EX PARTE : THE FINANCIAL SERVICES BOARD AND OTHERS

IN RE: FINANCIAL ADVISORY INTERMEDIARY SERVICES BILL AND FINANCIAL SERVICES OMBUDSCHEMES BILL

 

 

O P I N I O N

 

BACKGROUND

  1. First Consultant is the Financial Services Board ("the Board"), a regulatory body duly constituted in terms of section 2 of the Financial Services Board Act, No. 97 of 1990 ("the Act").

  2. The Board is joined in seeking our advice by the Ombudsman for Long-Term-Insurance, the Ombudsman for Short-Term Insurance, the Banking Adjudicator and the Banking Council, as additional Consultants.

  3. The functions of the Board are as set out in section 3 of the Act and are:

    1. to supervise compliance with laws regulating financial institutions and the provision of financial services;

    2. to advise the Minister of Finance on matters concerning financial institutions and services; and

    3. to promote programmes and initiatives by financial institutions and bodies representing the financial services industry to inform and educate users and potential users of financial products and services.

  4. Our advice is sought in connection with the proposed Financial Advisory and Intermediary Services Bill ("the FAIS Bill") and the Financial Services Ombudschemes Bill ("the FSO Bill"), both issued during 2001.

  5. We have been briefed with the final draft of the latter Bill dated 20 June 2001 and with the 7 November 2001 version of the former Bill containing certain passages in bold type now omitted from the earlier version, as well as other passages which are underlined and constitute amendments or refinements to the earlier version.

  6. It appears from the explanatory memorandum which accompanies the FAIS Bill that the primary purpose of the Bill is to regulate the business of rendering financial services and the selling of a range of financial products to clients, including the furnishing of advice and all intermediary services relating to financial products.

  7. We are instructed that at the heart of the Bill lies the objective of providing protection to clients of financial service providers by requiring the latter to be licensed, including that group which in common parlance is known as "brokers". The financial services industry will also be subject to codes of conduct and enforcement measures.

  8. The main focus of our advice is Chapter VI of the FAIS Bill where provision is made for a complaints-handling structure which takes the form of a purportedly independent and impartial ombud scheme. This is intended to provide an expedient and informal mechanism for the resolution of complaints by clients against financial services providers or their representatives, and of disputes between them. To this end the Ombud is expressly authorised to follow and implement any procedure (including mediation) deemed appropriate in the investigation and determination of a complaint lodged by an aggrieved client ("the complainant"). Conciliation is recommended and in clause 28(1)(b) of the Bill the Ombud is authorised to make an award to a complainant of an amount which he regards as "fair compensation" for financial prejudice and damage suffered.

  9. The rationale behind Chapter VI of the Bill is apparent from the provisions of clause 20(3) of the Bill which read as follows:

"The objective of the ombud is to consider and dispose of complaints in a procedurally fair, informal, economical and expeditious manner and by reference to what is equitable in all the circumstances with due regard to :

    1. the contractual arrangement or other legal relationship between the complainant and any other party to the complaint; and

    2. the provisions of this Act."

  1. In terms of clause 28(5) an award by the Ombud is deemed to be a civil judgment of a Court of law and is binding on the financial service provider against whom it is made, unless it is taken on appeal to the Board of Appeal which is constituted in terms of section 26 of the Financial Services Board Act, No. 97 of 1990. That Board was originally created for the purpose of hearing appeals by any person aggrieved by a decision of the executive officer appointed in terms of section 13 of the said Act. At present the Board of Appeal consists of a retired judge, an accountant and an actuary.

  2. In our instructions it has been drawn to our attention that the Bill does not contain any provision compelling the Ombud to convene or conduct any public or private hearing. Clause 27(5)(a) does, however, provide that the Ombud may, in investigating or determining a complaint, follow and implement any procedure which he/she deems appropriate and must allow any party the right of legal representation. The Ombud moreover, has the power to apply the provisions of the Commissions Act regarding the summoning and examination of persons, in terms of clause 27(6).

  3. While clause 40 of the Bill preserves the rights of clients (as defined) to approach the Courts for legal redress, the Bill is framed in such a way that financial services providers will be deprived of the right of access to the Courts and will have to be content if they are aggrieved by any decision of the Ombud, with the findings of the Board of Appeal. Though the Bill is silent in this regard, the review jurisdiction of the High Court is, however, not excluded.

