Every professional sport has its rules whether it is rugby, soccer, netball, hockey, or cricket, just to name a few. The rules ensure that every stakeholder can compete on equal grounds and together they offer a framework within which the game can be played honourably. Without such a framework every sport will result in chaos. The rules are necessary, not only because they establish the boundaries of the game so that every contender has a fair, and reasonable chance of success, but it also limits exposure to injuries. Therefore, not only do the rules establish a sound framework within which to play the game, they also offer essential protection to all the players.
The most valuable players in any team sport are not only those who are talented and hard-working, but also those players who manage to play within the framework of the rules. Every penalty, yellow card or red card against a player may ultimately cost the team the match. Therefore, it is essential for all the players not only to know the rules in a match, but more importantly, to apply the rules. The same principles apply to the business of providing financial advice. Although I believe that sport is a good analogy to explain the importance of understanding, and applying the rules, I also believe that for us as financial planners it is even more important, because the business of giving advice is much more than just a game.
It takes hundreds, if not thousands, of transactions over many, many years to establish a successful advisory business in the financial services industry. However, it only takes one transaction, which may be concluded in a couple of minutes, to ruin all that effort. Business lessons from the FAIS Ombud may just prevent you from becoming another Ombud statistic.
Not all rules are created equal
Some rules are more critical than others, simply because transgressions of the rules are treated differently. For example, in rugby the penalty for a knock-on is a scrum and the opposing side will have the benefit of possession of the ball, but a dangerous tackle may result in a red card and the end of the game for the transgressor. It is far easier to make a come-back and compete after a knock-on and scrum than it is for a side to compete with 14 men against 15.
Business lessons from the FAIS Ombud highlights those rules that have caused financial services providers the biggest headaches since the introduction of the Act. A comprehensive study of FAIS Ombud determinations, Appeal Board- and High Court decisions revealed that the Pareto Principle (The 80/20 Rule) also applies to FAIS Ombud determinations. Just over 20% of the provisions of the FAIS General Code of Conduct have been instrumental to more than 80% of FAIS Ombud determinations against advisors since the implementation of the Financial Advisory and Intermediary Services Act in 2004. This study of FAIS Ombud determinations as summarised in Business lessons from the FAIS Ombud now makes it possible for advisors to focus on those vital few sections of the General Code of Conduct to ensure that they provide suitable advice and comply with the essence of legislation, and by doing so, they could limit or even avoid client complaints. This publication reveals that there is a golden thread that runs through the majority of Ombud determinations and Appeal Board decisions that advisors should be aware of when they engage with their clients.
The General Code of Conduct, as sub-ordinate legislation to the FAIS Act, specifically regulates the ethical standards of financial services providers (representatives in particular) and the client interaction process, with specific reference to the activities of advice and intermediary services as defined in the Act. This piece of legislation therefore regulates a very specific component of the rendering of financial services to customers, under the watchful eye of the FAIS Ombud, who ultimately serves as the referee for financial services providers. Just like rugby players and spectators do not always agree with the referee’s decision, financial services providers may take determinations issued by the FAIS Ombud on Appeal.
When the International Rugby Board concludes a disciplinary hearing and finds against a player, he has the right to appeal the decision. In the same way the FAIS Act stipulates that any person who feels aggrieved by any decision by the Ombud may appeal to the Board of Appeal.
What is important though is to know when to pick a fight, and with whom to pick it. Logically, it would be foolish for a rugby player to pick a fight with the referee on the field, because the referee’s whistle, and the rules of rugby are more powerful than even the strongest player in the team. In the same way it would be wise to avoid picking a fight with the FAIS Ombud, because the Ombud’s interpretation weighs heavier than yours and mine, especially when the Appeal Board has already endorsed the Ombud’s findings in similar cases. Therefore, financial services providers will do well to consider the interpretations of the FAIS Ombud, the Appeal Board / Tribunal, and the High Court before confronting the FAIS Ombud with theirs.
In this publication, the decisions that have been made and endorsed by the Appeal Board are highlighted, which financial services providers should learn from rather than to argue against. There are some sections in the Code of Conduct that have been tried and tested by the Ombud and the Appeal Board, and financial services providers will do well to adapt and amend their process and record-keeping accordingly. The key sections of the General Code of Conduct that feature in almost every determination against advisors are:
- Section 2 – Ethical conduct
- Section 3 – Transactions must be accurately accounted for
- Section 7 – Product disclosures
- Section 8 – Suitability of advice
- Section 9 – Record of advice
In The 7 habits of Highly Effective People, the late Stephen R Covey asserted that being proactive is the first habit of effective people, and when it comes to compliance with the FAIS Act, I most certainly agree. Knowing upfront which sections in the Code of Conduct pose the biggest threat to your business, proactively assessing your documentation and designing a sound process accordingly, may just be one of the most important things that you can do for your business. Interestingly, Covey’s second habit is Begin with the end in mind. My advice is – Begin with a client complaint in mind! If you do that proactively, it will help you to focus on the vital building blocks that will not only protect you against client complaints (injuries), but it will also help you to help and protect your clients.