I recently attended a Financial Services Board workshop on the FAIS Act (Financial Advisory and Intermediary Services). FAIS is big on putting consumer interests first and on making sure that consumers get appropriate advice. Despite the legislation there are still many instances of investors getting bad advice and being ripped off – this is partly due to the way that advisors are remunerated and partly due to the fact that the insurance companies continue to offer inferior and inappropriate products (I am referring specifically to the long-term contractual savings policies that are still offered by insurance companies and more specifically, retirement annuities (RA’s) through life insurance companies). It is my opinion that it is time to explore using FAIS legislation to force the industry to change – yes this is contentious and potentially highly explosive…but here goes anyway.
For me the issue has to do with insurance companies still contractually binding people to long term contracts in this day and age. W e all know that anyone who enters into any contract is bound by the conditions of that contract and if you alter or break the contract there are penalties. This is the case with contractual insurance products such as life insurance RA’s. This is just the way that it is…However, given that the average person will change jobs many times in a working career (some stats say as many as 6 times) there is no way that any client should or could commit to binding themselves to such a contract – it is doomed to fail.
Consider the following:
Mrs Client starts working for Company A that has no pension fund and she is sold a life RA (not the better unit trust option). A year or 2 later she leaves the company and goes to Company B and they have a pension fund so she is “forced” to stop the RA because she can no longer afford the premium and there is also no longer any tax incentive to continue paying. As a result of this she will incur a penalty of up to 30% on the value of her funds.
Or on a slightly different tack, she has an RA through an insurance company and her employer decides to implement a pension scheme with compulsory membership and again she is forced to stop her RA because she cant afford to contribute to both funds. As a result she will lose up to 30% of the value of her RA. These penalties are as per the Statement of Intent (SOI) that was signed between the Minister of Finance and the Life Insurance Industry some years back.
This is just wrong! And yet insurance companies still insist on selling these products and still insist on penalising clients when they break the contract (I am still trying to get statistics from an insurance company as to how many RA contracts actually make it through the entire term but have not been able to get these yet).
As a result of the penalties that an investor in a life insurance RA is likely to incur, could he/she not make a case for “inappropriate advice” against any advisor who puts him/her into a life RA? Especially when the advisor knows full well that the client is extremely unlikely to be able to stick to the contract for the entire term and as a result will incur penalties of up to 30% each time they need to alter the contract.
If the life insurance RA was the only option then there may be some leniency that could be applied, but there is a perfectly good (if not superior) alternate product in the form of the unit trust RA where there will never ever be any kind of penalty because there is no contractual obligation to continue paying? And more importantly, the fee structure on them is completely different – there is no accounting for future earnings in today’s income statement.
Perhaps the time is coming when the FAIS Ombudsman could well find the following case of “inappropriate advice” on his desk…
“Mr Broker, you put me into a contractual product, knowing full well that I would probably not be able to adhere to the terms of the contract and that at some stage in the future I would have to alter the premium. As a result of that I will incur penalties…and all along you could have put me into a unit trust option where there are never ever any penalties…surely that was inappropriate advice”?
Perhaps the same approach will be used when the National Savings Scheme is finally introduced and many people who have RA’s will be forced to stop these as they will be obliged to contribute to the NSS and will not be able to afford to do both the RA and the NSS. At this point, anyone in an insurance RA will incur penalties of up to 30%. My thinking is that either the insurers will be legislatively forced to waive these penalties or else there could well be more than a few cases for “inappropriate advice” on the FAIS Ombudsman’s desk against advisors for putting clients into life RAs when they knew full well that the NSS was coming and that there would be penalties when the contracts were altered, especially when they could have put the client into a non-contractual (unit trust) RA.
How about it? There must be some good legal minds out there? Could a client make a case of inappropriate advice against an advisor for putting them into a life insurance RA where they have incurred penalties when there was a better product with no penalties (albeit with much lower commission) available?