  4. We are instructed that, after the initial publication of the FAIS Bill in May 2001, the entire concept of regulation of the financial services industry, particularly the broker industry, elicited opposition from the Free Market Foundation and the Medical Schemes Council. This opposition included a contention that the FAIS Bill would violate the constitutional rights of financial service providers by depriving them of access to the Courts. Legal opinion was obtained by these bodies in support of this contention.

  5. Consultants are concerned that the thrust of the Bill will be lost if dissatisfied clients of the broker industry, particularly those clients who are least able to afford the cost of exhausting customary legal remedies, are unable to obtain access to a cost-efficient and expeditious complaints-handling system such as that envisaged by the formation of the Ombud’s office and are instead compelled to have recourse to a tribunal that must function virtually as a Court of law. Clearly this would nullify the benefits of the ombud mechanism introduced by the Bill to the detriment of the consumers concerned.

  6. We are instructed that, in response to the objections to the constitutionality of the Bill, certain amendments were introduced which are reflected in the underlined portions of the version of the Bill dated 7 November 2001 with which we have been briefed. The amendments are predominantly aimed at countering the apparently valid attack upon the ostensible lack of independence and impartiality of the office of the Ombud under the earlier version of the Bill.

  7. We are further instructed that there is a perceived need for statutory recognition of voluntary ombudschemes and similar complaints-handling systems which already exist in the financial services industry and the extension thereof to financial institutions which do not participate in a voluntary scheme. This need has culminated in the formulation of the FSO Bill and the proposed rules concerning the detailed requirements for recognition of a voluntary ombudscheme as defined in clause 1 of the Bill.

  8. Clause 6 of the FSO Bill empowers the statutory Ombud (defined in clause 6(1) as the Ombud appointed under the FAIS Bill) to entertain client complaints against a financial institution inter alia if those complaints cannot be accommodated under a voluntary ombudscheme because the financial institution does not form part of a category of financial institutions authorised to operate such a scheme, or the institution concerned could, but has failed, to participate in a scheme recognised under the FSO Bill, or the Ombud concerned under a recognized scheme lacks jurisdiction to entertain the complaint. The clause also gives the statutory Ombud the power to decide which Ombud or Ombuds jointly may exercise jurisdiction over a specific complaint in the case of overlapping jurisdiction. Clause 6(4) requires the statutory Ombud to deal with complaints entertained by him in the manner and in accordance with the procedures provided for in Part I of Chapter VI of the FAIS Bill.

  9. It follows that if the relevant provisions of the FAIS Bill are open to constitutional attack, the provisions of the FSO Bill in relation to the statutory Ombud’s powers to deal with complaints against financial institutions would be similarly flawed. Moreover, the situation could arise that the statutory Ombud refers a complaint against a financial institution which is not a member of a voluntary ombudscheme to the voluntary Ombud concerned, thereby depriving that financial institution of its normal rights of access to Court.

  10. Given the interaction between the two Bills and the overlapping nature of the jurisdiction of Ombuds of voluntary schemes recognised under the FSO Bill and the statutory Ombud’s compulsory jurisdiction under the FAIS Bill, the provisions of the FSO Bill may equally be the subject of constitutional attack.

  11. Our instructing attorney has briefed us with a variety of correspondence, opinions (both English and South African) and supporting documentation which are listed in paragraph 20 of his instructions. We have also had the benefit of conferring with the Ombudsman for Long-Term Insurance and have been provided with additional documentation by him.

    12.  

    THE QUESTIONS POSED

  12. The essence of our brief is to consider and advise on the constitutional issues which arise from the provisions of both of the Bills and to advise generally on measures which could be taken to put both Bills beyond successful constitutional challenge. We have also been asked to answer certain specific questions which are set out in paragraph 15 of our instructions, read with paragraphs 5 and 6 of the letter from the Ombudsman for Long-Term Insurance to our instructing attorney, dated 13 November 2001.

    13.  

    APPLICABILITY OF SECTION 34 OF THE CONSTITUTION

  13. We propose to deal first with the broad principles relating to section 34 of the Bill of Rights of the Constitution, Act No. 108 of 1996 ("the Constitution") and its applicability to the provisions of the two Bills under consideration.

  14. Under section 34 of the Constitution:

    15. "Everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a Court or, where appropriate, another independent and impartial tribunal or forum."

