Disclosures are essentially the only way to ensure that a client can make an informed decision when entering into any given agreement, contract or fund, as I told delegates at a recent hedge fund forum hosted by the Financial Services Board.
There are two types of disclosures; tick box and real - both are based on the assumption that the regulator has thought to include everything in an agreement. But companies need to realise that they must go above what the regulators say. Question if every detail has been documented and disclosed in line with everything that you would want to know about your own product or service.
Further, be aware that a seismic change has occurred in disclosures, whereby companies are urged to do away with contracts with too much legalese and, instead, put forward contracts that are in plain, understandable terms - making it fair and easy for all customers to understand fully what they are signing.
The overseas trend is to do away with drafting contracts through legal departments, because by the time the contract reaches the end customer, the document is effectively meaningless as it's written in such a complex, confusing manner.
Failure to disclose effectively can create an expectation gap, which can result in client dissatisfaction.
According to the FAIS Act (Financial Advisory and Intermediary Services Act), section 8A1 confirms that requirements pertaining to disclosure apply equally to both Category 2 and Category 2A companies.
Category 2A is an extension of Category 2 and does not exclude Category 2 requirements, meaning that confirmation from a client, and, therefore, fair disclosure in making any decisions, is essential in both Category 2 and Category 2A agreements.
In the case of a customer investing in a hedge fund, for example, there are specific requirements to be met in line with Hedge Funds BN571, which lists certain disclosures that must be demonstrated, as well as mandate requirements that must be met. Before a business can render hedge fund services, a hedge fund mandate must be concluded and approved by the registrar. This mandate has to be kept up to date and must comply with section 5 of the FAIS Act.
When communicating with a client in this case, you need to specify that there are risks, you need to be open with the status of the hedge fund, and you need to assess if there are other invested disclosures that are necessary to mention, as well as make sure that the client fully understands.
Compliance Officers should utilise principles including fairness, ethical conduct, transparency, responsible investing, and respect towards clients, which, in turn, result in adequate disclosure and form part of effective TCF practice. Failing to do so can put the company at risk.
If you don't disclose, you cannot defend yourself or manage complaints effectively. You must stay in touch with your clients and make sure that they fully understand any piece of paper you give them.
I further advise you to avoid using jargon and generalisations when communicating with clients, to stay within your area of expertise and authorisation, and to always act professionally and fairly in the best interests of your clients.
