FINANCIAL SERVICES OMBUDSCHEMES BILL 2004

MAIN MEMORANDUM PREPARED FOR CONSIDERATION BY THE PARLIAMENTARY COMMITTEE ON FINANCE BY THE OFFICE OF THE OMBUDSMAN FOR LONG-TERM INSURANCE

1. INTRODUCTION

1.1 The Office of the Ombudsman for Long-term Insurance wishes to avail itself of the invitation extended to all interested persons and institutions by Government Notice 1802 of 2004 to submit written representations on the Financial Service Ombud schemes Bill 2004.

(The FSOS Bill).

    1. The Bill, recently approved by Cabinet, has been the subject of protracted debate between various representatives of the industry affected thereby, the voluntary schemes, the FSB and National Treasury.
    2. This office has been, and remains, a strong supporter of the FSOS Bill and its underlying principles. Some of its provisions, however, have always been controversial. One of them is section 13. That section, as formulated, must accordingly not be seen as a product of consensus of all the representative sections of the industry which participated in the consultative process leading to the current draft.
    3. The genesis of the proposed section 13(2) have been described in greater detail in Annexure A hereto, entitled "Some Background Material".

2. THE PROPOSED SECTION 13 (2)

    1. National Treasury, in its presentation of the FSOS Bill 2004 to the Parliamentary Committee on Finance on 18 August 2004, is on record as staling that the Minister made a policy decision that there should be a clear demarcation in the FSOS Bill between the jurisdictions of the FAIS Ombud and the voluntary schemes, and between the Pension Funds Adjudicator and the voluntary schemes.
    2. The drafter of the FSOS Bill sought to achieve this end by sections 13 (2), (3) and (4).
    3. If a ministerial policy decision is conclusive of the entire issue there is of course an end to any debate. But there is a distinction between the principle underlying the proposed provision and its formulation. The principle, as we understand it, is that uncertainty on the part of consumers, as well as between the institutions themselves, about the institution which may deal with a specific complaint should be removed. The current formulation, in seeking to prohibit voluntary schemes from even negotiating with their own subscribing members from settling a complaint lodged with them, far exceeds the bounds of that principle.
    4. The concern of this office is that section 13 (2), as it now reads, may well be the cause of, rather than the cure for, any perceived uncertainty in the market place.
    5. What should be emphasised at the outset is that the office of the Ombudsman for Long-term Insurance does not make the representations that follow in an attempt to protect its "turf'. The Office is fully extended as it is. As it appears from its Annual Reports of recent years it is anxious not to develop into a bureaucracy. Its strength is the fact that it remains small enough to function as a tightly run and narrowly focused team, able, because it is small, to deal with matters informally, efficiently and consistently.
    6. The representations that follow are, in substance, an appeal to the Parliamentary Committee on Finance to prevent a situation from developing where undue time and energy is spent in unraveling jurisdictional issues, to the delay and thus ultimate detriment of consumers.
    7. What the Office of the Ombudsman for Long-term Insurance, in common with the other voluntary schemes, seeks to achieve is that complainants who approach them in the normal and ordinary course should not be turned away when there is no compelling practical reason for doing so.
    8. In the past the voluntary schemes have never experienced jurisdictional problems amongst themselves. Each enjoyed jurisdiction over its own subscribing members. Where a complaint was addressed to the wrong office it would routinely be forwarded to the correct one. When there was an "overlap" properly so-called the office to which the complaint was directed would deal with it. The only consideration would be whether the instance to which the complaint was addressed in the first place had jurisdiction to deal with it. It has never happened that a complaint, determined by one office which had jurisdiction, was thereafter resuscitated in another office which also had jurisdiction. In practice arbitrage has never been a problem.
    9. This was likewise the position between the Office of the Ombudsman for Long-term Insurance (LTO) and the Pension Funds Adjudicator (PFA), established in terms of the Pension Funds Act, No. 24 of 1956. During the past seven years or so the PFA and the LTO have operated together without even a suspicion of a "turf war" between the two offices. They co-operated regularly whenever circumstances so demanded. Section 13 is a step backwards. The LTO and PFA will henceforth be obliged, in terms of section 13(3), to involve the statutory ombud whenever there is room for jurisdictional uncertainty between them about a specific complaint.
    10. The Financial Advisory and Intermediary Services Act, No. 37 of 2002, introduced overlapping or concurrent jurisdictions between the FAIS Ombud and the LTO in respect of advice-related complaints against subscribing members to a scheme. The submission of the voluntary schemes, at the various workshops at which provisions of FSOS were debated, was that concurrent jurisdictions do not pose a problem if the office to which the complaint was directed was allowed to deal with it. The only proviso has to be: that each office, either by agreement or by an appropriate amendment to the FSOS Bill, should respect determinations made by the other.
    11. The advent of section 13(2) of FSOS will not affect the relationships between the various voluntary schemes but only those between the voluntary schemes and the FAIS Ombud, on the one hand, and the PFA, on the other. Section 13 (2) of FSOS specifically outlaws submission to jurisdiction by consent. Where a complaint falling within the jurisdiction of the Ombudsman concerned happens to fall within an area where the FAIS Ombud or the PFA would also have jurisdiction (e.g. if an untied broker should consent to the office determining a matter on an advice-related complaint), the LTO is now prohibited from even attempting to broker a settlement.
    12. Neither the FSB nor National Treasury, although challenged to do so, has ever been able to explain why voluntary submission should be so outlawed.
    13. If complainants and insurers are free, as they will be even under the FSOS Bill, to refer a specific complaint to a third party as an arbitrator, it is difficult to appreciate how it can be in the interests of consumers to deprive them of the right of doing so to an Ombudsman who has dealt with such matters routinely and expertly over decades.
    14. It is within that context that complaints to the LTO, which may potentially fall within the jurisdiction of the FAIS Ombud or the PFA, will henceforth have to be approached. Since the respective lines of jurisdiction of the FAIS Ombud and the PFA in terms of their respective Acts are not always easy to define, much time and energy will now have to be devoted in determining, in advance, whether a matter, properly directed to the scheme, should or should not be determined by it. This is because a party, unhappy with a determination, may conceivably challenge it on the basis that such a determination does not bind him because it also falls within the jurisdiction of, say, the FAIS Ombud. That means that many determinations made by the voluntary schemes will have to be made under the threat that the determination, for all the effort made to reach it, may afterwards be challenged and held to be wasted effort.
    15. The unfortunate and perhaps unforeseen result of section 13(2) is thus that it will create new uncertainties and undermine the authority and independence of the voluntary schemes.