  15. The approach of the South African Constitutional Court to this section of the Bill of Rights is set out in Chief Lesapo v North West Agricultural Bank & Another, 2000 (1) SA 409 (CC). The banking legislation under consideration in that matter was declared unconstitutional, mainly because it permitted the bank to engage in self-help and be judge in its own cause by executing against its debtor’s property in respect of indebtedness as determined by the Bank without recourse to a Court of law. The ratio of the Court was as follows (at p. 418F-G):

    16. "The right of access to court is indeed foundational to the stability of an orderly society. It ensures the peaceful, regulated and institutionalised mechanisms to resolve disputes, without resorting to self help. The right of access to court is a bulwark against vigilantism, and the chaos and anarchy which it causes. Construed in this context of the rule of law and the principle against self help in particular, access to court is indeed of cardinal importance. As a result, very powerful considerations would be required for its limitation to be reasonable and justifiable."

  16. The decision in Lesapo was followed by the Constitutional Court itself in First National Bank v Agricultural Bank of South Africa & Others, 2000 (3) SA 626 (CC), especially at 630A, where Mokgoro J., speaking for a unanimous Court, emphasised that the right of access to Courts is fundamental to a democratic society that cherishes the rule of law:

    17. "Only very powerful considerations may justify the limitation of this right".

    See also Mjeni v Minister of Health and Welfare, Eastern Cape, 2000 (4) SA 446 (TkHC) at 453C-H and Findevco (Pty)( Ltd) v Faceformat S.A. (Pty) Ltd, 2001 (1) SA 251 (E).

  17. It will be observed that when a dispute can be resolved by the application of law, section 34 requires it to be decided in a fair public hearing, either before a Court, or where appropriate, another tribunal or forum which is independent and impartial. It seems that an administrative tribunal does not necessarily have to be structurally independent of the executive in the same way as a Court of law does pursuant to the separation of powers doctrine. But, if the administrative tribunal has an adjudicative function, it must nevertheless be independent and impartial and grant the affected parties a fair public hearing. See De Waal, Currie & Erasmus, The Bill of Rights Handbook (1998) at 405 – 406. These requirements of access to justice have been constitutionalised. See Bernstein & Others v Bester & Others NN.O., 1996 (2) SA 751 (CC) at para. [105]. It has been suggested that in relation to the structuring of administrative bodies which have adjudicatory functions, there should be an "internal" separation of powers. See Chaskalson et al., Constitutional Law of South Africa, s.v. "Administrative Justice" by Jonathan Klaaren, at p. 25-24.

  18. We are in agreement with the conclusions reached in the opinion of Gilbert Marcus, SC, and the opinion obtained by the Medical Schemes Council, to the effect that Part I of Chapter VI of the Bill does not satisfy the constitutional requirements of section 34 insofar as a responding party is compelled to have a complaint against it determined by the Ombud and does not have the option of recourse to a Court of law to resolve the dispute. The criticisms of the Ombud’s lack of independence and impartiality seem to us to have substance. They are based upon the Canadian case of S v Valente, (1985) 24 DLR (4th) 161 (SCC), which decision was followed by the Constitutional Court in De Lange v Smuts NO & Other, 1998 (3) SA 785 (CC). The relevant passages are referred to in the opinion of Marcus, SC and we do not propose to set them out again here. In a nutshell, applying the principles adumbrated in Valente and De Lange, supra, the Ombud’s lack of independence is evidenced by the various provisions of the FAIS Bill indicating his lack of security of tenure, institutional independence and financial security. He is in effect an officer in the public service who answers to the Board and accordingly does not enjoy the independence or impartiality required by section 34 of the Constitution of an administrative tribunal which resolves disputes by the application of law. Cf. De Lange, supra, at para. [75] where the Court observed:

    19. "…. officers in the public service, who answer to higher officials in the executive branch do not enjoy the independence of the judiciary".

     

  19. We are mindful of the fact that financial services providers are not in any way deprived of their rights to resort to judicial review of the Ombud’s actions and decisions. This may well prove inadequate in view of the limited scope of judicial review and in particular because disputes of fact cannot be determined in review proceedings. See Bryan v United Kingdom, (1995) 21 EHRR 342 which is referred to in para. 18 of the opinion of David Pannick, Q.C., dated 23 February 1998. Inasmuch as the FAIS Bill does not oblige the Ombud to hold a hearing and he is free to resolve complaints in any way he sees fit, the fact that judicial review of his actions is not excluded does not, in our opinion, suffice to provide the fair and public hearing enjoined by section 34 of the Constitution. Unless the Ombud complies with section 34, or there is an appeal to a body which complies with section 34, the FAIS Bill and in turn the FSO Bill are likely to be found to be in violation of the right of access guaranteed in the Bill of Rights.

