CR65 Costs – alleged failure of broker to explain costs and commission structure
Costs – alleged failure of broker to explain costs and commission structure – whether deductions on calculation of surrender value authorised by policy – error in calculation of surrender value uncovered.
The complainant applied through a broker for an endowment policy whereby he would contribute a fixed amount per month for ten years. Two years later he cancelled the policy, having by that stage paid R20 400.00 in premiums. He maintained in his complaint that he had not been advised of the costs structure or commission at the time of application, and that he had assumed that there were no costs or commission payable by him as he was a bank customer. He stated that after signing the application he received certain documentation, which he failed to understand. He was unhappy with the surrender (cancellation) value of some R9 600 he had received and with the insurer’s calculation of this value, which mentioned deductions for costs; furthermore he alleged that the commission amount deducted did not tally with the amount set out in the policy.
The broker (which is a member of our scheme) replied that all the features of the investment had been explained to the complainant prior to signing of the application form, and that a product illustration had been discussed with the complainant. A copy of this product illustration provided to our office indicated that there was full disclosure of costs, being a monthly premium fee and policy fee against the contribution (in rand amounts), an asset management fee (with a given percentage), and a fund administration fee depending on the size of the investment (with a scale of percentages for different rand amounts). It was stated that the insurer would pay commission for advice and services rendered in arranging the product to the policyholder’s financial adviser (the broker). This would be a fixed monthly commission for the first year, and a reduced monthly commission (rand amounts provided) for the second year. It was stated that “Commission is usually paid annually in advance. The aggregate of these payments, together with interest (currently 12%) will be recouped over the term of this contract by canceling units in the relevant investment funds on a monthly basis, ie it is amortised over the term of the contract”. Illustrative values on a 6% and 12% inflation scenario were set out in a table, as well as illustrative cancellation values.
In reply the complainant reiterated that he had never seen the product illustration. Further, he maintained that his policy only mentioned first year commission. He remained unhappy with the calculation of surrender value.
We obtained a fuller response from the insurer on these aspects, wherein the insurer pointed out that the costs and commission were also set out clearly in the policy, and that the complainant had not questioned these parts of the policy at the outset. The insurer had its actuaries re-examine the surrender value and an error in the calculation was uncovered, in that less commission had been paid to the broker than was deducted in the surrender value calculation; thus the complainant had been underpaid by some R2000. This amount was paid into the complainant’s bank account. The insurer conceded that the policy did not provide for second year commission, apologised, and stated that it had opened an inquiry as to why only the first year commission was shown in the policy and not the full amount due to the broker. However, it was pointed out that in this particular case the renewal commission played no part in the calculation of the surrender value as the second year commission was completely recovered from the broker, and was deducted from the outstanding costs.
There was clearly a dispute of fact between the complainant and the broker as to whether the broker had explained the costs structure and commission payable. This dispute of fact had to be addressed on a balance of probabilities and with due regard to the incidence of the onus. As the person lodging the complaint the onus rested on the complainant.
The copy of the product illustration indicated that it had been specifically prepared for the complainant in his name and with his details. Signing of this document was optional and it had not in fact been signed by the complainant, but he had signed both the application and a mandate, which acknowledged that his needs had been analysed by the broker and that the pros and cons of the product had been explained to him. It was difficult to resolve the dispute of fact but it appeared unlikely to us that such a document would have been prepared for the complainant and not shown to him; furthermore he did sign the mandate in the terms mentioned above and thus the probabilities favoured the broker’s version that he showed the complainant the product illustration material, in the course of explaining the investment to him.
The policy document was sent to the complainant together with a statutory notice informing him of his right to cancel the transaction within 30 days (the “cooling off” period), and an insurer’s certificate. These documents were apparently the documents which the complainant failed to understand. At the outset of the policy he contacted the insurer to change the commencement date and this was reflected by an endorsement sent to him; however he did not raise any other aspects with which he might not have been satisfied.
Set out in the contract document under the section headed “Wat kos die belegging?” are full details and descriptions of the charges, comprising a fee on the recurring contributions, the administrative fees, the asset management fees (“bestuursfooi”) and the upfront commission amount paid to the broker with recovery from the policyholder by means of the commission loan payments. It appears that the amount of the commission was incorrectly stated (this is addressed below). The contract also states, in the section “Kan u geld onttrek voor die realisasiedatum?”, that should the policyholder cancel the investment, any costs not yet recovered and any debt on the contract will be deducted to calculate the cancellation value, and illustrative cancellation values at different dates are provided. It is also provided that there will be a penalty cost if the contract is cancelled. In our view there was thus clear disclosure of the costs in the contract, even if the complainant had not received the product illustration. Since he was informed of the costs by the insurer and did not raise any questions about the costs, either with the broker or with the insurer, it must be assumed that he accepted the cost structure.
We were therefore unable to make any finding against the broker or the insurer with regard to the alleged failure to inform the complainant of costs. On a balance of probabilities it appears that he was properly informed of the costs of the investment.
In our view the insurer had provided a reasonable explanation as to how the surrender value was calculated. It was clear from the performance information and graphs provided that the performance of the fund had been disappointing, due largely to the strengthening of the rand in the period after the investment was made, which wiped out the actual growth achieved on the offshore markets. This provided some explanation as to the reduction in investment value as compared to the amount of contributions paid. The insurer had also provided an explanation as to the commission, and in re-examining the surrender value they had detected an error, in that the deduction for commission had been overstated. This error was rectified, and the amount refunded to the complainant. The insurer also apologised for the fact that the second year commission was not disclosed in the contract, but as they pointed out the effect of this amount had been removed from the calculation of the surrender value in the complainant’s case.
As clearly set out in the contract in the section on costs, commission is paid up-front to the financial adviser, and this amount is recovered over time on a monthly basis as a commission loan payment from the policyholder’s contributions. The insurer had provided a calculation setting out the commission account build-up.
Furthermore the contract also sets out cancellation provisions to the effect that in the calculation of the cancellation value the insurer will deduct any expenses not yet recouped and any outstanding debt, as well as a cancellation fee. The cancellation calculation provided by the insurer indicates that from the fund value of R16 705.79, deductions of R10 138.15 (in respect of commission not yet recouped) and R500 (cancellation fee) were deducted. No other cost items were deducted. 50% of the first year commission and 100% of the second year commission, amounting to R6 298.50, was “clawed back” (recovered) from the broker, and 80% of this amount was added back to the complainant’s value, giving him a cancellation value of R11 106.44.
The complainant was copied with all the correspondence, documentation and calculations received from the insurer and invited to comment. He did not do so.
A preliminary ruling against the complainant was issued, wherein we stated our conclusion that he had been properly informed of the costs on this contract. In the course of investigating the complaint the insurer had uncovered an error in the complainant’s favour in their calculations and had compensated him for this error. We pointed out that while the insurer’s explanation of the calculation of the surrender value was initially not fully detailed, he had now been provided with a full explanation including detailed calculations. It appeared that no unauthorised costs had been deducted. We invited the complainant to provide us with any further comment and/or information which might cast a different light on matters but he did not do so and the case was closed.