LEGAL SIGNIFICANCE OF KEEPING A RECORD OF ADVICE FOR FINANCIAL SERVICE PROVIDERS

The Financial Advisory and Intermediaries Services Act (“the Act”) defines a Financial Service Provider (“provider”) as any person who, in the ordinary course of business, provides advice; provides advice and renders any intermediary service; or renders any intermediary service. The definition specifically excludes “representatives.” Providers play a vital role in furnishing advice to potential and existing financial services customers. The legal framework specifically regulates the ‘furnishing of advice’. In providing advice, providers are legally required to record such advice. The record of advice benefits both the provider and the financial services customer. Additionally, a failure to keep such a record can have negative ramifications for the provider. This piece intends to highlight the legal significance of proper record keeping.

The General Code of Conduct states that a provider must furnish “suitable advice”. It then enlists what a provider must consider prior to providing such advice. A provider is required to comply with the following:

• Take reasonable steps to ascertain the financial situation of the customer; the customer’s experience with the financial product; and the client’s intentions the product;
• Do an analysis and assessment based on the information obtained;
• Identify a financial product that is suitable for the client considering his/her risk profile and financial needs;
• Where a financial product is intended to replace an existing product, the provider must advise the customer on the potential implications of such replacement, including the costs thereof.

Once advice is furnished in line with the above, the provider is required to keep a record of such advice – recording the basis upon which the advice was furnished. The record of advice must reflect: the information considered in the process of furnishing advice; financial products that were considered; and the recommendations made and the basis thereof.

The record is necessary because failure to keep it is in contravention of the legal framework imperatives, and as such, there may be penalties applicable. Further, should there be a complaint by a customer to the FAIS Ombud or Financial Services Tribunal or a court case, and the provider is unable to produce a record, the provider will not be able to rebut the allegations by the customer – in which case, he or she is likely to be held legally liable. In practice, there are many complaints of this nature. In some cases, there is a record of advice, but it does not address the relevant points required by the Codes. Providers should therefore at all times adhere to the legal framework, failing which there may be regulatory and/or legal consequences for not doing so.