Didn't understand the investment policy fine print? New ruling offers no sympathy

Image source: Franck Boston – 123RF.com

Nosifiso Chigombo unfortunately misunderstood the provisions of the contract, and was shocked to discover that she couldn’t simply cancel the investment once she realised that its full implications didn’t suit her. As the judges hearing this case agreed, this didn’t mean that her incorrect interpretation should prevail, and she must now wait for the policy to run its course before she can access the balance of her investment.

The story begins when Chigombo inherited some money from her mother and looked around for the best way to manage it.

Eventually she chose to invest her inheritance in Sanlam’s Cumulus Fixed Return policy. She deposited R320,000 into this investment policy and it was to run for five years, from 1 January 2022 until 1 January 2027, by which stage her investment would have grown to R418,368.20.

But three weeks after the contract began, she applied for a partial withdrawal of R120,000 from her investment. This was duly processed and paid over to her. Then, a year later, she asked for another partial withdrawal, this time saying she needed the cash for ‘tuition fees’.

Cancel the contract

After Sanlam declined her request, she said she wanted to cancel the contract and that all her investment funds should be returned to her. But Sanlam refused this too.

She quickly approached the Nelspruit Regional Court with an application for Sanlam to be ordered to cancel the contract and pay her out. Despite strong opposition by Sanlam, the Regional Court that heard the matter granted her application.

That magistrate reasoned that if a party to a contract wanted to cancel it, the law would allow cancellation and that it would be ‘untenable to refuse a party or a consumer an opportunity to cancel’ a voluntary agreement. It would, said the Court, not be interests of justice to force someone to continue an agreement that they wanted to quit.

Was Sanlam being ordered to act contrary to the law?

Sanlam then appealed to the High Court, and judgment in the appeal has now been handed down.

For Sanlam this was a most serious situation. As it saw the matter, obeying the Regional Court’s order would mean that the company would have to act contrary to the laws that prescribe the conditions under which it may invest funds in a policy.

Chigombo’s argument, on the other hand, was that the two parties had agreed to a contract in terms of which Sanlam was to invest her funds for five years, with the funds, plus interest, being paid out ‘after the lapse of five years or at any other time upon demand’.

By not letting her draw a second tranche, and by refusing to cancel the contract, the company had breached the agreement.

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Contract didn’t allow maturity at any time ‘upon demand’

But Chigombo seemed to have missed a crucial line in the contract. Under the section about legal restrictions on the policy, Sanlam makes clear to clients that ‘if you only partially cash in your policy before (the end date), you are not allowed to cash in again before this (end) date.’ There is also nothing in the contract that says, or could be interpreted to mean, that the invested funds would be paid back to Chigombo ‘at any time upon demand’.

Insurers like Sanlam are bound by insurance legislation, which prescribes limitations on access to investment policies. One of the reasons for this is to preserve the distinction between banks and insurance companies and the kind of financial investment products they can offer.

Once these problems with her case became clear, Chigombo had changed tack. Her new complaint was that nothing was explained to her before she contracted with Sanlam: she claimed she was only told to sign some documents, and their contents weren’t explained to her. She said she had been advised by an intermediary.

Consumer Protection Act wrongly applied by magistrate

In the High Court, the two judges hearing the appeal quoted from the Long Term Insurance Act, one of the laws governing the investment contract that Sanlam had offered Chigombo.

This law makes it quite clear that Sanlam acted as the law required by refusing any further draw down from the investment and in refusing to end the contract and pay over the funds to Chigombo before the due date.

But what about section 24 of the Consumer Protection Act, quoted by the magistrate to explain his decision? According to the magistrate, this section says anyone who signed a contract was entitled to quit the contract if they changed their mind.

But was the magistrate correct? Is this indeed what this section says? Not so, the judges write. Section 24 of this law says nothing about cancelling contracts. Instead, it deals with labels on products and trade descriptions.

The other issue is that the Consumer Protection Act (CPA) doesn’t actually even apply to Chigombo in relation to this policy contract. That’s because the definition of ‘consumer’ in the CPA specifically excludes anyone whose financial contract ‘is regulated in terms of the Long Term Insurance Act’, the very law under which the Sanlam contract was drawn up.

Only one chance to make changes

The contract had stipulated that Chigombo would have one chance to make changes, either by cancelling the contract or doing a partial withdrawal. In her case, she’d chosen to make a partial withdrawal, and under the Long Term Insurance Act, she could make no further changes in relation to her investment until it matured on 1 January 2027, the judges explained.

Both parties were bound by the contract. The judges added that what Chigombo expected the court to do, namely ordering that the contract be cancelled, would have been against the law and the provisions that formed part of the contract.

If Sanlam had allowed her to withdraw further funds or cancel the contract after she had made the first withdrawal, the company would be deviating from the agreement and ‘would also be breaking the law’.

Chigombo, who must pay the costs of the case, now must wait another three years until her policy matures. And in the meantime, she can’t make any further withdrawals and nor can she cancel the policy.

Teaching moment

While it’s obviously a very tough lesson for her, we urge all readers to learn from her mistake and check very thoroughly that you understand all the conditions of any investment contract that you might want to take out.

If you need access to funds during the life of the investment contract, then your needs are quite different from someone who is happy to leave the investment untouched until its maturity. And then you must find a way to invest your money that will give you the flexibility you need.

Insist on a thorough explanation

A further caution is sounded around the financial advice you receive. Financial advisors and intermediaries are bound by strong ethical codes and strict legislative provisions. One of the most important duties they have is to ensure that their clients fully understand the implications of the financial product they are buying into.

However, that doesn’t always prevent unscrupulous intermediaries from mis-selling products to clients because they are motivated by better commissions or financial incentives.

As the client, you should never sign forms in blank or put your signature to documents you have not thoroughly read through. If there is something you do not understand, ask your intermediary for a full explanation.

Most financial product descriptions are required to be in language the layman can understand. If Chigombo had read the policy documents, she would have been aware of the limit on withdrawals.

Do not rely solely on the verbal advice you receive – check for yourself.