Dear Mr Viljoen

SUBMISSION ON FINANCIAL SERVICES OMBUD SCHEMES BILL ("the FSOS Bill")

1. We refer to the Financial Services Ombud Schemes Bill, which we understand is scheduled for hearings before the Parliamentary Committee on Finance on 12 and 13 October this year.

2. The JSE has a high level of concern about the regulatory position to be introduced by the Bill, which we submit will result in duplicate and potentially conflicting regulation. We would very much appreciate the opportunity of making oral presentations to the Committee to clarify how the Bill will impact on the JSE (as a self-regulatory organisation). We look forward to receiving further information regarding the hearings.
3. The JSE has a substantial amount of comment on the FSOS Bill and for this reason we set out in the following paragraphs the detail of our submissions. In our oral representations, we will focus on the key aspects of our comments. We have repeatedly drawn these comments to the attention of the FSB and National Treasury, but unfortunately they have not been addressed in the version of the FSOS Bill before PCOF.

4 Policy considerations

1. The JSE is concerned that the introduction of the FSOS Bill will result in duplicate and possibly conflicting regulation in respect of the same aspect of the JSE's business. All self-regulatory organisations (as defined in the Securities Services Bill ("SSB")), namely The Bond Exchange of South Africa and STRATE Ltd will find themselves in similar positions. In this letter, however, we refer only to the JSE.
2. The SSB will require the JSE to have dispute resolution schemes, which schemes will have to be approved by the Registrar of Securities Services under the SSB and will have to meet the requirements of the SSB. However, if introduced in its current form, the FSOS Bill will also regulate the JSE's dispute resolution mechanisms and will require the JSE's dispute resolution schemes to comply with the FSOS Bill requirements and to be approved by the Council introduced by the FSOS Bill. This clearly amounts to duplication of regulation.
3. The consequences of this duplicate regulation are two-fold:
0. the obligations and costs of the JSE are unnecessarily increased and the JSE may find itself obliged to comply with conflicting regulation, imposed by two different regulators; and
1. uncertainty between the requirements of the two regulatory structures will be to the detriment of investors. For instance, if the requirements under the FSOS Bill and under the SSB should differ, which will take precedence? Is one Bill specific as opposed to general legislation and would it take precedence on that basis? Would the legislation that is enacted last take precedence? We provide further examples of the uncertainty introduced in the rest of this letter.

1. the powers of the Registrar under the SSB are superior to those of the Council introduced in the FSOS Bill. The JSE's dispute resolution schemes will therefore be better regulated under the SSB than under the FSOS Bill. For example:
0. the SSB not only requires and regulates dispute resolution between members of the exchange and their clients, but also between members inter se. The FSOS Bill only regulates only disputes between members of the exchange and their clients and only if the institutions involved elect to have a scheme (the FSOS Bill does not actually require institutions to have schemes);
1. the FSB has day to day oversight over the operations of the exchange (including its dispute resolution schemes) – the Council does not have this power;
2. the approval process of the JSE Rules requires publication of the Rules in the Government Gazette and the involvement of public comment in addition to FSB approval. The approval of rules under FSOS is not a public process and does not allow for public involvement;
3. before an exchange can be issued an exchange licence under the SSB, it will have to have a dispute resolution scheme. If an exchange does not meet its licence conditions, its licence can be revoked. The SSB therefore has much more teeth than the FSOS Bill does.

Ultimately, investors will be better protected by the regulation under the SSB than under the FSOS Bill. If there is concern regarding level playing fields between schemes regulated under the SSB and under the FSOS Bill, the Registrar can liaise with the Council or the Minister prior to approving the exchange’s rules and can also refer to requirements promulgated in terms of the FSOS Bill. We caution, however, against a blanket referral to the FSOS Bill requirements because of the potential conflict between the requirements of the SSB and those of the FSOS Bill;

2. the SSB (which is to be debated by PCOF in early October) is being introduced to consolidate all legislation applicable to exchanges, CSDPs and securities trading into one Act. The JSE's proposed approach upholds this principle;
3. a single point of regulation will ensure that the JSE's obligations are certain; and
4. the validity of the JSE's dispute resolution scheme under the SSB cannot be questioned as a result of possible non-compliance of the FSOS Bill requirements (discussed in more detail in paragraph 7 below).

