The duty of due skill, care and diligence

A recent Ombud determination highlights the importance of adhering to the FAIS General Code of Conduct (GCoC) when rendering financial services and the duty to investigate a client’s needs when providing advice.

In the case of Bongani Nxumalo v Central Financial Advisors (Pty) Ltd t/a Coler Financial Services Providers, the financial service provider (FSP) assisted the client to insure a vehicle that was purchased for use as a courier vehicle. Two years later the vehicle was stolen. The insurer rejected the claim, as the vehicle was insured on a personal lines policy. The vehicle’s use was also captured as business use, while the vehicle was used for commercial use. The ‘Domestic Policy’ schedule specifically excluded the vehicle from cover.

The client claimed to have specifically disclosed to the FSP that the vehicle would be used as a courier vehicle and that he had never been informed that he required a commercial insurance policy.

The FSP argued it had used the insurer’s official application form, which had only two options for class of use, namely domestic use and business use. Business use was therefore correctly selected.

Despite the FSP’s arguments, the Ombud found:

• The FSP was negligent in failing to adequately advise the complainant as to the appropriate policy cover for his vehicle – it recommended a personal lines policy instead of a commercial policy,
• The damage/loss to the client was not only foreseeable but inevitable,
• The FSP’s negligence is the reason the client suffered the loss,
• The FSP legally caused the loss the client suffered, and
• The FSP is liable to compensate the client for his loss.

Further points from the Ombud

In reaching the finding against the FSP, the Ombud pointed out several issues advisors should take on board. Some are ‘mistakes’ the FSP made, while others are important general principles. Highlighting them can help you avoid them.

• As an FSP primarily acts as a client’s agent, the law of agency governs the relationship between FSP and client. The FSP is therefore responsible for communicating information to the insurer during the application process to obtain insurance.
• The FSP did not comply with the duty to investigate the client’s needs, as required by the FAIS GCoC. Also, as a client’s agent, the duty of care and skill requires an FSP to not merely rely on the information a client provides; rather it must ensure the information the client provides correctly represents that client’s needs.
• The FSP did not act in terms of the client’s mandate. If the FSP was unable to source the correct commercial insurance policy, it should have informed the client that it was unable to perform its duties in terms of the mandate.
• Section 8(1) of the GCoC places a duty on FSPs to obtain all relevant and available information from clients to conduct an analysis and make a recommendation appropriate for the client’s needs and circumstances. The information that the client was a self-employed courier was available to the FSP, but it did not act on this information and therefore did not recommend a commercial insurance policy. A client is regarded as a layperson, and the client was merely asked if the vehicle would be used for private or business use. There was no proof the FSP asked questions to fully understand the client’s circumstances.
• The FSP cannot rely on the insurer’s application form, which only made provision for business use or private use, as a mitigating factor. As part of the duties of due skill, care and diligence, the FSP should have considered that a commercial policy would have addressed the client’s needs and circumstances, rather than a personal lines policy.

How to avoid the same pitfalls

The determination indicates the importance of following the requirements set out in the GCoC to render suitable advice.

Section 2 of the GCoC requires FSPs and their representatives to act with the required due skill, care and diligence. FSPs are obliged to understand the products they sell and the clients on whose behalf they are mandated to act.

The duty to act with the required skill, care and diligence includes understanding the products offered to a client or any other products that may be suitable, given a client’s objective. All representatives should understand the products they are mandated to market on behalf of their FSP.

By keeping record of needs analyses that were conducted and records of advice, FSPs can show the process that was followed to provide clients with the most suitable product option, given those clients’ circumstances and needs.

FSPs should regard clients as ‘laypersons’ when it comes to insurance and not assume clients know what they need. It is better to ask more questions and give more information rather than less.

By acting with due skill, care and diligence, you can ensure you are appropriately meeting clients’ needs and you can confidently face the Ombud if such an occasion arises.