Financial Advisory and Intermediary Services Act (FAIS)

In terms of FAIS and the General Code of Conduct issued in terms of this act, a Financial Advisor has amongst others, the duty to act with due skill, care and diligence, in the interests of clients and the integrity of the financial services industry. This includes the duty to provide the client with proper advice that is appropriate in the circumstances and means amongst other things, that Financial Advisors should advise their clients of available alternatives when:

• New financial products are proposed/ considered, and
• Termination of or changes to existing products are contemplated.

Long Term Insurance Contracts
Policies issued in terms of the Long Term Insurance Act may have different attributes:

• Pure investment
• Pure Life cover
• Combination of the above

When a long term insurance policy is terminated, it can be done in different ways:

• Cancellation or lapse,
• Surrender or
• Trade for higher value than surrender value

Depending on the attributes of a long term insurance policy, the policy may have a very low or even no surrender value. Many so-called structured investment products are styled as long term insurance policies with no liquidity until maturity. It is self-evident that in order to identify the most advantageous option for a client, the different options must first be identified and the impact of each quantified.

If a product is terminated as part of a replacement strategy, there are also specific additional requirements stipulated in the General Code of Conduct relating to the replacement of existing policies of clients.

What to do?

What should a Financial Advisor then do when advising on the termination of a long term insurance policy? The first question is to consider if it is appropriate for the client to discontinue the policy. This question can only be properly answered by accessing the circumstances and financial position of the client. Which means a proper financial needs analysis is required. Key considerations are:

• The continued need for life cover and other benefits available under the existing policy or the appropriateness of the investment. As circumstances change the needs of the client change as well;
• The available alternatives, including the nature and cost of alternative cover if required;
• The current insurability of the client (if applicable);
• Penalties and other charges imposed if the policy is terminated; and
• Affordability

In the current economic climate, affordability of continuing with a policy is often an overriding consideration.

The second question to consider is the value of the policy. What is the best price that can be obtained for the policy? Do you accept the surrender value offered by the issuer of the policy? Or could the policy be traded for a higher amount? The surrender value of a policy is just an offer like any other offer. Just as one would not sell any other asset without assessing the market value, its not good practice to accept the first available offer for a policy (i.e. surrender value)

The third essential element is to make a full disclosure to the client of all the pertinent facts relating to the policy. Where a policy is traded, any remuneration received by the Financial Advisor should also be disclosed as required by FAIS.

How do I know if a policy is tradable?

Determining whether a policy is tradable and/ or obtaining offers for a policy could be cumbersome. ATPS provides such a service to Financial Advisors through the APE service. Even if a policy is not tradable, by submitting a policy for automatic evaluation through APE, a Financial Advisor will have evidence that an alternative was considered. It is clear that surrendering a policy by or on advice of a Financial Advisor without investigating, considering and where applicable, acting on alternatives, is not in accordance with the principles of either FAIS or the common law.

Can you afford not to make your clients aware of the true value of their Long Term Insurance Portfolio?