of the occurrence.”

Na my mening was daar geen nalatigheid deur AM in enige twee van die beleggings wat hulle namens die appellant gemaak het nie en is die appellant se klagtes korrek deur die Ombudsman afgewys. Die appèl faal derhalwe. Hierdie gevolgtrekking maak dit onnodig om met AM se punt in limine nl. dat enige eis deur die appellant verjaar het, te handel.

Wat die appellant se klagte teen die Ombudsman betref gaan sy argument, dat daar nie genoegsame of behoorlike aandag aan sy klagtes teen AM gegee is nie, myns insiens nie op nie. Sy klagtes is op 5 Augustus 2003 by die Ombudsman ingedien. AM se antwoord daarop is gevra en die appellant is daarna die geleentheid gebied om daarop te reageer. Al die feite is behoorlik uiteengesit en die verskillende sienswyses daarop oorweeg en die Ombudsman se eerste beslissing is op 31 Mei 2004 aan die partye bekend gemaak. Die appellant het daarna verdere vertoë aan die Ombudsman gerig wat ook oorweeg is waarna die eerste beslissing op 13 Augustus 2004 bekragtig is. Desnietemin is daar nog verdere vertoë deur die appellant gemaak. Weereens is hulle oorweeg voordat die finale beslissing deur die Ombudsman op 1 Junie 2005 gemaak is. Elke geleentheid is aan die appellant gebied om sy sienswyse en vertoë voor die Ombudsman te lê, en AM is behoorlik oor hulle optrede uitgevra. Daar kan derhalwe in geen opsig betoog word dat die Ombudsman nie die appellant se klagtes oorweeg het nie. Dat die Ombudsman teen die appellant beslis het, beteken ook nie dat sodanige beslissing eensydig of nie onpartydig was nie.

In elke geval is daar twee partye – een party se sienswyse moet gehandhaaf word; die ander party se sienswyse moet dan noodgedwonge afgewys word. Waar die een party dus “wen”, om dit eenvoudig te stel, en die ander “verloor” kan daar nie gesê word dat die beslissing eensydig of nie onpartydig was nie, tensy daar feite is wat dit ongetwyfeld aandui. Geen sulke feite bestaan of is deur die appellant geopper nie. Sy klagte teen die beslissing van die Ombudsman moet derhalwe ook van die hand gewys word.

Resultaat

In lig van die uitspraak is mnr H se R10 000 verbeurd verklaar en ooreenkomstig Reglement 6.8.4 aangewend om ‘n deel van die koste van die verrigtinge (insluitende die Regter se gelde) te delg. Desondanks en ten spyte van die volledige uitspraak was mnr H steeds ontevrede. Hy het gevra dat sy deposito aan hom terugbetaal moes word. Dit is geweier. Sy slot- woorde was: “Ek voel werklik magteloos oor die onreg wat my aangedoen is. Dit gaan hier duidelik oor die beskerming van die versekeringsbedryf ten koste van ‘n onskuldige verbruiker.” In antwoord daarop is mnr H daarop gewys dat sy opmerkings ongevraagd, onvanpas en ‘n belediging vir sowel die kantoor as die betrokke regter was. Ons slotwoorde was: “Ons lêer word hiermee finaal gesluit.” Dit bewys maar net weer: ‘n hardekop hoor nóg raad nóg rede.

AS
April 2006

CR150 Misselling – complainant not uninformed.

CR150

Misselling – complainant not uninformed.

Background

Due to a decline in his capital investment and monthly benefit, the complainant contemplated changing his life annuity investment with the insurer. According to the complainant, a pensioner, he was reliant on this monthly income and sought a safe investment which would grow and not reduce.

The insurer furnished the complainant with a variety of investment portfolios from which to choose. The complainant opted for a portfolio which the insurer described, inter alia, as:

“aimed specifically at the sophisticated investor who will understand and accept the higher risk when compared to a fixed interest annuity. The level of income will reduce from one year to the next, if the investment returns underlying the bonus rates are lower than the selected income level. Each year the investment account will increase by bonuses added according to the portfolio’s investment performance and decrease by the amount drawn by way of income”.

The investment portfolio to which the complainant had switched continued to perform below his expectations. Consequently he complained to this office that the insurer had ill advised him.

