CR171 Advice – intermediary – intermediary’s obligation, if any, to furnish advice?
Advice – intermediary – intermediary’s obligation, if any, to furnish advice?
Advice, seriously given, be it gratuitous or for reward, must always be appropriate. But is an intermediary, who holds himself out to be a professional financial adviser, whether he is an independent broker or is associated with a particular insurer, legally obliged to tender advice to his customer? That question surfaced in a trio of recent cases, discussed below.
The adequacy of advice will always be assessed against the circumstances under which it was given. Was it solicited or gratuitous? Was there a mandate to furnish advice? If so, the terms of the mandate will be the cornerstone for any enquiry on whether the advice, not given, should have been given or, if given, was bad – whether the advice, in short, was missing or misselling.
Misselling has its own set of considerations which is dealt with elsewhere on this website. (s.v. Papers and Presentations and Topics and Cases). If the cause of the complaint arose after 1 October 2004 it would of course be a matter for the attention of the FAIS Ombud.
The cases under discussion concern a different and anterior issue: when is there a duty on an intermediary to furnish advice, either on his own initiative or if invited to do so?
Such a duty would normally arise and be defined by a contract although even unsolicited gratuitous advice, if bad, can lead to delictual (as opposed to contractual) liability.
Contractually there will of course be a difference between the nature and extent of the duties owed to a client by an independent broker as opposed to an intermediary who is employed by or associated with a particular insurer (a so-called tied agent). What is said below refers in the main to the latter.
The terms of the contract, and hence the mandate to furnish advice, must be sought in the contractual relationships between:
(a) policyholder and intermediary;
(b) insurer and intermediary;
(c) policyholder and insurer.
There may of course be an overlap between these relationships.
What is pertinent will be:
(a) the intermediary’s letter of appointment, if any, be it from the policyholder or the insurer;
(b) the policyholder’s application form for insurance;
(c) the policy itself;
(d) a consistent course of conduct from which a mandate to give advice can be inferred;
(e) an ad hoc arrangement between the policyholder and the intermediary to furnish advice.
In each instance it will become a matter of interpretation whether there was a duty to furnish advice and, if so, how far that duty extended.
The commission payable to an intermediary, be it up-front, in instalments or as an on-going fee, may also serve as an indication of the extent of his or her duties. Such commission, for instance, may be for:
(a) introducing a customer to a product provider or a particular product. Such advice would be pre-contractual;
(b) responding to a policyholder’s queries and liaising on his behalf with the insurer. Such interaction would be post-contractual;
(c) monitoring or reviewing an investment on an on-going basis e.g. by updating information. Such a duty would be post-contractual;
(d) furnishing on-going advice on whether an investment should be moved when the market fluctuates. Such a duty would once again be post-contractual. This would include advice on whether the policyholder should surrender or make his policy paid-up or whether he should switch to a product which is better suited to his or her current needs.
So too, it is a matter of interpretation whether the intermediary is to take the initiative in furnishing advice (e.g. to move the investment in the case of a living annuity) or whether the intermediary is only obliged to react when he or she is asked to give advice.
The answer to these questions will invariably depend on the express or tacit terms of the mandate and the circumstances of the case.
Against that background we turn to the three individual cases mentioned above.
Advice – duty to furnish post-contractual advice – delay.
The complainant in 1997 took “a package” which in effect meant that his pension money was made available to him to invest at will. He made enquiries and spoke to one of Company X’s advisers, Mr A. Mr A recommended a preservation fund and so it was done. That was the end, at least initially, of Mr A’s involvement for which he received an agreed commission from Company X.
In 2000 the complainant realised that the investment was performing poorly and he decided of his own accord to switch to an overseas portfolio in the hope of achieving improved growth.
This investment, as so often happens, flourished to begin with but gradually began to deteriorate.
The complainant on occasion met Mr A on the golf course. In May 2002 he canvassed him for advice about his overseas investment. According to the complainant he asked Mr A to move his money to a fund in Company X where it would not diminish. Mr A was reluctant to give the complainant any advice on his overseas investment since he did not feel qualified to do so. He did, however, promise to speak to his area manager, Mr B. Nothing, however, happened for months. Mr A, on being confronted with the long delay from May to November 2002, tried to excuse himself on the feeble ground that he was not au fait with Company X’s newer products.
A meeting was eventually arranged between the complainant and Mr B. Mr B advised the complainant, in accordance with the generally prevailing wisdom at the time, not to withdraw his investment from the overseas market.
