Plain talking about the General Code of Conduct

The General Code of Conduct for Authorised Financial Services Providers and Representatives, in terms of the FAIS Act 37 of 2002 – to give it its full title when it has to report for ceremonial duties – is a really important piece of subordinate legislation. It’s been with us since 2003 and has seen several changes over the years – gaining weight as it has grown older (don’t we all?).

In late June this year, in amongst the turmoil of Covid-19 regulations and uncertainties, amendments to the General Code were gazetted. Some of the changes represent fine tuning and alignment – sort of legislative panel-beating. Others are significant changes, though, to which smaller financial services providers and individual representatives need to pay attention. In an occasional series of short blog posts we’ll look at aspects of these changes and what they could mean for providers, their Key Individuals and representatives.

The Code of Conduct gets its power from the FAIS Act. Section 15 of the Act orders the Authority (previously the FSB, now the FSCA) to draw up codes of conduct for FSPs. The Authority must consult with the industry, representative bodies and consumers and then publish the code(s) that emerge. Once published in the Gazette, any code becomes binding on all FSPs and representatives that it refers to – so it’s not a set of suggestions. In fact, an FSP that doesn’t reasonably ensure that its representatives comply with the code of conduct is guilty of a FAIS offence – and that could, depending on the circumstances, mean a fine of up to a R10 million or 10 years’ accommodation at the State’s pleasure, or both.

One of the requirements of the General Code has always been that anything that Providers and representatives tell clients should be in plain language, avoid confusion and not be misleading. A sound idea (wouldn’t it be nice if legislation were held to those standards?) – and so these notes will keep things simple.

(Interesting fact: the new amendments include a definition of “plain language”.)

Sales v. Service – an interesting amendment

One of the oldest pressure points in financial services is the place where sales and service meet. When the financial representative is paid for clients signed up, policies sold, or investments gathered there is always a tension between what is objectively correct for the client and what is favourable for the representative. Good representatives have always understood that long term client relationships are more important than short term sales incentives, but the tension remains. The Authority now has an approach that is pro-active, pre-emptive, and intrusive – they want to anticipate what could go wrong and takes steps to head it off.

If a representative has a limited range of financial products to offer (i.e., pretty much like everyone), the Authority fears that there is greater risk that the person will recommend an unsuitable product because of the need to make the sale. A new amendment now nails down the Authority’s expectation: section 8 (1) (cA) – for those of you who like that sort of precision.

Once the client’s needs have been properly analysed on the basis of appropriate information, if the representative doesn’t have an appropriate financial product in his or her basket, he or she must tell the client so. In such a case, the representative must decline to recommend a product – and should send the client somewhere else. We can certainly see that causing a flutter in the sales-driven world, where you are urged to close the deal with what you have.

In fairness, the Authority does not require the representative to scan the market to identify other products that are better suited or more appropriate than his or her own offering – and this amendment applies only when advice is being given. However, it is clear that FSPs and their representatives will have to ensure that they can clearly show how the product recommended was suitable to the client’s needs, objectives, financial situation, profile and experience.

This means this is a good time to revise and refresh our needs analysis processes and our ability to write sound reasons for the recommendations we make. It is a common observation in FAIS Ombud findings that the quality of the records of advice produced during cases is very poor. FSPs and representatives must make sure that their standard of work in these areas is high. One of the amendments to the Code now gives the Authority the power to prescribe the format and content of the record of advice. It probably won’t be too long before we see this power being exercised.

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