Discussion

In evaluating the facts of this matter the following transpired:

• That the insurer had presented the complainant with a variety of viable options from which to choose, ie, to change selected percentage levels, to switch portfolios or to convert to a conventional fixed interest annuity which carried less risk;

• That the complainant solicited information from the insurer and was duly furnished with same;

• That the information given to the complainant was credible and did not, per se, amount to financial advice;

• That such information was sufficient to alert the complainant to the need for careful management of the annuity and for seeking financial advice;

• That it could not be expected of the insurer’s call centre or actuarial department to provide the complainant with full financial advice when what the complainant required was a careful consideration of his overall financial position;

• That the complainant made a conscious choice to purchase a living annuity instead of a conventional annuity;

• That the insurer duly informed the complainant of the features of the investment portfolio he chose;

• That the risk of capital depreciation inherent in this portfolio was explained;

• That the insurer was obliged to carry out the mandate received from the complainant.

Result

On these bases the complaint was not upheld.

SM/TS
April 2006

CR145 Misselling; misleading marketing material.

CR145

Misselling; misleading marketing material.

Background

The complainant, a 47 year old teacher, was handed a flyer while she was standing in a bank queue, by a broker in the employ of a brokerage linked to the bank. The flyer read: “WORRIED? OUR EXPERT ADVICE WILL GIVE YOU PEACE OF MIND. DID YOU KNOW? – YOUR CHILD’S EDUCATION, A HOUSE (NEW OR EXTENSIONS), A CAR, SECURITY FOR FUTURE NEEDS FROM DAY ONE, MAY NO LONGER BE A WORRYING FACTOR IF YOU LET US SHOW YOU HOW”. The flyer meticulously set out, in a table format, cash values which would be realised by investors at different time periods of investment, namely 5, 7, 10, 12 and 15 years. The complainant maintained that this led her to believe she could be paid R51 507 after five years, if she paid R500 per month. She alleged that the broker did not alert her to any risks or pitfalls, and she did not understand the concept “illustrative value”. Although she was Venda-speaking with English her second language, she was presented with an Afrikaans application form for an insurance policy, which she signed in October 1999.

After contributing R40 450 for five years she was paid an amount of R28 000. The investment had been placed in foreign equities, and the unexpected strengthening of the rand and decline in global investment markets over the five years contributed to the poor performance.

The complainant engaged the services of an attorney to lodge her complaint.

Discussion

It was the unanimous view of the office that this was a clear case of misselling, together with the use of misleading marketing materials.

The flyer used by the broker was misleading. It did not indicate that the product sold was an insurance policy, but created the impression that this it was a bank product, through its prominent heading. The bold print on the flyer promised “peace of mind” and a lumpsum investment which could “work wonders”. The table led the reader to believe that s/he could be paid R51 507 after five years, if s/he paid R500 per month. These bold promises were qualified by a sentence in small print reading “Returns are quoted at illustrative values of 12%”. There was no explanation of the term “illustrative values”, or that the values payable would be the actual values achieved. Only one illustrative rate, the high rate of 12%, was mentioned, in non-compliance with the LOA guidelines stipulating that a high and low rate be illustrated. There was no mention of risk; as conceded by the broker’s manager, the material focussed on the benefits, and “unfortunately did not highlight the risks”.

The product was also in our view missold, in that inappropriate advice was rendered. The initiative did not come from the complainant but from the broker, who approached her with the flyer in a banking hall queue. The broker stated that the product was in his view appropriate for her needs, yet he made no effort to establish what her needs, financial circumstances or risk profile were. As a 47-year old teacher these were in all likelihood not conducive to the risk of an investment in foreign equities, no matter how good the past performance of the portfolio had been. An Afrikaans form was filled in on her behalf, despite the fact that she was Venda-speaking with English her second language. By the broker’s admission no other options for investment were discussed with her apart from the equity international portfolio.

There was a dispute of fact as to whether the concept of illustrative values or the risk attendant on the policy were discussed at all with the client; the broker maintained that they were, whereas the complainant stated that they were not. The balance of probabilities in our view favoured the complainant’s version, especially in the light of the broker manager’s view (which presumably was held by the brokers) that “at the time there was no real risk” because of the good performance of the specific portfolio and the off-shore markets due to the weakening of the rand. The fact that the broker agency did not appreciate that there is always risk, borne out by events in this case, was alarming.

Result

We made a provisional ruling that the advice afforded in this case was inappropriate, in that no effort was made to establish the suitability of the product for the complainant’s needs, the risk was not adequately explained to her, either by the broker or in the marketing materials, and she did not make an informed choice. The remedy was to place the policyholder in the position she would have been in had appropriate advice been given at the time of the inception of the policy, that is, an investment without the pitfalls of this one. The brokerage was ordered to calculate the amounts that would have been payable if the complainant had invested in a 32 day call account or the money market, and to pay the difference between what had already been paid and the higher of the two alternatives.

