PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE FINANCIAL SERVICES OMBUD SCHEMES BILL, 2004 ("FSOS BILL")

DEMARCATION OF THE RESPECTIVE JURISDICTIONS OF STATUTORY OMBUDS AND OMBUDS OF RECOGNISED SCHEMES: CLAUSE 13 OF FSOS BILL

5 October 2004

BACKGROUND

  1. Clause 13 is a later addition to the Bill, which was inserted after the Financial Services Board (FSB) became aware of at least one of the voluntary ombud schemes, viz. the Office of the Ombudsman for Long- term Insurance, aspired to entertain FAIS related complaints if the responding party was a participant of its scheme.
  2. This claim was totally unacceptable to the FSB and the matter was discussed with officials of National Treasury. The discussions culminated in the Minister of Finance deciding to withdraw the FSOS Bill in order to examine and to ensure (inter alia) "there exists a clear demarcation of the jurisdiction between the various statutory and voluntary Ombud's offices in the interests of both consumers and Industry Ombuds alike".
  3. The Minister's directive was conveyed in the form of a letter to the FSB received on 2 July 2003.
  4. Clause 13 as presently worded was inserted in the Bill pursuant to the Minister's request. The revised Bill was thereafter workshopped at a meeting with representatives of all interested parties held in July 2003, and re-submitted for Cabinet approval. Cabinet approved the present version of the Bill.
  5. WHY DEMARCATION OF JURISDICTIONS IS NECESSARY IMPERATIVE JURISDICTION OF STATUTORY OMBUDS

  6. The statutory ombuds referred to in Clause 13 of the Bill are creatures of statute. This discussion will centre on the FAIS ombud, although the arguments are equally applicable to the Pension Funds Adjudicator.
  7. The jurisdiction of the FAIS Ombud is derived from the Financial Advisory and Intermediary Services Act, No 37 of 2002 (FAIS Act). This is not a voluntary jurisdiction, neither from the FAIS Ombud's point of view, nor from the industry player's point of view. The FAIS Act obliges the FAIS Ombud "to consider and dispose of complaints ..." (section 20(3)), subject only to that ombud's procedural rules and jurisdictional limitations (imposed in terms of section 26 (1)(a)).
  8. The type of complaint which the FAIS Ombud must consider and dispose of is defined in the FAIS Act. It is a "complaint" lodged by a specific "client" which relates to a "financial service" rendered by a "financial services provider" or a "representative", to the complainant, which has caused the complainant financial harm.
  9. The words in inverted commas are all defined in section 1(1) of the FAIS Act. If they are analysed, it becomes clear that it was the legislature's intention that the office of the FAIS Ombud would be the forum to deal with FAIS related complaints. This conclusion is fortified by the fact that parties complained against (responding parties) have no choice but to submit to the jurisdiction of the FAIS Ombud. This applies equally to a financial services provider who happens to be an insurer who participates in a voluntary ombud scheme.
  10. VOLUNTARY JURISDICTION OF OMBUDS OF RECOGNISED SCHEMES

  11. By contrast, participation in a recognised scheme is voluntary. Only those financial institutions who wish to participate in a scheme are subject to the scheme's rules and the jurisdiction of its ombud, and only for as long as they are participants. Nothing prevents a participant from resigning its participation in a scheme, the entire substratum of such a scheme being contractual. The FSOS Bill, even if proclaimed law, does not change this situation.
  12. The three voluntary ombud schemes presently functioning in the financial services industry, have been formed by product suppliers - long-term insurers, short-term insurers and banks. These are the participants in the scheme, which have agreed to accept the jurisdiction of the scheme's ombud in accordance with the latter's terms of reference. The ombud has no authority over any party who is not a participant of the scheme, not even for the purpose of procuring evidence.

PROCEDURAL AND ENFORCEMENT OF DETERMINATIONS

11 While both the FAIS Ombud and the ombud of a recognised scheme are free to employ procedural rules of their choice, there is a vast difference in the mechanisms available to each.

12 The FAIS Ombud may employ the mechanism provided for in the Commissions Act, 1947, for the purposes of any investigation or determination (section 27(6) of the FAIS Act). Thus the FAIS Ombud may;