3. IS SECTION 13(2) OF THE BILL IN THE BEST INTERESTS OF CONSUMERS?

    1. Section 13(2) is designed to deprive the voluntary schemes of their current jurisdictions to resolve, even by negotiation and settlement, a complaint against a subscribing member if any such complaint should also happen to fall within the jurisdiction of the PFA or the FAIS Ombud.
    2. As such it is neither consumer orientated nor consumer friendly; and it is anticipated that it will inevitably lead to some consumer confusion and unnecessary delays in the resolution of complaints.
    3. The self-evident solution in matters of this nature is to allow the ombudsman of a voluntary scheme concerned to deal with complaints addressed to him against his own subscribing members.
    4. This will not deprive the ombud concerned of the opportunity of dealing with similar matters directed to him in which he enjoys concurrent jurisdiction. On that approach there would be parallel jurisdiction between the scheme and the ombud in question.

    5. At the workshops referred to in Annexure A, and in a genuine attempt to meet concerns expressed on behalf of the Ministry about the perceived spectre of jurisdictional wrangles between the FAIS Ombud, the PFA and the voluntary schemes, a compromise was suggested by the voluntary schemes.
    6. The draft (then section 15(2)) that was adopted without dissent by all the parties present, including the representatives of the FSB and National Treasury read as follows:
    7. "No ombud of a scheme or recognised scheme, or the statutory ombud, has jurisdiction to resolve a complaint or matter through determination in respect of which the Adjudicator or Ombud referred to in subsection (1), has in terms of a law/jurisdiction, except in the case of any such complaint in respect of which the Ombud in that capacity has in terms of a law declined to resolve a complaint or matter."

    8. The effect of the compromise, if implemented, would be that the that, failing a negotiated settlement, it would not decide the issue but refer it to the ombud concerned.
    9. The FSB's subsequent reaction to this well-intentioned and workable solution was extreme and emphatic: the schemes, according to the proposed version of section 15(2), as it was then numbered, were to be expressly forbidden from even attempting to mediate between consumers and their subscribing members. That is also the effect of section 13(2) as it is now numbered.
    10. This prohibition makes no sense. It prevents a voluntary scheme from attempting to fulfil its primary function, namely to resolve complaints as expeditiously and fairly as possible, preferably by negotiation and settlement.
    11. The arguments raised and concerns finally expressed at the meeting of 22 July 2004, referred to in Annexure A, against the stance of the voluntary schemes, both in respect of parallel jurisdiction and the lesser compromise suggestion, were three-fold:
      1. the approach of the voluntary schemes would, so it was suggested, encourage confusion on the part of consumers:
      2. if more that one ombudsman would have the right to determine complaints, there would be inconsistencies in the resolution of disputes: and
      3. it would encourage "forum shopping".

