The Replacement Record of Advice, short-term and long-term

What counts as a replacement — the 2020 definitions

Before 2020 the Code used “replace” without defining it. Board Notice 706 of 26 June 2020 inserted two definitions that decide most arguments:

Short-term: a renewal moved to another insurer is a replacement

Put the two definitions together and the everyday short-term case is settled. Not renewing the client’s existing policy is a “variation”; placing the same cover with a different insurer to meet the same needs is a “replacement”. Section 8(1)(e) makes it your job to take reasonable steps to establish whether that is what you are recommending — the client will not volunteer it — and once it is, sections 8(1)(d) and 9(1)(d) apply in full. The mid-term move (cancelling one policy to incept another) is the same thing without the renewal date. A change of cover with the same insurer is a variation but not a replacement unless a second product is bought to meet the need.

Section 8(1)(d) — the nine disclosures before you replace

Where the recommended product replaces another, the Code requires full disclosure of the actual and potential financial implications, costs and consequences of the replacement, including, where applicable, full details of:

1. 01fees and charges in respect of the replacement product compared to those in respect of the terminated product;
2. 02special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided — compared;
3. 03in the case of an insurance product, the impact of age and health changes on the premium payable;
4. 04differences between the tax implications of the two products;
5. 05material differences between the investment risk of the two products;
6. 06penalties or unrecovered expenses deductible or payable on termination of the terminated product;
7. 07to what extent the replacement product is readily realisable or the funds accessible, compared to the terminated product;
8. 08vested rights, minimum guaranteed benefits or other guarantees or benefits which will be lost as a result of the replacement; and
9. 09any commission, fee or other remuneration you received on the terminated product and any payable to you on the replacement, where you rendered the service on both.

Section 9(1)(d) — what the record must add

The ordinary Record of Advice has three elements: the information relied on, the products considered, and the recommendation with its reasons. Where the recommendation is a replacement, section 9(1)(d) adds two more, and the FAIS Ombud reads them as the test of whether the replacement was advice or a sale:

Long-term risk policies: Rule 19 and the FSCA-prescribed record

For individual long-term risk policies (life, disability, dread-disease and similar risk cover), the Policyholder Protection Rules under the Long-term Insurance Act add a second layer. Rule 19 requires a replacement advice record in a format determined by the Authority, and the FSCA published that format in FSCA Communication 5 of 2019 (Insurance), effective 1 September 2019. The record’s sections are: the replaced and replacement policy or policies; the reasons for recommending a replacement; the differences between the new and the replaced policy, looking at the specific policy benefits and the general policy features; remuneration; and a declaration signed by both the adviser and the policyholder. The insurer issuing the replacement policy must obtain a copy of the record and satisfy itself that it complies with the disclosure requirements relating to a replacement — so a life office will not issue the policy without it. It is the section 9(1)(d) record in a prescribed shape, with the client’s signature added; it does not replace your Record of Advice, it sits inside the file with it.

The ASISA Standard on Replacement — what the life office will ask you for

Every ASISA member life office applies the Standard on Replacement (in force since 1 October 2015) to all long-term policies other than reinsurance, fund and group-scheme business, and makes adherence a term of its contract with every representative. Its mechanics decide what you are asked to sign:

1. 01Annexure 1A — the replacement question on every application form: “Is this application to replace the whole or any part of your existing insurance with any insurer, whether immediately or to replace an insurance discontinued within the past four months or within the next four months?” The client answers yes or no and signs.
2. 02Annexure 1B — your declaration that, whatever the answer, you explained the meaning of replacement, that replacements are potentially prejudicial, the termination charge, and the client’s right to comprehensive information about the consequences.
3. 03Annexure 2 — the Replacement Policy Advice Record (RPAR), completed with the client when the answer is yes: policyholder and representative details, the new and the replaced policies, a tick-list of the reasons a replacement may not be advisable (charges paid twice, higher premiums for age or health, different guarantees, more exclusions or waiting periods, access restrictions in the first five years, tax advantages lost, a surrender value that may be as low as 60% of the policy value, higher investment risk, whether the existing policy could have been amended, and why replacing it is appropriate), and declarations by both of you — yours confirming you discharged the section 8(1)(d) duties and retained the record as section 3 requires.
4. 04The RPAR goes to the replacing insurer with the application and may not be held back pending the insurer’s decision; the replacing insurer sends it to the replaced insurer within five days.
5. 05Non-adherence — a “no” where there was a replacement, or a “yes” with no RPAR — goes to an ASISA Review Board, which can grant the client a further 30-day cooling-off period with a full premium refund on a risk product.