    20.  

    THE EFFECT OF THE RIGHT OF APPEAL

  20. We turn now to the question whether the right of appeal provided for in clause 39, read with clause 28(5) of the FAIS Bill, would satisfy the requirements of section 34 and thereby save the Bills from successful constitutional attack. The right of appeal is to the Board of Appeal established by section 26(1) of the Financial Services Board Act. This Board at present consists of a judge, an accountant and an actuary whose primary function under the statute concerned, is to consider appeals by persons aggrieved by the decisions of the executive officer under a power conferred or a duty imposed upon him by or under the statute or any other law. That Board has also been pressed into service to fulfil similar functions for the stock exchange, and the pension and unit trust industries.

  21. The question whether the functions of this Appeal Board are consistent with the provisions of section 34 of the Constitution arose in the case of Financial Services Board & Another v Pepkor Pension Fund & Another, 1999 (1) SA 167 (C). The issue in that case was whether the inclusion of a member of the Financial Services Board in the Board of Appeal created under section 26(1) to hear an appeal against the decision of the Registrar of Pensions was consistent with the Constitution. It was held by Conradie, J. that, notwithstanding the fact that the Registrar was required to perform his functions "subject to the supervision of the [Financial Services] Board", the presence of a Board member on the Appeal Board did not taint its structure or composition, and that it was an independent tribunal as envisaged by section 34 of the Constitution. In coming to this conclusion the Court (at 174J – 175B) approved the following analysis of independence and impartiality in the Valente case, supra: (also reported as (1986) 19 CRR 354 (SCC) at 361):

    22. "Although there is obviously a close relationship between independence and impartiality, they are nevertheless separate and distinct values or requirements. Impartiality refers to a state of mind or attitude of the tribunal in relation to the issues and the parties in a particular case. The word "impartial", as Howland CJC noted, connotes absence of bias, actual or perceived. The word "independent" in s 11(d) reflects or embodies the traditional constitutional value of judicial independence. As such, it connotes not merely a state of mind or attitude in the actual exercise of judicial functions, but a status or relationship to others, particularly to the executive branch of Government, that rests on objective conditions or guarantees".

  22. We should point out that, despite the favourable decision of the Court as to the composition of the Board of Appeal and its compliance with the constitutional requirements of section 34, the composition of the Board was changed in terms of an amendment introduced by section 18(a) of Act No. 12 of 2000. There is no longer a provision for one of the three members of the Appeal Board to be a member of the Financial Services Board. Instead, apart from the chairperson appointed on account of wide experience and expert knowledge of the law and one person who is a qualified accountant and auditor with wide experience and expert knowledge of the latest developments in that profession, the third person is one appointed "on account of his or her wide experience and expert knowledge of financial institutions and financial services".

  23. If the decision of Conradie, J. in the Pepkor case, supra, is correct, then, in our view, the deficiencies in the Ombud provisions of the Bills would be saved by the existence of an appeal to an independent and impartial specialist tribunal, provided that it is an appeal in the wide sense of that term and not limited to consideration of the Ombud’s conduct of the matter. This is essential because of the requirement in section 34 that the dispute must be determined in a fair (public) hearing before the relevant tribunal or forum. The change in the composition of the Appeal Board mentioned above would, of course, tend to strengthen the contention that it is an impartial and independent tribunal which satisfies the requirements of section 34 if a full hearing can be had before it.

  24. It needs to be stressed that the finding of Conradie, J. was made in the context of limited attack upon the composition of the Appeal Board. It was not concerned with the role and function of the Appeal Board in relation to an ombudscheme, and the question whether the Appeal Board could fulfil the role of an independent or impartial tribunal was not fully considered. It should be noted that the Board of Appeal is not a Court of law, as was correctly pointed out in the opinion of Marcus, S.C. who describes the Board of Appeal as "neither a Court nor an independent tribunal", but without considering the decision of Conradie, J. in the Pepkor case to the contrary. It would seem that the opinion is based on the fact that the Appeal Board does not, as we understand the position, hold public hearings, nor is it required to do so in terms of the enabling legislation. It is also by no means clear that the scope of the appeal provided for in section 26 is in fact an appeal in the wide sense which would enable an aggrieved party to have a re-hearing on the facts in the appeal. As to the scope of appeal jurisdiction, see Koetsier v S.A. Council of Town and Regional Planners, 1987 (4) SA 735 (W), in particular at 741D-742C. Cf Salig v South African Council for Professional and Technical Surveyors, (Case No. 1347/98) delivered on 8 December 1998 by Booysen J. in the Durban and Coast Local Division, unreported at pp. 40 and 41. (A copy of this judgment is in the possession of our instructing attorney).