4. We therefore submit that the FSOS Bill should be amended to provide that the dispute resolution schemes of self-regulatory organisations as defined in the SSB are exempted from the FSOS Bill - similar to the approach adopted for the Pension Funds Adjudicator and the FAIS Ombud - and that those schemes are regulated only in terms of the SSB.

5 Definitions clause

1. The definition of a "scheme" has been expanded to include "any scheme or arrangement established by or for a financial institution or a group of financial institutions" and specifically includes resolution of complaints "by arbitration" (our emphasis).
2. The definition initially only covered schemes set up by financial institutions themselves, i.e. voluntary schemes where the institutions decided whether to have a scheme or not. The JSE's dispute resolution schemes are a statutory requirement in terms of the SSB and are imposed on members of the JSE and are binding on members and on the investing public through the publication of the JSE's Rules in the Government Gazette. The JSE's dispute resolution schemes therefore initially fell outside the definition. The words "or for" was inserted to ensure the inclusion of the JSE's dispute resolution mechanisms in the definition. However, by the insertion of "or for", the Pension Funds Adjudicator and the FAIS Ombud are now also included in the definition of "scheme". They are therefore now also required to apply for recognition and must also comply with the requirements of the FSOS Bill. It is our understanding that this was not the intention of the Bill and we submit that this insertion should be re- considered. It does, however, illustrate again that the JSE's schemes fall in the same category as the Pension Funds Adjudicator and the FAIS Ombud, because the inclusion of the JSE schemes automatically resulted in the inclusion of the other two schemes.
3. It should be noted that all other schemes regulated by the FSOS Bill, are voluntary schemes. The FSOS Bill itself does not require institutions to have schemes, but simply states that if an institution does have a scheme, the scheme has to comply with the requirements of the FSOS Bill. It is only the Pension Funds Adjudicator, the FAIS Ombud and the dispute resolution schemes of self-regulatory organisations that are by law required to be established (by the Pension Funds Act, 1956, the Financial Advisory and Intermediary Services Act, 2002 and the SSB respectively). By including these schemes in the ambit of the FSOS Bill, these schemes are now effectively forced into the shape of an ombud schemes by requiring the schemes to comply with the requirements of the FSOS Bill.
4. The second amendment, the insertion of "by arbitration" is equally concerning. This insertion expands the scope of the Bill from only ombud schemes, to also arbitration schemes. Arbitration, which follows essentially an accusatory model where the arbitrator remains independent, does not fall within the structure of ombud schemes, which are essential inquisitorial in nature where the ombud takes an active role in the investigation of the dispute. It is not clear whether references to an ombud should also be read as references to an arbitrator. It is unclear how the requirements of clause 10(1) will be applied to arbitration schemes. In addition, where a financial institution contractually agrees with its clients that disputes will be referred to arbitration, does that also fall within the definition of a scheme, being "any ... arrangement ... established by a financial institution .. in order to resolve a client's complaint?" Finally, arbitration is already regulated extensively under the Arbitration Act, 1965 (Act 42 of 1965). What will be the interplay between the provisions of the FSOS Bill and the Arbitration Act? We submit that the consequences of including arbitration in the definition of "scheme" have not been sufficiently considered.

