Col 6 of 7

When financial services companies start treating vulnerable customers fairly

 

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa

 

Nothing stops the financial services industry from treating vulnerable customers fairly.

 

There is nothing to stop financial services companies implementing and testing systems to ensure the proper protection of all their customers, particularly vulnerable consumers.

Financial services companies are supposed to have long ago reported to the regulator that they have a culture that is aimed at treating customers fairly. But, judging by the treatment and some of the products they produce, not all seem to have such a culture.

But some do. It was impressive when the chairman of the Sanlam Umbrella Retirement Fund and actuary, David Gluckman, recently tested in his own name, the application of two-pot system applied by Sanlam Umbrella Retirement Fund.

He was a member of the fund and had no need to use the two-pot system. He disclosed exactly what had happened, including an early failure because of the pressure buildup of required cash-ins.

But against this, all consumers, but particularly vulnerable consumers, continue to suffer at the hands of the formal financial services sector.

The two main organisations representing the financial services industry are: the Association for Savings and Investment South Africa (ASISA), which represents the long- and short-term insurance industry, retirement administrators and investment companies; and, the Banking Association South Africa (BASA). Both were approached for comment on vulnerable customers.

 

The ASISA  approach

Against BASA,  ASISA  does not seem to take treating the economically vulnerable with much interest.

ASISA says that it has little to do, as an organization, about treating vulnerable consumers fairly as it is a ‘competitive’ issue between their members.

Adrian Burke, acting chief executive of ASISA says: ‘One of ASISA’s focus areas is to grow a culture of savings and investment, which requires building the trust of consumers. Consequently ASISA will always encourage the industry to align with the TCF principles. However, ASISA cannot get involved in the operations of individual member companies - this would be in contravention of the Competition Act. Service delivery, for example, is what can give one company the competitive edge over another.

 

A contradiction

This comparison to contraventions of the Competitions Act is simply rather odd as it has far more to do than simply price – it is telling members how people should be treated.

Added to this is another thin ASISA’s excuse! Burke says: ‘As is pointed out by the FSCA, member companies are expected to deliver the six TCF outcomes and treat customers fairly, but ASISA is not a regulatory body and cannot enforce this. This is the role of the FSCA.’

But ASISA has sets of Standards, Guidelines and Codes to direct members to set certain standards. The Standards, Guidelines and Codes are available to read on the Asisa website and which deal with a range of matters.

 

An interesting ASISA Standard

One of the more interesting ASISA Standards is based on recommendations to limit withdrawals from investment-linked living annuities to ensure that pension payment will last for the life of the policyholder.

When living annuities were first introduced in the 1990s very little research was done by the product companies. The result was that thousands of pensioners have or will not have a sustainable income in retirement.

The main reasons were because of:

• High withdrawal drawdowns: No limits, except for tax, were set with many pensioners exceeding 10 percent of the capital value of the pension. Now the initial current recommendation is 5% of the capital value. But it still remains high. For 2003 is 6,6 percent, but it is down from 2022 level of 6,7 percent.

• High risk investments: To make up for the high draw down levels inexperienced advisers often recommended high risks investments often aimed more at people aimed at savings rather the withdrawing savings. The result people were withdrawing a lot more money in bear market. It was then difficult to recover the last amount meaning the pensioner would run out of income even sooner.

Most advisers initially were selling and providing products and investment advice to pensioners that were not in the interests of the pensioners. The advice given then by advisers was often based on free trips luxury free offshore trips provided by product providers.  And the trips were based on sales of the product of a financial services company.

The companies and ASISA (and its predecessors) ignored the criticism of the product. The National Treasury and SARS then warned the industry that they would withdraw living annuities as pension product if the companies and their intermediaries persisted with bad advice; and, the Financial Services Board (now the Financial Sector Conduct Authority) banned issues such as free trips and other forms of alternative renumeration (apart from commissions and fees).

With this warning ASISA introduced a new Standard ensuring its member companies stuck to minimum requirements to ensure an income for life form pensioners.

 

Three urgently required ASISA Standards

ASISA should be considering similar Standards for:

• Treating Customers Fairly and the Policyholder Protection Rules for long- and short-term insurance.

• Defining vulnerable customers and measures to protect them from unfair treatment.

• Getting rid of contractual insurance products where customers must pay heavy penalties if they reduce or stop a payment. This measure applies even where policyholders lose income as a result of being retrenched, losing their jobs as a result from illness or accident, or even suffering economic consequences of a pandemic.

 

BASA defines a vulnerable person

BASA says vulnerable people can include customers who:

• have a physical disability;

• have psychological problems and/or mental health problem;

• have a debilitating illness;

• have limited financial literacy;

• experience changed or changing financial circumstances;

• experience adverse life events;

• are susceptible because of:

‒  their age (the youth, due to a lack of experience, or the elderly, in other words people of 65 and older),

‒  language barriers,

‒  loss (such as of a job, a family member through death, because of divorce or an illness), or

‒  geographical location (which can lead to customers not being able to access certain banking products and services); and,

• are at a higher risk of experiencing unfair treatment because of:

‒  a limited ability to maintain or develop their wellbeing,

‒  difficulty in obtaining or understanding information, or

‒  being unable to access, choose or buy suitable products (and services).

 

BASA Guidance to the Vulnerable

BASA says its ‘members are committed to treating customers fairly, in line with the Financial Sector Conduct Authority’s standards for banks.

‘BASA’s members define vulnerable customers as a person, who because of personal circumstances, are especially susceptible to harm, particularly when a bank does not act with appropriate levels of care.

‘Banks undertake to provide a reasonable level of care and understanding to the needs of the vulnerable so that they are treated fairly when engaging with banks.’

BASA says the customers, who are vulnerable, ‘must provide as much information as they are comfortable to disclose to help banks understand their vulnerability and enable them to provide the appropriate level of service’.

The BASA statement does show intent, but whether all banks abide by the intent is very questionable particularly when there is clear evidence of people being forced into telephone contact and not properly guided through complaint mechanisms.

 

Protections for the vulnerable

BASA states that bank commitments to the vulnerable, include:

• recognising vulnerabilities and, if necessary, prioritising and providing timely service and detailed explanations of banking products and services to help the vulnerable understand and make informed financial decisions;

• recognise that vulnerability is not static and can change with circumstances;

• considering initiatives to make sure they know how to use banking products and services appropriately, and how to protect their finances, where needed;

• taking reasonable measures to accommodate physical needs if you have a disability;

• making reasonable efforts to make sure that banking products and services are sufficiently flexible and accessible to accommodate vulnerability; and,

• ensuring that bank processes provide for the vulnerable to inform banks if there is a change in circumstances that makes a person vulnerable.

If you feel you have a complaint that cannot be resolved with your bank, BASA says you should take it to to the National Financial Ombud Scheme, at www.nfosa.co.za. (Incidentally you can do the same about ASISA members and complain to the same body)

 

There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa.

For more information on how to purchase the book go to Buy Now on the website  www.retirementplanning.co.za

 

Related topics:

https://retirementplanning.co.za/column-5-of-7-ombuds-council-promoting-special-rules-for-vulnerable-consumers/

https://retirementplanning.co.za/col-4-of-7-vulnerable-consumers-to-be-better-protected/

https://retirementplanning.co.za/new-system-for-complaints-about-financial-institutions

https://retirementplanning.co.za/column-2-of-7-economically-vulnerable-consumers

https://retirementplanning.co.za/column-3-of-7-economically-vulnerable-consumers-part-2/

https://retirementplanning.co.za/col-13-name-and-check-your-beneficiaries/

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