The complainant heeded that advice but when the investment continued to perform poorly he took the initiative in responding to an advertised invitation from Company X to ask for advice by email. This elicited a response from another adviser employed by Company X, Mr C. Mr C advised the complainant to move from the old style product in which he was invested to one of Company X’s newer products which was essentially a money market fund. Complainant did so and his investment stabilised.
The question the complainant posed in his complaint to this office was whether he was entitled to hold Company X liable for the overall loss in his investment due to Mr A’s tardiness in advising him to move his investment to a safer haven which was available from Company X’s range of products at the time; and that Mr A’s delay in doing so caused him his loss.
The first difficulty facing the office was that there was a dispute of fact on whether the complainant gave Mr A a firm instruction (which was accepted) to move the investment or whether it was merely a general request for advice. The onus to prove such a mandate was on the complainant. On the evidence adduced that onus was not discharged.
The next question was whether Mr A was contractually obliged to respond to the complainant’s request for advice.
As stated earlier, Mr A’s fee, which he received from Company X, was geared to the introduction of the complainant to the company and to its product. In terms of his agreement with Company X, and hence with the complainant, he was not obliged to furnish post-contractual advice.
On his own evidence Mr A never undertook or even presumed to advise the complainant about moving his investment either at all or by a specific date.
Mr B, on the other hand, voluntarily undertook to furnish the complainant with advice. Such advice had to be appropriate. Viewed objectively against the circumstances prevailing at the time, his advice not to move the investment, could not be said to have been inappropriate, a conclusion the complainant did not challenge.
That left the question of Mr A’s delay to arrange a meeting for the complainant with Mr B. On the evidence it could not be found that the complainant gave Mr A an instruction (which Mr A accepted) to arrange a meeting by a particular date. He could accordingly not be held liable for mora debitoris.
In the circumstances we came to the conclusion that we could not assist the complainant on the merits to recover his losses on the investment from Company X. But we did persuade Company X, having regard to Rule 3.2.5, to offer complainant R2500 on condition that it would be in full and final settlement of any claim against Company X.
The complainant, as was his prerogative, was not prepared to settle the matter on that basis. We accordingly made an unconditional award of R2500 against the insurer and closed our file.
Inappropriate investment advice – failure to provide information regarding performance of off-shore portfolio – failure by intermediary who received a yearly revision fee to provide any advice and/or information. Whether the insurer can be held liable for “loss” incurred and/or quality of service.
The complainant was 68 years of age in 2000 when her policy with Company X matured. She contended that she was persuaded by an intermediary of Company X to invest the maturity proceeds of R66 611 in an off-shore portfolio for five years and, in addition, to make further monthly contributions of R500 to such policy. She received no information from Company X and was never contacted by the intermediary until she received a statement in 2005 informing her that the expected maturity value would be R79 000. Her total contributions amounted to R103 241.81 (R66 611.21 initially and ongoing contributions amounting to R36 630.60).
The complainant contended that if she had received regular information on the performance of the portfolio, she could have taken timeous corrective action.
Although she argued that the advice she was given was inappropriate and also raised other aspects relating to costs, it seemed doubtful to us whether these aspects were worth pursuing. The available information indicated on a balance of probabilities that she was aware of the risk involved in the off-shore investment and that she agreed to the costs concerned.
Two aspects (extracted from Company X after some protracted correspondence) were, however, relevant with regard to the complainant’s contention that:
(a) she was deprived of the opportunity to take corrective measures and thus prevent the “loss” she suffered as a result of Company X’s failure to provide her with information on the performance of the portfolio; and
(b) the intermediary failed, notwithstanding the fact that he received an ongoing “adviser’s fee”, to provide her with any advice or information.
In Company X’s first response it was stated that it “dispatches portfolio statements to clients annually”. The complainant was adamant that she never received such statements up to 2005 (the year that the policy matured). Company X eventually conceded that “According to our records, we did not send annual portfolio statements, except for 2005 which the client has received”.
A second aspect relates to the commission received by the intermediary. In spite of specific questions as to whether the intermediary received an on-going commission and after we were provided with a copy of the application on which it was clearly indicated that the intermediary would receive an ”investment review fee annually of 0.6%”, Company X eventually conceded that such a fee was paid, but it argued that that was not an on-going commission.
The first issue was accordingly whether an intermediary (who received such a fee) was under an obligation to inform and/or advise the policyholder.
Although the investment in fact represented a substantial portion of her total portfolio and factors such as the age of the investor and the degree of risk may cast some doubt on the appropriateness of the particular investment, it seemed that the investor was aware of the nature of the investment and the risks involved. Company X could accordingly not be held liable for inappropriate advice.