The calculations indicated that the money market position was higher. In response to the provisional ruling the brokerage offered to pay half the additional money market interest, as well as the complainant’s legal costs. The complainant accepted this offer.
SM
April 2006

CR112 Misselling

CR112

Background

During 2000 the policyholder sought advice from a bank on how to invest the R20 000 she received on her husband’s death. She informed the broker that the money was to be invested for her children’s education. On the advice of the broker, the money was invested for 5 years in an offshore equity portfolio with an insurer. The policy commenced on 1 March 2000 and matured on 1 March 2005 with a value of R14 245,48.

The complainant, a friend of the policyholder, submitted a complaint shortly after the policy matured querying the advice given to the policyholder at inception. He was of the view that, given the policyholder’s circumstances, the broker should not have recommended a 5-year pure endowment policy and it was alleged that the risks of the particular portfolio were not explained to the policyholder.

As the broker was employed by a brokerage who is a subscribing member to the Ombudsman’s scheme, the office proceeded to investigate the complaint.

Assessment

The broker, who was no longer in the employ of the brokerage, submitted a report stating that the offshore portfolio was explained to the policyholder and that “no-one was aware that the rand would fall to make this investment pay less than the projected values”. The brokerage concurred. It was of the view that the policyholder received the correct advice and that she had knowledge of the portfolio she was invested in.

The matter was discussed at a fortnightly Adjudicators’ meeting where it was decided that the advice given was not appropriate. We wrote to the brokerage and provided the following reasons for our decision.

1. The circumstances of the policyholder at the time the advice was given were of relevance. She was a 37-year old housewife and a recent widow at the time, with dependants. She received the R20 000 on the death of her husband. There was no indication that she had access to any other capital or source of income, or that a risk profile of the policyholder was undertaken. Taking the policyholder’s circumstances into account and the amount she had available for investment, we were of the view that the funds should not have been placed in an offshore portfolio and subjected to the fluctuation of the international markets.

2. It was initially alleged that the policyholder was not advised of the risks of investing in an offshore portfolio. We were aware that the particular portfolio in the three years prior to the investment achieved growth rates of 22,76%, 27,14% and 30,84% respectively. It could very well have been that because of the good performance of the portfolio, the risks thereof were not in fact explained to the policyholder. We were of the view that, simply because the portfolio performed well, it did not follow that the advice given was appropriate or that the risks were minimised.

3. Taking the second point into account, we could not come to the conclusion that the policyholder made an informed decision about the option that was provided to her. There was also no indication that other options were presented to her. The fact that she signed the application form was not sufficient proof that she made an informed decision, if she was not adequately advised of the option and its implications.

4. The mandate given to the broker was to invest the R20 000 for the policyholder’s children’s education. Bearing this and the above points in mind, we were of the view that the advice was not appropriate.

We therefore made a provisional ruling against the brokerage that the policyholder should be placed in the position she would have been in had the appropriate advice been given at the inception of the policy. We afforded the brokerage an opportunity to inform us what appropriate advice would have been. It did, however, appear to us that a policy might not have been a suitable vehicle for the investment and we requested the brokerage to consider other alternatives in this regard, such as a money market bank account.

The brokerage advised that the capital of R20 000 with interest earned would have achieved an amount of R33 164,74 in a money market bank account. It therefore offered the policyholder the difference between this amount and the actual maturity value plus interest, which amounted to R18 813,51.

Result

The policyholder accepted the offer and the amount was paid accordingly.

AR
October 2005

CR109 Misselling – can insurer be held liable on the basis that the policy should never have been issued

CR109

Misselling – can insurer be held liable on the basis that the policy should never have been issued?

Background

• In 2002 the complainant was 82 years old when he was sold a policy for a 10 year period with a recurring premium of R300 000 per annum by an independent broker. The complainant and his wife were the lives assured on the policy.
• Subsequent to his wife’s death the complainant ceded the policy to a trust and a while after his wife’s death added his daughter as the second life assured.
• The problem was that the complainant could not keep up the premiums and the paid up value was much lower than the original investment amount.
• The complainant believed that the policy was missold but he was also of the opinion that the insurer should never have issued the policy. The broker was an independent intermediary who was not subject to our jurisdiction.
• It appeared from documentation that the insurer has a practice that does not allow for policies to be issued with a maturity date after a client’s 90th birthday. We questioned them about not applying it in this case and they advised that they will accommodate a client but then insist on a second life assured as they did in this instance.