Section 8(3): tell both insurers

Where the advice is to replace an existing long-term insurance policy with any other financial product, section 8(3) of the Code requires you to notify the issuer of the existing policy and the issuer of the replacement policy of the advice at the earliest practicable opportunity — and in any event no later than the date any transaction requirement is submitted for the replacement. The ASISA machinery above is how the industry operationalised that duty; the Code duty is yours independently of it.

A replacement record that holds up — the comparison table

The comparison in section 9(1)(d)(aa) and the disclosures in section 8(1)(d) overlap almost entirely, so one table discharges both. Section F of the Record of Advice template linked below has these rows; for a long-term risk policy the same rows populate the FSCA record’s “differences” section.

Where replacement advice fails

The recurring shapes in Ombud determinations and life-office review boards:

1. 01The replacement was never identified as one — the renewal “just moved”, the application answered “no”, and section 8(1)(e) was never applied.
2. 02A comparison of premium only. Section 9(1)(d)(aa) lists eight things to compare — fees and charges, special terms and conditions, exclusions, waiting periods, loadings, penalties, excesses, and restrictions on benefits; a premium figure on its own is none of them.
3. 03Reasons that restate the comparison. “The new policy is R180 cheaper” explains nothing about suitability; the reasons must say why the client’s needs are better met than by keeping or amending what they have.
4. 04On long-term cover: the FSCA record signed by the adviser only, or completed after the policy was issued.
5. 05The client who insists on replacing against your advice, recorded as if it were your recommendation. Section 8(4)(c) requires you to alert the client to any clear risk and to record that they elected not to follow the advice.
6. 06No written copy to the client — section 9(2) applies to every provider, and the RPAR requires the client’s signature besides.

Frequently asked questions

Is moving a client to a new insurer at renewal a replacement?

Yes. Since June 2020 the Code defines “variation” to include a non-renewal of a short-term policy and “replacement” to include terminating or varying one product and buying another to meet the same needs, in any order. Section 8(1)(e) requires you to establish that, and sections 8(1)(d) and 9(1)(d) then apply.

Do I need the FSCA replacement advice record for short-term insurance?

No. Rule 19 and FSCA Communication 5 of 2019 sit under the Long-term Insurance Policyholder Protection Rules and apply to individual long-term risk policies. For short-term cover the Code alone governs: the section 8(1)(d) disclosures and the section 9(1)(d) comparison and reasons in your Record of Advice.

What is the four-month rule?

It is the ASISA Standard’s test for a long-term replacement: a new policy or variation counts as a replacement where the same policyholder or life assured had another policy that suffered a termination event within four months before or after the new one, in anticipation of or as a consequence of it. The application-form question asks about exactly that window.

Who must sign a replacement record?

The Code does not require a client signature on a Record of Advice, only a written copy to the client. The FSCA-prescribed record for individual long-term risk policies and the ASISA RPAR both require a declaration signed by the adviser and the policyholder, and the life office will not issue the replacement policy without it.

Do both insurers have to be told?

For long-term replacements, yes: section 8(3) of the Code requires you to notify the issuers of both the existing and the replacement policy no later than the date the transaction requirement is submitted, and under the ASISA Standard the replacing insurer sends the RPAR to the replaced insurer within five days. For short-term cover there is no equivalent notification duty in the Code; cancellation of the existing policy is the client’s instruction, which you carry out and record.

What if the client insists on replacing against my advice?

Section 8(4)(c) applies: where a client elects to conclude a transaction that differs from what you recommended, you must alert them as soon as reasonably possible to the clear existence of any risk, advise them to consider whether the product is appropriate, and record that they elected not to follow your advice. The replacement comparison is still owed — it is how the client is put in a position to make that choice.

This page is general information about FAIS replacement rules, not legal or compliance advice. Section references are to Board Notice 80 of 2003 as amended to Board Notice 706 of 26 June 2020; the FSCA replacement-record format is described from a secondary source; check the current texts before relying on them.

Sources

1. 01General Code of Conduct for Authorised Financial Services Providers and Representatives, Board Notice 80 of 2003 as amended to Board Notice 706 of 26 June 2020 — definitions of “replace or replacement” and “variation”; sections 8(1)(d)–(e), 8(3), 8(4)(c), 9(1)(d), 9(2) (consolidated text hosted by Masthead)
2. 02ASISA Standard on Replacement, 27 March 2015 (in effect 1 October 2015) — definitions, basic rules, Annexures 1A, 1B and 2 (hosted by Associated Compliance)
3. 03Masthead — “Format for a replacement advice record (individual risk policies) and related documents”: a summary of FSCA Communication 5 of 2019 (Insurance) under Rule 19 of the Long-term PPRs, effective 1 September 2019 (secondary source; the FSCA document is not currently served at its published address)
4. 04Financial Advisory and Intermediary Services Act 37 of 2002