However, Company X’s failure to provide the policyholder with portfolio statements and the failure of the intermediary to contact the policyholder at any stage after the conclusion of the contract, in spite of the annual revision fee received, supported the complainant’s argument that Company X should take responsibility for not keeping her informed so as to enable her to make educated decisions regarding the replacement of funds. The purpose of an annual revision fee, after all, is to compensate the adviser for taking time at least once a year to consult with the client and review the client’s portfolio.
The nature of the particular product was such that knowledge of the performance of the portfolio and input by the financial adviser were factors that would assist the complainant in the taking of decisions that were required from time to time.
There seemed to us to be room for the argument that the failures by company X and the intermediary to inform the complainant of any trends or changes in the performance of the portfolio may have left her with the impression that there had been no deviation from the initial performance of 15% growth and that she had thereby been deprived of the opportunity to take decisions which may not only have preserved the investment, but have provided for at least some growth.
We provisionally held that, as far as the merits were concerned, Company X was in principle liable for the failure of the intermediary to comply with his obligation (for which he received a fee) to give advice, which was compounded by Company X’s failure to provide the policyholder with performance statements.
The insurer was also invited to comment of an appropriate method of determining the quantum. This would require information regarding the performance of other available portfolios compared to the particular off-shore portfolio. In the light of the complainant’s concession that she also had some responsibility to monitor the performance of the investment, an apportionment of damages would also be relevant.
This matter was eventually resolved on a very practical basis in that the insurer pointed out that the tide has turned in the interim and that the value of the portfolio had increased to more than the value of the premiums paid.
The complainant accepted the insurer’s offer to pay that value and terminate the contract.
Adviser erroneously failing to afford complainant the advice to switch out of offshore fund that he gave to all his other clients; complainant claiming compensation for his losses.
In March 1997 the complainant purchased a single premium endowment policy which did well and grew from R70 000 to R182 216 over five years. In March 2002 he decided to reinvest this money for a further five years on the advice of his adviser, an agent in the employ of Company X, in “more of the same”. The adviser recommended an offshore equity fund, with which the complainant was happy. However within months the investment had nosedived in value as the rand strengthened. The complainant decided to hold on to the investment, hoping for an up-turn. However it continued to deteriorate, and the complainant cashed it in on 8 February 2005, when it was worth R117 922, some R64 000 less than the amount invested at the outset.
It emerged that the adviser had a list of 85 clients invested in the same offshore equity fund, and he had telephoned all of them in October 2002 advising them to switch out of this fund and into a guaranteed fund. Most had done so and had switched back into the market again in May 2003, thereby avoiding the losses which the complainant suffered. The adviser admitted that, due to a clerical error, the complainant’s name was not on the list although it should have been, and thus the complainant did not receive the advice which the other 85 investors received. The complainant wanted the insurer to make good his losses.
The insurer maintained that in the absence of a specific mandate, there was no general obligation on the adviser to have advised any of his clients to switch. The adviser apologized for the fact that the complainant was not contacted, and the insurer offered to refund him all the advice fees (initial and on-going), with interest.
If the complainant had received the same advice as the other investors, and had switched out of the fund in October 2002 and back in in May 2003, his “loss” would have been restricted to the difference between the value of his portfolio in October 2002 and May 2003, which we were advised was some R13 000. The question was whether there was a basis on which he could claim that loss from the insurer.
We found that there was no mandate to the adviser to manage the investment for the complainant. The responsibility for monitoring the investment lay with the complainant, and for this reason investment reports were sent directly to him and not to the adviser. As set out in the investment summary, he was free to consult the adviser at any time with any queries, or to make any changes to the investments, or for the purpose of investment review. It appeared that the complainant was indeed monitoring the progress of his investment and making decisions based on his evaluation from an early stage, without any recourse to the adviser.
Absent a mandate and thus a contractual duty on the part of the adviser to manage the investment for the complainant, we could not make a finding that there was a legal duty on the part of the adviser, for which the insurer could be held vicariously liable, to take the initiative to advise his clients to switch or not to switch, as the case might be. The fact that the adviser had done so in some cases did not render him legally liable if he failed to do so in others. In our opinion he would however have been obliged to give advice when asked for it. That was not the position in this case.
Nevertheless, we found that there could be no doubt that the adviser by his own admission had rendered poor service in discriminating between the complainant and the other clients on his list. In terms of our Rule 3.2.5 we are entitled to order an insurer to award compensation for omissions or maladministration, including incompetent service, on the part of an insurer which led to distress or financial loss by a complainant. We held this to be an appropriate case to invoke this rule, and made a provisional ruling that R5000 be paid in compensation, in addition to the refund of the advice fees in the amount of R5 600. This was accepted by the parties, and thus became the final ruling.