PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE

FINANCIAL SERVICES OMBUD SCHEMES BILL, 2004 ("FSOS BILL")

11 OCTOBER 2004

REPLICATION ON OPPOSING COMMENTS

1. This presentation deals with the submissions by the Ombudsman for Long-term Insurance, the Ombudsman for Banking Services and the Banking Council.
2. The gravamen of the opposition to the FSOS Bill by all three these offices are clause 13 of the Bill, which deals with the demarcation of jurisdiction.
3. There is nothing new for the promoters in the arguments submitted to the Committee. They have been raised ad nauseam in discussions with the promoters of the Bill. Anticipating this repetition before Parliament, the promoters submitted a memorandum dated 5 October 2004 on the demarcation issue, which was disseminated to Committee members. That document deals with most of the arguments of the objectors and none need to be repeated here.
4. What has not been canvassed in the submissions thusfar, is the consequences which a parallel jurisdictional regime may bring about. The present estimate by the FSB is that more than 14 000 financial services providers will be licensed under the FAIS Act. The representatives of licensees are likely to be in the order of 75 000 to 100 000. Of these by far the majority (approximately 80%) are active in the insurance industry.
5. When the FAIS Bill was promoted before Parliament two years ago, the evidence was that in the life insurance industry approximately 50% of the products are marketed through tied agents or employees of life insurers; the other 50% is marketed through independent brokers.
6. If the passionate plea of the Ombudsman for Long-term Insurance (LTO) should be successful, consumer complaints against tied agents and employees of life insurers could potentially find their way to the LTO as their principals (the insurers) are on the basis of vicarious liability responsible for their actions. These insurers are participants in the LTO's scheme.
7. If clause 13(2) should be struck down, it leaves little imagination - given the anxiousness of the LTO and the Banking Ombudsman to deal with FAIS complaints - that the LOA and the Banking Council will embark upon massive marketing campaigns to encourage potential complainants against insurers and their agents/employees, to submit their complaints with the industry ombud.
8. This will have a two-fold negative impact: It will deprive the FAIS Ombud, who is gearing up capacity to be able to deal with complaints statutorily intended for that office, of a substantial part of those very complaints; and in the case of the LTO, who admittedly is already "fully extended" capacity wise (paragraph 2.5 of the LTO submission), to deal with significantly more complaints.
9. Especially, as far as the FAIS office is concerned, this will have a massive adverse impact. It will then be left to deal with complaints against independent brokers who are responsible for 50% of life products marketed; and the left overs of complaints against tied agents/employees of insurers.
10. The promoters of the Bill find it strange that the LTO and the Banking Ombudsman (BO) both advocate a parallel jurisdiction for FAIS complaints. Yet between themselves they do not practise parallel jurisdiction. The LTO says (paragraph 2.8) "where a complaint was addressed to the wrong office it would routinely be forwarded to the correct one". The BO (p 2) also alludes to "referral arrangements with other voluntary ombudsmen"; and continues (p 3) that clause 13 (3) "is in line with the present practice adopted by the various existing ombud schemes". (Clause 13 provides that in the case of uncertainty of jurisdiction the affected ombuds must agree as to who should exercise jurisdiction over a specific complaint).
11. If two industries could logically have had cross-membership of ombud schemes, and parallel jurisdiction for their ombudsmen, that would be banks and life insurers. All major banks sell life products. Some registered banks are exclusively into investments rather than providing true banking services. Life insurers are heavily engaged in investment business as well, and offer bank products to their clients. "Bank- assurance" is the order of the day!
12. Yet these two industries have seen fit to run separate ombud-offices of their own volition, and refer complaints to the office where they belong. Both ombuds have told the Committee that.
13. This fact adequately dispels the allegation by the BO that clause 13(2) is "monopolistic". Consumers need not avail themselves of the ombud facility which the FAIS Act provides. However, if they do, it is the legislature’s responsibility to see that their complaints land up at the "correct office" Clause 13 (2) does no more than to legislate what the voluntary schemes practise!
14. It is necessary to correct a statement in paragraph 2.10 of the LTO's submission. There is no truth in the statement that the FAIS Act "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 FAIS Act created only one ombuds forum for advice related complaints against licensed financial services providers and their representatives - the FAIS Ombud. If providers happen to be participants in a voluntary scheme, that makes no difference. They and their representatives are subject to the jurisdiction of the FAIS Ombud. Only the FAIS Ombud may in terms of section 27 (3)(c) of the FAIS Act "on reasonable grounds" (and not willy nilly) decide to refer a complaint which he must deal with, to the Court or to some other forum.