6 Clause 10(1)(b)

7 Clauses 11(5), 12 and 14(2)(b)

8 Clause 14(2)(a)

9 Clause 16(1)(a) and (b)

10 Exemption of regulated schemes

1. Clause 13(1) attempts to exempt the Pension Funds Adjudicator and theFAIS Ombud from the Bill ("the currently regulated schemes"). As stated in paragraph 4 above, we submit that the JSE's dispute resolution schemes should also be exempted from the Bill. We are, however, concerned that clause 13(1) does not achieve an effective exemption. Clause 13(1) only provides that the Bill does not affect the activities and authority of the two currently regulated schemes. It does not exempt those schemes from the requirement to apply for recognition nor to meet any of the other provisions of the Act. This problem is amplified by the amendment to the definition of financial services ombud scheme which now includes the currently regulated schemes. As a result, these schemes may fall foul of the provisions of clause 18. Clause 18(1) provides that no financial institution may participate in a scheme unless it is recognised or unless the financial institution is exempted in terms of clause 18(4). In addition, clause 18(2) provides that any participation in violation of clause 18(1) is null and void. As currently drafted, unless the already regulated schemes apply for recognition, no financial institution may participate in them (clause 18(1)) and any participation will be null and void (clause 18(2)). We would suggest that clause 13(1) unequivocally states that the FSOS Bill does not apply to the currently regulated schemes and to the dispute resolution schemes of self-regulatory organisations as defined in the SSB. Look for example at the wording used in clause 3(2) of the SSB - the wording is unequivocal: "This Act does not apply to ...".
2. It has been suggested that the JSE should apply for exemption under the existing clause 18(4), instead of being exempted from the Act as proposed by the JSE. This proposal is not workable because clause 18(4) does not in fact exempt a scheme from the application of the Bill:

1. the exchange still has to apply to two regulatory authorities – the Registrar for approval under SSB and at the same time the Minister for exemption under the FSOS Bill and there is no guarantee that an exemption would be granted;
2. when the Minister exempts a scheme under clause 18(4), he may prescribe conditions which again opens the door for possible conflicting regulation. The Minister's powers in relation to exempted entities are currently even wider than his powers in respect of recognised schemes. Recognised schemes only need comply with the requirements prescribed by regulation by the Minister. For exempted entities, however, the Minister can apply additional conditions without following a formal prescription route;
3. the exemption is only granted temporarily and the exchange will therefore have to apply for exemption more than once;
4. the exemption is provided only "from any provision of this Act relating to the resolution of a compliant by an ombud". It is not clear whether this includes exemption from the requirement to apply for recognition, whether exemption from clauses 17(1) and 17(2) is possible or whether exemption is granted on a complaint by complaint basis only or for an entire scheme:
5. it is the financial institution or category of financial institutions that is exempted - not the scheme itself. We suggest that the scheme should be exempted; and
6. the exemption lapses (automatically?) whenever a financial institution "contravenes or fails to comply with any such requirement condition". This is a much stricter compliance requirement than for recognised schemes where recognition may only be suspended if the "scheme no longer complies with any provision of this Act in a material manner" (clause 11(1)(c)) and then only after the scheme has been afforded reasonable opportunity to be heard and has the right to appeal the decision. The revocation of exemption should be subject to at least as high a hurdle.

1. the FSOS Bill should be amended to provide that the dispute resolution schemes of self-regulatory organisations regulated under the SSB are exempted from the FSOS Bill (similar to the approach adopted for the Pension Funds Adjudicator and the FAIS Ombud);
2. that the wording of clause 13(1) should be amended to unequivocally state that the FSOS Bill does not apply to the Pension Funds Adjudicator, the FAIS Ombud and the dispute resolution schemes of self-regulatory orgnsations as defined in the SSB: and
3. that resolution of disputes by means of arbitration should be excluded from the ambit of the FSOS Bill.

1. amendment of the definition of "scheme" as follows:

1. and includes any arrangement in terms of which resolution of the complaint is to be effected by mediation or arbitration;
2. but does not include any internal complaint resolution arrangement established by a financial institution either with or without any affiliate or subsidiary of the institution"

12.2 amendment of the definition of clause 13(1) as follows:

Yours sincerely,

Kind regards,

ELBI J VAN VUUREN

LEGAL COUNSEL