We propose to deal with each of these points in turn.

3.10 Alleged Confusion

3.10.1 The concern, expressed on the part of National Treasury at the meeting of 22 July 2004, that the stance of the voluntary schemes would encourage confusion on the part of consumers is, it is respectfully suggested, misplaced.

3.10.2 If a consumer is faced with a choice as to the ombud or ombudsman to whom he is to address his complaint there can only be cause for customer confusion if he is faced with a choice that matters. The choice will only matter if the outcome of the complaint would materially differ depending on which route of complaint the complainant follows. If the complaint will be fully and properly addressed, regardless of whether it is directed to the voluntary scheme or the FAIS Ombud, it matters not which route is adopted. If the choice does not matter there is no cause for confusion. The real objection would, therefore, on analysis, appear not to be one of confusion but of a perceived "inconsistency in outcome" of the complaints procedure.

3.10.3 Any residual confusion could in any event readily be addressed by the educational initiatives envisaged in the FSOS Bill.

3.11 Inconsistency in outcome

3.11.1 Precise demarcation between various financial institutions is an important issue when it concerns regulation: it is less significant when it concerns the resolution of complaints. Demarcation serves the purpose of ensuring that the correct disciplines are applied in the regulatory function; it is less obvious what the purpose is where the area is one of resolution of complaints. Reserving certain categories of complaints for statutory schemes and prohibiting voluntary schemes from resolving such disputes does not have a purpose serving the particular interests of consumers.

3.11.2 Under the parallel jurisdiction regime referred to in para. 3.3 above the FAIS Ombud and the voluntary schemes concerned operate similarly by applying broadly the same approach and criteria for the determination of a dispute. They mediate and only rule when mediation fails. When mediation succeeds and a matter settles, it means that both parties accept the outcome, regardless of who the mediator was.

3.11.3 The only meaningful difference in outcome can thus be one where a determination is to be made and relief is granted. That is also not a matter of serious concern. Where the criteria and techniques of adjudication and the form and substance of relief are alike the result will not significantly differ. Differences in determinations do sometimes occur between different adjudicators, in exactly the same way that they do between different judges and different divisions of the High Court, but that will be the exception rather than the rule. And if a determination is palpably wrong there will always be the corrective of an appeal, whether the decision is that of the voluntary ombudsman or the FAIS Ombud. The only requirement, to avoid "forum shopping", is that the different offices must agree not to presume to review each other's determinations. That is implicit in, for instance, section 8 (1) (e) of the FSOS Bill that "the independence and impartiality of an ombud, is not affected."

3.11.4 Under the compromise referred to in para. 3.4 - 3.6 above the sole issue is whether the voluntary scheme may be permitted to broker a settlement between the complainant and the subscribing member or instance concerned. A settlement presupposes consent by both parties thereto. The intercession of an ombudsman, experienced in these matters, will ensure that the settlement is fair to the consumer. Once that agreement is reached it is impossible to say (and in any event immaterial), whether the FAIS Ombud would have been able to broker a better settlement or not. A settlement between the parties presupposes the meeting of minds at a point both parties find acceptable.

3.11.5 Regardless of which approach is adopted, the threat of an inconsistency in outcome that will truly prejudice consumers is, at most, theoretical rather than practical.

3.12 Arbitrage

3.12.1 A regime of parallel jurisdiction would indeed be vulnerable to the undesirable practice that a complainant, disappointed with a determination by one body with jurisdiction, might seek a more favourable determination from another body with concurrent jurisdiction. That is why, if the solution suggested in para. 3.3 is pursued, the rider referred to in para. 2.10 will be essential.

3.12.2 If, however, the lesser solution is adopted, of allowing the voluntary schemes to act as intermediaries for purposes of negotiation and settlement, the danger of "forum shopping" is eliminated. If a matter is settled there is an end to it; if not, it is escalated to the FAIS Ombud or the PFA.

3.13 Further considerations

3.13.1 The explanation given in para. 1.6 of the memorandum accompanying the FSOS Bill ("to enable Adjudicator and the FAIS Ombud to develop expertise in their fields") is, with respect, unconvincing. The PFA has been functioning for several years and does not need the protection of the FSOS Bill to educate him to do his job. And the FAIS Ombud, it is envisaged, will receive and have to attend to numerous advice-related complaints directed to his office in any event. To provide a training ground is not a justification founded on the interests of consumers; the reason given is a clear indication that the section is not at base inspired by concern for consumers.