  25. For these reasons, though it is arguable that the existence of an appeal from a decision of the Ombud to the Appeal Board renders the process under the FAIS Bill constitutional, there is a risk that it is open to challenge on the grounds that neither the Ombud nor the Appeal Board, provides access to an independent and impartial tribunal which affords affected persons a fair public hearing. We should add that it occurs to us that, in any event having regard to its existing widespread commitments, the Appeal Board may not have the time or facilities to consider what may well prove to be numerous appeals in which it may be necessary to hear evidence.

  26. In our view, a safer approach which would almost certainly eliminate the risk of unconstitutionality, is that the FAIS Bill should make provision for an appeal by either party to a newly created independent appeal panel consisting preferably of judges (whether or not on the active list), appointed by the Minister of Finance in consultation with the Minister of Justice and Constitutional Development, for their knowledge of and expertise in commercial law and the financial services industry. Such tribunal, which we shall call the Ombud Appeal Tribunal, should be required to hold its hearings in public and to hear evidence if required in order to resolve disputes referred to it. (It may be that the appointment should be made from the ranks of judges on the advice of the Judicial Service Commission as is the case with the Competition Appeal Court – vide section 36(2) of the Competition Act, No. 89 of 1998).

  27. In order to limit the number and extent of appeals, we suggest that it could be provided that access to the Ombud Appeal Tribunal may only be had with the leave of the Ombud or failing that, of the Ombud Appeal Tribunal itself. Such a screening process would in our view pass constitutional muster. Even if access to the Ombud Appeal Tribunal requires leave of the Ombud or the Tribunal itself, this would not be regarded as a clog on the right of access to justice. See Besserglik v Minister of Trade, Industry and Tourism: Minister of Justice intervening, 1996 (4) SA 331 (CC) at 334-5 and Dormehl v Minister of Justice, 2000 (2) 987 (CC) at 990, para. [4] in which the constitutionality of the leave to appeal process under the Supreme Court Act, No. 59 of 1959, was upheld.

  28. We conclude that while it is arguable that the right of appeal to the Appeal Board suffices to ensure compliance with section 34, there is a distinct risk that this contention may be rejected by the Courts. We consider that the creation of an independent appellate tribunal consisting of judges with jurisdiction to grant a full re-hearing of the matter at a public hearing is a preferable alternative which would probably render the Bill immune from constitutional attack.

    29.  

    THE LIMITATIONS ANALYSIS:

  29. Neither of the two South African opinions with which we have been briefed give any detailed consideration as to whether, even if the provisions of the FAIS Bill are unconstitutional as being in violation of section 34, they can be saved by the application of section 36(1) of the Constitution.

  30. The most recent judicial exposition of the interpretation and application of section 36(1) by the Constitutional Court, is the decision in Moise v Greater Germiston Transitional Local Council: Minister of Justice and Constitutional Development Intervening, 2001 (4) SA 491 (CC). At issue in that case was the constitutionality of the provisions of section 2(1)(a) of the Limitation of Legal Proceedings (Provincial and Local Authorities) Act, No. 94 of 1970 which limit and circumscribe the rights of individuals to sue provincial and local authorities. The section had been declared invalid in the Court a quo and this declaration of invalidity was confirmed in a unanimous decision of the Constitutional Court.

  31. The application of section 36(1) as expounded in an earlier decision of the Constitutional Court is reiterated in this decision and because of its importance, we quote at some length from the judgment (at pp. 497 – 498):

"[17] The enquiry must then turn to possible justification. Can the limitation be justified under s 36(1) of the Constitution? That section reads as follows:

'(1) The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors, including -

(a) the nature of the right;

(b) the importance of the purpose of the limitation;

(c) the nature and extent of the limitation;

(d) the relation between the limitation and its purpose; and

(e) less restrictive means to achieve the purpose.

        1. Except as provided in ss (1) or in any other provision of the Constitution, no law may limit any right entrenched in the Bill of Rights.’

