(BGH, ruling of 13.11.2014, Ref. III ZR 544/13) has recently decided that the failure of the insurance broker to comply with the documentation obligation under Section 61 (1) of the German Insurance Supervision Act (Versicherungsvermittler). 1 sentence 2, § 62 of the German Insurance Contract Act (VVG) may lead to a shift in the burden of proof in favour of the policyholder. If a required notice of material importance has not been documented, even at the outset, the insurance intermediary must in principle prove that this notice has been given.
This is only the tip of the iceberg, of which Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm are convinced, because some professional judges at higher courts jokingly say “in the past we would have preferred to ban the trade in used cars by law – today the financial sector has soon outgrown this rank”.
Majority of intermediaries and advisors of banking and insurance products work illegally
Up to more than 75 percent of all conversations with brokers and consultants do not result in the legally required documentation or minutes, which should then be handed over to the customer. Such documents almost certainly always prove gaps in information, education and advice. The decisive factor is usually what is not written there. Customers who inform themselves professionally later can use it to reverse almost any insurance or banking product or to enforce compensation.
Today you have the money and we have the experience – tomorrow it could be the other way around
If legally required documentation or records are missing, this will extend to a reversal of the burden of proof – at the expense of the consultants or agents. It is then no longer the customer who has to prove that he has been wrongly advised, but the agent who has to prove that he has advised correctly. As far as a liability insurance for mediation or consultation errors exists, this will declare itself with a little “luck” for the violation of legal regulations for incompetence. The legislator has allowed this gap in coverage for years, which can hardly be seen as effective consumer protection. There is therefore a good chance that advisors and intermediaries will also lose their livelihoods as a result – but the injured customer may have little chance of receiving appropriate compensation.
Confusion of terms in insurance mediation: documentation or logging?
Since 22 May 2007, insurance intermediaries, in particular insurance brokers, have been obliged to document their own advice and make it available to customers. Documentation is an ordered summary of data, for example, on the customer, his wishes, the needs, the advice given, the customer decision, and the place and time of the consultation.
Such documentation is already error-prone if it is generated with text modules using software incorrectly referred to as “insurance agent protocol”. Specialists will easily detect content traps, errors and gaps. Judges will notice that it is unlikely that there has been any consultation in this way, and thus deny the document any probative value. As a broker or advisor in insurance matters, there are some things that you just have to express and document in such a way that even those who would rather understand something else will understand it.
If “Protocol” is written above the documentation, this proves that the meaning of the word has not been understood. The protocol, which is not required by law, as an image of the course of the conversation, has been the usual document for the customer file in the insurance sector for decades for the purpose of reducing one’s own liability. If associations and clubs in the intermediary sector do not train this, customers can be even more certain that they will later be able to conduct liability proceedings with good prospects.
Confusion of terms in financial investments and banking advice: documentation or logging?
In the case of financial instruments (e.g. shares, bonds), closed investments, hedge funds, shares in cooperatives, etc., the legislator prescribes a protocol. This affects financial service providers such as the financial investment advisor, but also every bank advisor behind the counter or desk.
However, this legally required protocol simply does not exist, because that would mean too much effort. Specialist publishers in the industry have developed beautiful forms as a substitute, nicely arranged, in other words, documentation. They are also well trained for the mass lie by ticking off “Yes I know all financial products, including all risks, how they work and that it is similar to the lottery game – sometimes there is nothing left of the money at the end of the day”.
It’s a bit like putting a passenger in Düsseldorf on a plane to Boston with a time bomb set for three hours, with aviation gasoline only to the middle of the Atlantic, and having him sign “Yes, I’ve flown before and I know about aviation risks and I know that planes can crash and sink into the sea without a trace”.
This saves the advisor the trouble of explaining to the customer in an understandable way how the selected investment works. It is not uncommon for client advisors to admit that they had never read the 400-page contract terms, or at most eight pages of advertising flyers. This kind of sales pressure increases the chances of the customers to hold themselves harmless later on.
BaFin duplicates study commissioned by the Minister of Justice on investment advice?
In its leaflet on “investment advice”, the Federal Financial Supervisory Authority correctly speaks of an obligation to draw up a protocol. A more recent study commissioned by the Minister of Justice incorrectly states in a subheading “Documentation obligations for securities according to § 34 para. 2a WpHG” in order to state “According to § 34 para. 2a WpHG, securities service companies must prepare a written record of every investment advice given to a private client”. This confusion of terms unsettles even established financial service providers.
Reversal of the burden of proof for insurance mediation
The fact that customers of bank and insurance brokers have not yet taken much from the documentation or the minutes to prove that they were given the wrong advice may well be due to the fact that they – or their lawyers – look for the proof in what is documented or recorded, instead of in what is not there at all, but should be, in relation to the individual customer and the financial product brokered. More often than not, a life insurance policy is brokered but it has not even been checked whether the customer can still afford it in the typical “unforeseeable” vicissitudes of life – instead of very often having to terminate the policy prematurely and with losses. The agent then says that he could not have known that the customer would become unemployed. But then he wouldn’t have to arrange fire insurance for him, because he can’t know that there would be a fire. The specialist addresses thereby the investor and object-fair consultation, i.e. that an investment, even a life insurance, must fit the needs as well as the need of the customer, and not with the first-best unforeseeable however typical incident will fail. However, when a savings bank board of directors specifies the products on a weekly basis, such as “this week we are arranging building society savings”, the 96-year-old great-grandmother is also arranged for a building society savings contract, so that after the savings period at the age of 126 she may be able to have her crypt renovated by her heirs.
Reversal of the burden of proof also for investment advice
The Federal Court of Justice has repeatedly ruled on the liability for investment advice (judgement of 8 May 2012, Ref. XI ZR 262/10) that there is a rebuttable actual presumption to the detriment of the investment adviser that investment damage would not have occurred if the information had been provided in accordance with the duty of disclosure. This includes the case that the dutifully enlightened investor would have had various alternatives for action. The assumption of a certain course of events is then no longer relevant if a clarification had been incomplete or incorrect.
Enormously good chances for disappointed bank and insurance customers
The mass failure to produce or hand over documentation and protocols opens up masses of good chances for disappointed customers to claim damages. Higher courts support this by applying a shift in the burden of proof in liability proceedings.
Consultants and brokers of banking and insurance products are often personally liable for their misconduct under the law or case law. The courts have put a stop to the mass “misconception” about documentation and logging obligations, even though many customer advisors continue to oppose the legislator like insurgents, in the belief that compliance with legal requirements can simply be replaced by moral self-commitments for honest merchants.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published on 16.03.2018)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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