  1. summon any person to give evidence;
  2. examine any person under oath;
  3. call on any person to produce books, documents or other evidential material, etc.
  1. These powers enable the FAIS Ombud to probe the truth in any given case, for example to resolve a dispute of fact, as would a court of law. Yet, in normal circumstances, this would be at no cost to the complainant.
  2. 14. Both financial services providers (i.e. the licensed entities) and their representatives (employees and mandatories) are directly subject to the FAIS Ombud's jurisdiction. Hence the FAIS Ombud may award an amount, or grant any other relief, against either the licensed entity or its agent, or against both. In fact, the rules of the FAIS Ombud go so far as to extend its jurisdiction to unauthorised financial services providers and their agents (section 26(1)(a)(iii) of the FAIS Act).
  3. The determination of the FAIS Ombud is equal to a civil judgment of a Court and may be enforced against the responding party(ies) as if it were a judgment (writ of execution, etc) (section 28(6)).
  4. These stringent procedural and enforcement measures provided for in the FAIS Act, demonstrate the intention of the legislature to secure a sound and effective dispute resolution system for complainants in FAIS related matters. It was no doubt known to the legislature that the activities regulated by FAIS, and the entities covered by FAIS, had either not been regulated before, or at least had not been regulated to the necessary extent. Furthermore, it was common cause that a law like FAIS was desperately necessary, including the enforcement measures provided in the FAIS Act, of which the office of the FAIS Ombud is the most significant.
  5. By contrast, the ombuds of recognised schemes do not have the same range of procedural and enforcement mechanisms available to them. As stated earlier, in their case everything depends on the voluntary participation of the members of the scheme.
  6. The voluntary ombuds have no statutory base, despite the fact that their schemes may have gained recognition under the FSOS law.

Hence:

  1. they have no legally enforceable method of procuring the attendance of witnesses at their investigations, compelling testimony or the discovery of documentation, other than by the participants in their scheme;
  2. they have no jurisdiction over any person, other than those participants, for example the employees or agents of such participants:
  3. they can make no binding determination against non- participants of the scheme;
  4. there is no certainty that an award made by the ombud on the grounds of negligence or improper conduct of a participant's agent, will be honoured by the participant. It is not always easy in law to hold an employer/principal liable for the acts/misdemeanours of its employee/agent. There exists voluminous case law on this subject;
  5. there is at least a measure of doubt as to the enforceability of the ombud's determination against the participant itself. The scheme may be able to enforce a contractual remedy against a recalcitrant participant who simply refuses to accept the ombud's determination. The complainant, however, may well be remediless, other than to take recourse to the Court.

FORUM SHOPPING

  1. It is common cause that an ombud's determination may not be the final word in a dispute. Both the FAIS Act (section 40) and the rules of the voluntary schemes provide that a determination by the ombud is not binding on the claimant. If two or more forums would be given authority to handle FAIS related complaints, it could well happen that a complainant who may not have achieved the desired result at the one forum, will thereafter submit the same claim to the other forum.
  2. What is more, in the absence of one dedicated forum, the potential is there that consumers may be actively encouraged to submit their FAIS related complaints with the ombud preferred by the industry player. On the other hand, the FSB and consumer associations may recommend the FAIS ombud to deal with FAIS related complaints. This may degenerate into active marketing campaigns which will serve the interest of neither ombuds nor consumers.
  3. Further negative developments may be perceptions that the one ombud is "complainant-friendly" and the other "industry-friendly". There may also be inconsistency in the approach of different ombuds, their emphasis and reasoning. Ombuds' determinations are not reported or always recorded as court judgments are. Therefore, it will not be possible for two ombuds to develop a precedent system as in the case of court judgments, for the sake of consistency in determinations.
  4. From every perspective it is simply undesirable to create or to allow a situation where the consumer should officially be allowed a choice of forums for the determination of FAIS complaints (forum shopping) or for the evil of forum arbitrage to develop in the system.
  5. EXPERTISE

  6. There is a reason why over the course of time several ombuds offices have been established voluntarily or statutorily in the financial services sector. Internationally, there are in operation different ombuds offices to serve customers of banks, long-term insurers and short-term insurers and the members of pension funds respectively (to mention the more important). Even the Financial Ombudsman Service in the United Kingdom, though operating as a single office, is divided into several specialist divisions in accordance with the applicable financial services sector.
  7. Incidentally, courts of law have not followed this tendency. In South Africa, with a few exceptions, all cases are accommodated in the Magistrates Court or the High Court. One judge may become seized with the hearing of different types of cases.
  8. The reason for specialisation and the development of expertise in the case of ombuds offices, probably lies in the following:
  1. Unlike the case with courts, ombuds offices also investigate the underlying facts of a complaint.
  2. To enable them to do so effectively, their investigators should preferably have sound knowledge and experience of industry products, systems, practices and methods of operation. This type of expertise need not necessarily reside in the ombud, but must be available in the office.
  3. For this reason, ombuds offices are resourced with reference to specific skills applicable to the industry whose customers they serve. Therefore, apart from legal and judgmental skills, there must be available broad-based industry expertise in the office to enable reliable facts and information to be fed through to the adjudicator.
  4. In fact, every existing ombuds office presently in operation can boast an infrastructure of this nature, even the recently established FAIS Ombud's office.
  1. The FAIS Ombud is the latest addition to the ombuds offices in the country. While preparatory work and the setting up of the office commenced more than a year ago, it only came functional on 1 October 2004. This office should be allowed to develop its capacity and expertise to the fullest extent as contemplated by the FAIS Act (section 21 onwards). It is a dedicated office established to deal with FAIS related complaints, an area hitherto not covered by any other ombud arrangement.
  2. It is, with respect, fallacious for any voluntary ombud office to claim that it has until now been dealing with "advice" complaints and should be allowed to continue to do so. If this is correct, the handling of "advice" complaints was simply not effective, as it became apparent to government and the regulators that a comprehensive law was required to regulate advice and intermediary services.
  3. The FAIS Act, with its subordinate legislation, is this law. FAIS elevates sound market practices to the status of law. It covers areas not regulated before. With this law has come the office of the FAIS Ombud as the principal enforcement forum. To hive off its statutory domain to other ombud arrangements will have the effect of undermining the office of the FAIS Ombud, instead of empowering it to do its work.
  4.  