3.13.2 A regime of exclusive jurisdiction for the FAIS Ombud in relation to advice-related complaints would not serve the interests of consumers, not only substantively but also procedurally. Section 13(2) is sought to be bolstered by sections 13(3) and (4). These subsections presuppose uncertainty about a jurisdictional divide between a voluntary ombudsman and the FAIS Ombud or PFA in circumstances where neither declines jurisdiction. The wording of the section suggests that such uncertainty is to occur at the outset when a specific complaint is submitted to the one or the other. The jurisdictional issue, say, between the LTO and the PFA, must be referred to the statutory ombud. Ultimately, if the three parties cannot agree, the opinion of the statutory ombud will prevail. This whole process may take time and energy, at the expense of the consumer, that could have been better devoted to the resolution of the specific complaint in the first place.

3.13.3 So too, there is the frequently occurring problem of mixed complaints. The complaint, for example, can be that inappropriate advice about an investment in product A (a complaint falling within the definition of "complaint" in the FAIS Act) was compounded when someone in the insurer's office inadvertently changed the investment to product B (which complaint does not fall within the said definition) which performed even more poorly. It is clearly better for such a complaint to be dealt with by one body rather than to have it parcelled out between different offices. And, complaints, particularly those involving the LTO and the FAIS Ombud, are not always immediately discernible as being advice-related. For example, the complainant complains that he is paid less than the R100 000 he maintains he is owed in terms of a policy. The insurer responds that the policy, on a proper interpretation thereof, only entitles him to R75 000, being the then maturity value, since the policy did not incorporate a guarantee. The first issue then is an issue of interpretation, whether the policy does or does not contain a guarantee. This falls outside the province of the FAIS Ombud. Assume that a ruling is made in favour of the insurer, the complainant then responds: "If that is the meaning, I never intended to enter into such a policy". This then becomes an issue of consensus and whether the complainant's belief, created by his understanding of the wording of the policy that he was entitled to R100 000, was reasonable or not. That is again an issue falling within the Ombudsman's jurisdiction and outside that of the FAIS Ombud. Assume the ruling is again in favour of the insurer. The complainant then responds; "But the insurance agent told me that that is what the policy means". That is an issue that may or may not fall within the jurisdiction of the FAIS Ombud. It will not be in the interest of consumers to be faced with further delays if complexities of this nature are first to be submitted to a third party, such as the statutory ombud, to determine whether a voluntary ombudsman may safely deal with it. Such difficulties and delays can readily be avoided if the voluntary ombudsman to whom the complaint is directed in the first place is allowed, as at present, to resolve it.

3.13.4 Moreover, it makes little sense to forbid the ombudsman of a voluntary scheme, when a complaint is addressed to him against his own subscribing member, from picking up the telephone and exploring the possibility of a settlement, to everyone's satisfaction if the attempt should succeed.

3.14 The aim of section 13(2) cannot have been to deprive the voluntary schemes of their jurisdiction because their standards of adjudication fell short of what the FSB or National Treasury regard as adequate. Indeed, representatives of the FSB sit on the governing bodies of both the Long-term and Short-term Insurance Ombudsmen. The FSB has never complained about the capability of the voluntary schemes to deal with all matters fairly and expeditiously. On the contrary, such a concern would be at odds with the very purpose of the FSOS Bill which is to allow for the registration of such schemes to better serve the needs of the consumer public as a whole.

3.15 By the same token there is no suggestion that consumers would, in practical terms, be better served if the voluntary schemes are deprived of jurisdiction.

4. CONCLUSION

4.1 Where a system works well there is no need to "improve" on it - especially not for reasons that are doctrinaire rather than practical. Section 13(2) does not present an ideal solution to what is perceived to be a problem of overlapping jurisdictions. There are, it is suggested, better ways of dealing with this situation:

  1. to permit the voluntary schemes to deal with complaints lodged with them by complainants against their subscribing members and otherwise falling within their own jurisdictions. Such a solution would not be in conflict with the principle referred to in para. 2.3, read with the proviso referred to in para. 2.10 above; and
  2. (b) at the very least, to permit each voluntary scheme to act as a facilitator between a complainant and its subscribing member in order to negotiate a settlement to the complaint. This could easily be achieved by deleting the phrase "or settle a matter" in section 13(2) and inserting, after the word "except", the words: "by negotiation and settlement or... "

4.2 Either of the above bases, it is respectfully submitted, would better serve the interests of consumers than section 13(2) as currently worded.

P M Nienaber

Ombudsman for Long-term Insurance

23/092004