15. This was the intention all along, and this was the basis on which FAIS was promoted before, and adopted by, Parliament. Clause 13(2) of the Bill merely confirms what was intended all along, and it was inserted to put the position beyond doubt, when the promoters became aware of the industry driven claim that the voluntary schemes have, or should have, concurrent jurisdiction with the FAIS Ombud.
16. The LTO says in paragraph 2.10 that this concurrent jurisdiction that it proposes as a "self-evident solution" (paragraph 3.3) must be subject to the proviso "that each office, either by agreement or by an appropriate amendment to the FSOS Bill, should respect determinations made by the other". This goes against the grain of the status of an ombud's determination. The FAIS Act and the rules of all the voluntary schemes entrench consumers' rights to take their complaint elsewhere if they are not satisfied with an outcome before a certain ombud. Ombuds’ determinations are only binding on respondents. How can ombuds by agreement deprive consumers of their rights? This proves how untenable this "self-evident solution" is.
17. 17. The argument that it is sometimes difficult to categorise a complaint at the outset and that its true basis only reveals itself "deep into the investigation" is, with respect, also not convincing. Complaints are not referred to an ombud until it is clear that the complainant and the financial institution have been unable to resolve the issue between them. The Rules of the FAIS Ombud oblige both claimants and respondents to do exactly this. Respondents have six weeks to resolve complaints before they are obliged to refer them to the FAIS Ombud. All voluntary schemes follow the same practice. The difficulty with typifying a complaint is likely to arise only in isolated cases. The same applies to "mixed complaints".
18. It is not considered necessary to deal in any depth with annexure A, the contents of which are largely irrelevant for present purposes. A few blatant errors therein must, however, be corrected.
19. It was never intended that the FAIS Act should cover only independent financial advisers. From the outset FAIS had a functional approach. No matter who the person was or what institution it was, if it made a business of furnishing financial advice, the person or institution would fall within the ambit of FAIS. Thus an attorney, an accountant, an independent broker, an insurer or a bank who, as a regular,feature of business, furnishes advice, is covered by FAIS; and is subject to the jurisdiction of the FAIS Ombud.
20. The evils of Masterbond were no more perpetrated by independent brokers than by agents of financial institutions. These agents were as much in the sights of FAIS as were independent brokers and other entities such as insurers and banks themselves that were rendering "financial service". What is said in paragraph 16 of Annex A is simply not true.
21. Equally incorrect is the premise (paragraph 17 of annex A) that the FAIS Ombud would deal only with advice-related complaints against "non-subscribing institutions and brokers". If this were the intention, it would have been clearly reflected in the FAIS Act. There is nothing of this kind in the Act.
22. What is said in paragraph 21 is only partially correct. The FSB never "lost its enthusiasm" for the FSOS Bill. At all times there was going to be promoted a law providing for a wider, if not an all-embracing, ombud arrangement in the financial services sector. The FSOS Bill was merely put on hold to consider alternatives, such as those which were developing in the United Kingdom (a single ombud service) and in Australia (closely coordinated individual schemes accommodated in one center). When the FSB discussed these with the industry associations and voluntary schemes, there was nothing less than a furore on their side and it was decided to revert to the FSOS Bill in somewhat revised form.
23. In conclusion, the promoters respectfully wish to sound a note of caution. It is dangerous to approach the matter of demarcation, jurisdiction and domain from the tiny perspective of one voluntary scheme or a specific industry association. National Treasury and the FSB have broad experience of the financial services sector and its regulation. At the FSB 2672 queries, mostly in the nature of complaints, have been received in the Insurance Department from the public since January 2004 in relation to the insurance industry (long- term and short-term). Of these only 98 were identified as belonging to the FSB. All the rest were forwarded to the insurers to deal with or else to the ombuds concerned.
24. A dedicated call center has been functioning at the FSB since August 2002. As the center came to be known to the public, it has been of increasing assistance to consumers in directing their problems to where they could receive attention. From 1 January 2004 to date the Call Centre logged 56 006 calls, that is calls where the FSB actually gave assistance, not only "quick calls". Needless to say, clients of the insurance industry also benefit from the Centre. No less than 7135 of the "logged calls" over the same period were insurance related being either complaints or queries, and directed to the correct destination.

NATIONAL TREASURY

FINANCIAL SERVICES BOARD

11 October 2004