    VOLUNTARY OMBUD SCHEME BY FINANCIAL SERVICES PROVIDERS

  5. The FSOS Bill enables a group of financial institutions to establish a voluntary ombud scheme and to apply for its recognition (definition of "scheme" in clause 1, read with clause 11 of the Bill). "Financial institution" is also defined in clause 1 and includes any financial institution contemplated in paragraph (a) of the definition of "financial institution" in section 1 of the Financial Services Board Act, No 97 of 1990.
  6. One such group of financial institutions which may, technically, form an ombud scheme and apply for its recognition, are "authorised financial services providers" or "representatives" as defined in section 1(1) of the FAIS Act. The Council who considers applications for recognition will be hard-pressed to refuse such an application for recognition, if another recognised scheme has been officially allowed to deal with FAIS related complaints. This may result in the complete sterilisation of the office of the FAIS ombud!
  7. CONSUMER CONFUSION

  8. Lastly, and most importantly, regulatory laws are made to serve the public interest. Both the FAIS Act and the FSOS Bill are aimed at consumer protection. If they are to achieve this objective, they must be clear and so must be their application.
  9. Laws that have the potential of confusing consumers do not serve their interests. The demarcation of domains is not always easy. In both the FAIS Act (section 27(3)(c) and the FSOS Bill (clause 13(3)) provision has been made to overcome problems arising from grey areas. All ombuds are selected for their wisdom. There is no reason to doubt that once FAIS and FSOS have settled in, practical problems regarding jurisdiction will be resolved by the ombuds as they arise.
  10. On the contrary, if parallel jurisdiction is allowed to two or more ombuds, problems may escalate and confusion may reign. Consumers must be educated as to the appropriate forum for the submission of their complaints and call centres must also have no uncertainty in this regard.
  11. It has been argued that consumers should be allowed a choice of forums or that a complaint should be dealt with by the office where it is submitted first. The apparent reasoning behind this view is that in any event parties locked in dispute are at liberty to have the dispute resolved by any person chosen by them, e.g. an arbitrator or, for that matter, "their neighbour".
  12. True enough, if parties of their own volition decide on a certain method of alternative dispute resolution, nothing can stop them. However, if the law creates such a mechanism that is made available to a consumer, it carries a certain authority. With it, the legislature incurs the responsibility to ensure that its creation will serve the interests of the consumer, and will not lead to confusion. Certainly the vast majority of consumers will understand this and avail themselves of the facility intended to serve their needs.
  13. During the consultation process, it was suggested by representatives of the office of the Ombudsman for Long-term Insurance that "as a compromise" ombuds of recognised schemes should be allowed to accept FAIS related complaints with a view to endeavouring to achieve a settlement or conciliation between the complainant and the responding party. If that failed, the complaint should be "escalated" to the FAIS Ombud for determination.
  14. This proposal, with respect, presents no solution and carries with it not only the potential but the certainty of compounding confusion in the minds of ordinary consumers. Complainants ought to know, and should be educated, where, at the outset, to submit their claims. One can only imagine the bewilderment in the mind of a consumer who has been subjected to a process before one ombud, and then to be told that unfortunately the matter could not be resolved and needs to be transferred to another ombud.
  15. Patently there will also be a duplication of efforts. The FAIS Ombud, now becoming seized with the complaint, will still be obliged to deal with the matter in accordance with the FAIS Act and the procedural rules passed thereunder. Section 27(5)(b) of the FAIS Act states imperatively that the FAIS Ombud "must, in the first instance, explore any reasonable prospect of resolving a complaint by a conciliated settlement acceptable to all parties". Moreover, it simply does not make judicial sense to expect of the FAIS Ombud to adjudicate on a set of facts and information assembled by another office. Each complaint, thus referred, will have to be investigated de novo.

 

CONCLUSION

39 The FSB respectfully submits that clause 13 of the FSOS Bill is an essential component of this new law. It provides for the basic demarcation of the domains of the two statutory offices and those of the recognised schemes. Clause 13 is not too rigid in that a solution is provided when there is uncertainty regarding jurisdiction over a specific complaint. The FSB, therefore, believes that clause 13 should remain in the Bill as presently framed.

JOINT SUBMISSION OF THE NATIONAL TREASURY AND THE FINANCIAL SERVICES BOARD

5 October 2004