Discussion

Our points of enquiry to the insurer were the following:
Although an insurer can rely on the proposal brought to them by an independent broker, where the circumstances are markedly out of the ordinary, as in this matter, a duty may well arise for an insurer to do an investigation when the proposal is received.
If it does not do so, it is capable of the interpretation that the insurer deliberately closed its eyes for fear of losing potentially valuable business. The investment was so out of the ordinary having regard to the complainant’s status as a pensioner, his age and the nature, length and magnitude of the recurring premium that the insurer should have been alerted.
Although most of the blame for this complainant’s misselling attached to his broker, the insurer was not blameless. On the abovementioned analysis it should have been more astute and proactive in enquiring into the complainant’s financial ability to sustain the policy.
Result

We suggested a settlement on the basis that the policy should be reconstituted as a single premium 5 year policy. Both parties accepted the suggestion.

We also communicated with the FSB regarding the activities of the independent broker.

JP
October 2005

CR38 Misselling – advice to 64 year old to move investments off-shore

[vc_row][vc_column][vc_column_text]CR38

Misselling – advice to 64 year old to move investments off-shore

Facts

In May 1999 the complainant retired and received a 1/3 lump sum. She invested this together with an inheritance at a bank in a money market account from which she drew an income. In August 2000 the complainant went to the insurer to seek advice on increasing the monthly contribution she made to a unit trust in her grandson’s name. The insurer’s agent, assisting her, advised her to reinvest her R400 000 investments in an off-shore investment housed in a policy. The complainant was 64 years old at the time of investment and she required an income. She was advised that she could draw £500 each quarter as income.

No formal needs analysis was done. When the investment dropped in value, the complainant contacted the adviser and he met with her on several occasions. At one of these occasions the adviser gave a personal guarantee that if the amount of the investment reduced beyond the original lump sum he would make up any shortfall. He also advised her to stop drawing an income so as not to erode her capital any further.

The insurer advised us that they did not regard the advice as inappropriate.

Discussion

On the facts we were convinced that the adviser had persuaded the complainant to invest off-shore rather than her wanting an off-shore investment from the outset.

Our view was that it was inappropriate advice for a 64 year old retired pensioner, who has no other significant investment, to transfer her pension fund money from a South African money market account to an off-shore equity portfolio.

We were also not convinced on the documentation on file that the complainant had made an informed decision when she chose the investment on the advice of the insurer’s adviser. We interviewed the complainant and her husband and it became clear that she had relied on the agent who had convinced her that an off-shore investment was the route to go and had painted a very bleak picture of South African investment market. At no stage did there appear to have been any warnings about the risks attached to her new investment.

We advised the insurer accordingly.

JP[/vc_column_text][/vc_column][/vc_row]

CR39 Misselling—instructions misunderstood?

[vc_row][vc_column][vc_column_text]CR39

Misselling—instructions misunderstood?

Background

The complainant, a divorcee aged 65, had all her pension money invested in the money market. The investment yielded a sufficient amount per month for her upkeep but she became concerned about the lack of capital growth. Because she was totally unskilled in financial matters, she turned to a firm of brokers for advice on how to invest her money. She insisted on a minimum monthly income equal to that which she got from her investment in the money market. The broker recommended an investment overseas. The plan was based on the assumption that the investment would produce a satisfactory yearly return and furthermore that the Rand would continue its downward trend. The complainant alleged that she instructed the broker that her capital should not be exposed to any risk. She, however, signed a mandate in which it was made clear that no guarantees were provided. She admitted to her signature but explained that she signed the document without reading it. The investment performed satisfactorily in dollar terms but as a result of the strengthening of the Rand, the capital deteriorated sharply. The complainant claimed compensation for the loss of her capital on the ground that her broker did not adhere to her instruction that her capital may not be exposed to any risk.

Assessment

We could not determine on the papers whether in fact there was a mutual understanding that the complainant’s money should not be exposed to any risk. It was furthermore not possible to decide whether the complainant took an informed decision. A hearing was arranged during the course of which the parties came to a practical settlement. The firm of brokers undertook to pay a sum towards compensation on the basis that there might have been some misunderstanding about the actual terms of the mandate.

MFBR[/vc_column_text][/vc_column][/vc_row]