the lack of a centralised arbitration system means advisers and clients are unsure about what to expect in terms of service
Offshore financial products tend to be more complex than onshore versions, both in legal structure and in underlying investments, and yet until the last few years there has been less supervision of the sale of offshore products than onshore.
International finance centres throughout the world are now tightening the screws on the regulation of intermediaries with regard to the mis-selling of products ' both through misrepresenting products or through lack of client understanding.
There is still little understanding of formal regulation of the marketing and sales administration of offshore products and it is often poorly defined. Formal supervision is dependent upon regulation within the countries in which intermediaries operate, or by cross-border delegated supervision.
According to Peter Hart, ombudsman at the Offshore Financial Trade Association, because mainstream offshore investment is a relatively new idea, there is no centralised arbitration system or even a traditional dispute resolution system. Instead, any complaints from clients about intermediaries tend to go the courts, to everyone's loss.
The Offshore Financial Trade Association was established to help lobby parliaments and territories effectively, to keep out cowboys, and improve standards and training. But also, some think primarily, it was created to provide the ombudsman service that is so vital.
Brian Cosgrave, chief executive of Inter-Alliance International, says: 'Intermediaries are regulated according to the jurisdiction they are based in. For example in the Middle East, regulation only applies to locals rather than expatriates. This gives expatriates little protection if they buy from an unscrupulous seller.'
It is very important for countries to have regulation for intermediaries. One of the case studies cited by Ofta includes the selling of a product in Argentina that involved 12 monthly payments of $2,000 with maturity in 20 years when the policy would be worth $200,000. The buyer was told that upon the twelfth payment, the provider would contribute the thirteenth. However, later the buyer discovered the contribution was only available after two years and his fund had reduced to $400 because of management charges and would be worth nothing unless he made annual payments for 14 years. There was no recourse to be had for the investor.
However, not all jurisdictions have such little regulation. The UK presently has tight regulations concerning the sale of offshore products back into the country.
Singapore also has a tight regime. Cosgrave says new rules have just been introduced to make sure there are proper controls over the licensing of individuals. These include making sure the business is sound, the intermediaries are qualified, and companies are appropriately supervised.
In general, companies have been increasing their internal due diligence process to help curtail the possibility of dealing with dubious intermediaries.
At Friends Provident International, the intermediaries the company uses go through a rigorous selection process ' the intermediary body must prove itself adequate. It must have a history of business with Friends Provident International or with a reputable company. The books and accounts of the intermediary is examined as well as the qualifications of the individuals selling the products. The terms of business may be withdrawn if these conditions are not met. Intermediaries are viewed not as agents of Friends Provident International but rather independent businesses. The company believes it is very important that intermediaries make sure clients understand the products they buy.
According to Chris Holland, communications manager at Friends Provident International, mis-selling has a number of different meanings. This can include something an intermediary is not allowed to sell, misrepresenting performance, or a client complaining that a fund has not performed as well as they thought it would.
Holland says if any incident of mis-selling occurs then the company investigates it and if further problems persist then it is taken to an ombudsman.
If a client purchases a high-risk fund through an intermediary, FPI issues a notice to them that the portfolio is risky. Holland says if someone has made an investment decision and has signed the appropriate forms usually the company can do no more.
If an intermediary is found to be not acting in a professional manner, Friends Provident International withdraws its business from the company. According to Holland, intermediaries are talked to on a regular basis and the word gets around if a company is not acting appropriately.
At Scottish Equitable International, the company only sells its offshore products back into the UK and accepts business from intermediaries who are registered with the FSA. If the company is not up to standard then business will not be placed with them.
Intermediaries used by Scottish Equitable International must be educated about the products so no misunderstandings take place. There are continuous development programs to keep intermediaries up to date with products.
If there were any problems, Scottish Equitable International would recommend the client contact the ombudsman and the company contact its own legal department to make sure everything was checked out.
It is also important to have good product design. If a product performs in line with what was indicated then it is harder to make a claim of mis-selling. It is vital to have clear communication of the products' objectives and what it will achieve.
At Inter-Alliance there are also tight sales procedures in place for each country to try to prevent mis-selling.
Cosgrave, says the company has adopted the UK style of sales process. In this process, the client is given documentation making the client aware of what they are buying. Reasons are given why recommendations are made about products and complete disclosure is given to clients.
But, this is not the practice for all intermediary companies. According to Cosgrave, some intermediaries claim that clients want confidentially and do not want to do lots of paper work such as getting their clients to sign forms.
Cosgrave warns the major things missing on the international market is little training of management in intermediary companies. He says without appropriate supervision on a local level it is hard for the investor to receive a good level of service. There are more problems with jurisdictions that have little regulation to protect clients.
Mis-selling of financial products is treated like any other complaint and has to be looked at in terms of the legislation.
At Inter-Alliance, if any complaints are made clients are asked to put the claim in writing. The documentation is then examined about what the client was given regarding the product. Unless the documentation shows the client was not warned about the risks associated with the fund, there is little that can be done to help the investor.
Royal Skandia has also made it a requirement for intermediaries to obtain a signed statement of understanding by clients. An intermediary would have to demonstrate the service they are offering to a client and a client must sign a statement showing that they understand the conditions attached to the product.
This would include demonstrating to clients on different growth rates, illustrating year-on-year premiums paid, and demonstrating the fund's value and the surrender value.
Advice from the Isle of Man ombudsman service to suppliers of financial advice
• Suppliers of financial services should have a well-established, documented internal complaints procedure.
• Strict time limits should be placed on each part of the process - from acknowledgements of receipt of letters to responses and payments of redress.
• There should be a maximum of 12 weeks from the receipt of the original letter of complaint to a resolution either in the form an agreement to use the ombudsman scheme; or in the form of a response explaining why it is still not possible to issue a final response and approximate time scale.
• The internal investigation should be carried out by an experienced member of staff who was ideally not involved in the original relationship.
• There should be sufficient management controls to analyse and improve the complaints system when it is lacking; and to keep good records of the entire process.
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