R681K Later: Why Every FSP Must Rethink Client Communication

A recent determination by the Office of the Ombud for Financial Services Providers ("FAIS Ombud") has brought to light the significant consequences of failing to communicate material policy changes effectively. The Ombud ruled in favour of a complainant whose insurer repudiated a claim based on a requirement the client argued was never disclosed to him.

On 23 October 2023, the complainant submitted a complaint following the theft of his Toyota Fortuner on 2 July 2023. His claim was rejected by the insurer on the basis of a new policy condition requiring certain high-risk vehicles to be equipped with a second tracking device. This requirement had become effective on 1 April 2023.

The complainant maintained that he had not been made aware of this new condition. Until receiving the rejection letter, he was under the impression that compliance with the existing requirements – namely, a factory-fitted alarm, immobiliser, and a CIB-approved tracking device – was sufficient. He had adhered to all prior obligations under the policy.

The respondent, a financial services provider, submitted that it had communicated the new requirement via email on 1 March 2023. The email was addressed to the complainant’s wife’s email address, which was stored in the FSP’s records. However, the complainant had been the sole policyholder since July 2020 and consistently corresponded with the FSP through his own email addresses. He denied receiving any communication regarding the second tracking device.

The FSP admitted that while the communication had been sent to the wife’s email address, no follow-up call had been made to confirm receipt, despite internal plans to do so for all affected clients. The FSP noted that this was the only case where the intended follow-up had not taken place.

In considering the matter, the FAIS Ombud referred to the General Code of Conduct for Authorised Financial Services Providers and Representatives ("the Code"). The Code places several clear duties on providers, including the obligation to:

"Render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry."

Further, the Code requires that providers:

"In making contact arrangements, and in all communications and dealings with a client, act honourably, professionally and with due regard to the convenience of the client."

The Ombud found that the FSP had failed to exercise the required standard of care and diligence by not verifying or updating the client’s contact information and not confirming that the communication regarding the policy change had reached him. As such, the Ombud upheld the complaint and ordered the FSP to pay the insured value of R681,250.00 plus interest at 11.25% per annum from the date of the determination until final payment. The FSP complied and paid the full amount owed.

This case underscores the importance of proper recordkeeping, updated client information, and thorough communication, especially when introducing material changes that may affect a client’s claim outcome. It further affirms that clients should never be expected to bear the consequences of a provider's administrative or communication failures.

Key Takeaways for FSPs and Advisors

1. Direct and Verified Communication is Crucial
Material policy changes must be sent to the correct, verified contact details of the client, especially where such changes may result in a denied claim.

2. Outdated Client Records are a Compliance Risk
Using obsolete or secondary contact information, even inadvertently can render a provider liable and compromise client trust.

3. Follow-Up Should Not Be Optional
Where critical information is sent, it must be accompanied by follow-up actions such as calls or written confirmation to ensure receipt and comprehension.

4. Policy Changes Must Be Clear and Proactive
Advisors must disclose all new requirements in an explicit and client-friendly manner to avoid disputes and uphold Treating Customers Fairly (TCF) principles.

5. Proper Recordkeeping Protects All Parties
Maintaining detailed and accurate communication records is essential in resolving client disputes and defending advisory actions.

6. Clients Must Stay Proactive
Policyholders are also encouraged to regularly confirm their compliance status and contact details with their providers to mitigate risks.

⚖ Final Thought:

This determination underscores that even minor administrative oversights in the financial services industry can result in serious legal and financial consequences. It reinforces the need for financial service providers to take a proactive and diligent approach to client communication and compliance.