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Providers will have to be more careful, writes Isaac Moledi

By unknown | Nov 14, 2006 | COMMENTS [ 0 ]

Financial services providers who cannot prepare needs analyses and keep records of recommendations can no longer recommend financial products to consumers.

Financial services providers who cannot prepare needs analyses and keep records of recommendations can no longer recommend financial products to consumers.

This is according to Alphen Asset Management, when reviewing the latest determination by the Financial Advisory and Intermediary Services' (Fais) ombud in the matter of Henry Carl Stephan and his wife Johanna v Durant van Zyl.

The Stephans, the complainants, were given advice by Van Zyl to invest in Leaderguard Spot Forex (LSF).

The complainants invested about R800 000 in a venture that failed.

According to Fais ombud Charles Pillai, service providers are required in terms of Fais codes to identify a need, consider various financial products and point out in writing which of the products are likely to satisfy their needs, and give reasons for recommending such financial products to consumers.

The code is aimed at dealing with the practice by providers of recommending financial products that are unsuitable. It demands that providers be able to justify their recommendations.

In addition, before an adviser can render financial services, he must be licensed by the Financial Services Board (FSB) to render the specific type of service.

The FSB licenses advisers to render services such as short-term insurance, life insurance, local collective investments or transactions in foreign exchange.

On the issue of the adviser's authority to give advice on forex transactions, it was clear that the adviser was not licensed by the board to give advice on forex transactions.

The ombud also found that there had been material non-compliance with the forex code and the code of conduct for Authorised Financial Services Providers.

In his determination, Pillai said that because of the absence of a record justifying the need for the investment with LSF, he ruled that no need existed.

He said the recommendation that Van Zyl gave to the Stephans was nothing more than a senseless one aimed at nothing other than ensuring the provider received commission.

According to Alphen Asset Management, Pillai's displeasure related primarily to the adviser's failure to keep any records whatsoever about the advice given in respect of the LSF investment.

After looking at various further breaches of the codes, Pillai found that the adviser's conduct had caused the complainants to suffer financially and that the respondents were consequently liable to compensate the complainants for their losses.

Alphen says there are a number of lessons to be learnt from this determination for investors and advisers alike.

l Investors should never take advice from a provider in respect of products the provider is not licensed to advise on.

l It is absolutely critical that an adviser keeps written records of advice given to a client in respect of any new investments or switches from existing investments. These records must also show how the adviser has complied with the codes of conduct.

l It is vital for advisors to be familiar with the prohibitions and duties that they generally must comply with, as well as specific prohibitions and duties regarding particular types of investment.

The management company said the codes of conduct should not be looked at by advisers as a hindrance, but considered as advisers' guides.


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