ON THE SCALES 10 OF 2015

Treating Customers Fairly sets a higher standard for

Pension Funds Adjudicator cases
The Pension Funds Adjudicator (the “Adjudicator”) has indicated that Treating Customers Fairly (TCF) will lead to
different results insofar as Adjudicator cases are concerned.

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Summary

• The Adjudicator said that a retirement annuity (RA) fund was not responsible for the incorrect information given
to policy holder, as the policy document set out the terms and conditions of the RA fund policy.
• However the Adjudicator has indicated that the TCF laws may lead to different outcomes for customers
(including members of funds).
• The Adjudicator said once TCF laws are in place, financial institutions, including funds and administrators,
could be responsible for incorrect information provided to customers.
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Recent Adjudicator case refers to the impact of TCF

In a recent case, the Adjudicator found that a life insurance company was not responsible for incorrect information
given to a policyholder.

Mr. DH was a member of a retirement annuity fund (‘RA fund’). The RA fund benefit was due and payable on 1
April 2023. Mr. DH and his wife divorced in December 2013. As part of their divorce settlement agreement, they
agreed that 100 per cent of Mr. DH’s pension interest in the RA fund would be paid to his former spouse. The
pension interest amounted to R253 520.

Before the pension interest was paid to his former wife, Mr. DH asked the RA fund whether it would charge a
penalty when paying the pension interest to his former spouse. The RA fund told him that they would not charge a
penalty.

However, when the RA fund paid the pension interest to Mr. DH’s former wife, they deducted a penalty amount of
R37 458 from the total benefit. The RA fund charged the penalty as payment of the divorce benefit amounted to an
early cancellation or change of the RA fund policy.

On the Scales is produced by Alexander Forbes Legal Services department to provide clients with information on employee benefits. The issues
need to be carefully considered taking into account the specific circumstances of each of our clients.
March 2015
The parties lodged a complaint with the Adjudicator because they were unhappy with the penalty charged. In their
complaint they asked the Adjudicator to order the RA fund to refund the penalty amount because the RA fund had
earlier said they would not charge any penalty.

The Adjudicator said that:

• The Pension Funds Act says retirement funds must give members relevant and correct information. Since the
RA fund wrongfully told Mr. DH that it would not charge a penalty, the RA fund acted unlawfully. A person may
claim for financial loss if the loss was caused by negligence. However, because the RA fund had measures in
place to guard against members being given wrong information, their unlawful behavior did not amount to
negligence. The Adjudicator recognised that there are rare instances where even the best measures fail.
• The terms and the conditions in the RA fund policy document determine how the policyholder’s investment is
managed. The RA fund policy document clearly said that changes to the policy would result in a penalty. Mr.
DH had a copy of the policy document. The fact that he called the RA fund to ask about whether a penalty
would be charged, showed that he was aware that early cancellation might result in a penalty.
• Mr. DH had a responsibility to seek clarification when the information of the RA fund conflicted with the
contents of the policy document.

Comment: the Adjudicator is reported in the media to have said that she reached this decision based on the current
legal principles. She said that she might have reached a different conclusion if TCF laws were already in place.
This is because she would have had wider powers to decide whether the RA fund’s actions were fair.

What are the six TCF outcomes?

1. The fair treatment of customers must be central to the firm’s culture.

2. Products and services marketed and sold in the retail market must be designed to meet the needs of identified
customer groups and targeted accordingly.

3. Customers must be given clear information and be kept appropriately informed before, during and after the
time of contracting.

4. Where customers receive advice, this must be suitable and must take account of their circumstances.

5. Your products must perform as you have led your customers to expect and your service must be of an
acceptable standard and must be what your customers are expecting.

6. There must be no unreasonable post sale barriers to change product, switch provider, submit a claim or make
a complaint.

Comment: TCF outcomes 3 and 6 have been contravened in the above Adjudicator case.

TCF requires financial service institutions comply with broad principles of fairness when dealing with
customers.TCF sets a higher standard for financial institutions, including funds and administrators when dealing
with members. This standard could be higher than the current legal principles which apply when a member claims
they have suffered a loss because of something that a fund or administrator has done, or not done, as the case
may be.

If you need more information, please contact your consultant.