[18] It is by now settled law what a limitation exercise under s 36 of the Constitution requires. In National Coalition for Gay and Lesbian Equality and Another v Minister of Justice and Others 20 the nature, purpose and process of the exercise were explained thus:

'[33] Although s 36(1) of the 1996 Constitution differs in various respects from s 33 of the interim Constitution its application still involves a process, described in S v Makwanyane and Another as the ''. . . weighing up of competing values, and ultimately an assessment based on proportionality . . . which calls for the balancing of different interests''.

[34] In Makwanyane the relevant considerations in the balancing process were stated to include

''. . . the nature of the right that is limited and its importance to an open and democratic society based on freedom and equality; the purpose for which the right is limited and the importance of that purpose to such a society; the extent of the limitation, its efficacy and, particularly where the limitation has to be necessary, whether the desired ends could reasonably be achieved through other means less damaging to the right in question''.

The relevant considerations in the balancing process are now expressly stated in s 36(1) of the 1996 Constitution to include those itemised in paras (a) - (e) thereof. In my view, this does not in any material respect alter the approach expounded in Makwanyane, save that para (e) requires that account be taken in each limitation evaluation of ''less restrictive means to achieve the purpose (of the limitation)''. Although s 36(1) does not expressly mention the importance of the right, this is a factor which must of necessity be taken into account in any proportionality evaluation.

[35] The balancing of different interests must still take place. On the one hand there is the right infringed; its nature; its importance in an open and democratic society based on human dignity, equality and freedom; and the nature and extent of the limitation. On the other hand there is the importance of the purpose of the limitation. In the balancing process and in the evaluation of proportionality one is enjoined to consider the relation between the limitation and its purpose as well as the existence of less restrictive means to achieve this purpose.'

(Footnotes omitted.)

[19] It is also no longer doubted that, once a limitation has been found to exist, the burden of justification under s 36(1) rests on the party asserting that the limitation is saved by the application of the provisions of the section. The weighing up exercise is ultimately concerned with the proportional assessment of competing interests but, to the extent that justification rests on factual and/or policy considerations, the party contending for justification must put such material before the Court. It is for this reason that the government functionary responsible for legislation that is being challenged on constitutional grounds must be cited as a party. If the government wishes to defend the particular enactment, it then has the opportunity - indeed an obligation - to do so. The obligation includes not only the submission of legal argument but the placing before Court of the requisite factual material and policy considerations. Therefore, although the burden of justification under s 36 is no ordinary onus, failure by government to submit such data and argument may in appropriate cases tip the scales against it and result in the invalidation of the challenged enactment. Indeed, this is such a case."

  1. It follows from this exposition of the law that the Minister, the Board and the Ombud would bear the burden of justification should the constitutionality of the Bills be attacked on the grounds that the access of financial services providers or institutions to the Courts or to an independent and impartial tribunal or forum is removed by the provisions and structures of the Bills.

  2. In the limitation enquiry into the reasonableness and justifiability of limiting access to the Courts, the focus is to balance the importance of the right guaranteed against the purpose for which the right is limited and the extent and efficacy of such limitation. Unquestionably, the right of access to justice is of the utmost importance to our society. On the other hand, the object of protecting and enhancing the rights of consumers of financial services products who may have been over-reached or unfairly exploited by those involved in the financial services industry and allowing them a speedy and inexpensive complaints mechanism, is also undoubtedly an important and worthy object. This is because consumers are generally at a huge disadvantage when they become embroiled in "David and Goliath" contests with big players or sophisticated advisors in the financial services industry and cannot afford the costs of protracted and complex litigation should they suffer loss and have cause for complaint. As is the case in many open and democratic societies, it has been found necessary to provide alternative means of accessing justice with a minimum of delay and expense, through the provision of ombudschemes. We have not been briefed with the relevant legislation pertaining to foreign ombudschemes and have had insufficient time, having regard to the deadline imposed for the furnishing of this advice, to initiate independent research into comparative foreign systems. However, our understanding is that this would show that other open and democratic societies have considered it expedient to adopt similar schemes.

  3. In our view reliance on section 36(1) would probably fail because it is possible to construct a less invasive method of achieving the purpose for which the constitutional right is limited. As we have indicated above, we consider that it is possible to fashion a workable and efficient system without depriving the affected parties of their access to an independent and impartial tribunal as an alternative to the Courts. The Bills in their present form fail the proportionality test because, in our view, less restrictive means of achieving the objects referred to above can be devised. As was stated in Moise, supra, at 499H:

    4. "However, untrammelled access to the courts is a fundamental right of every individual in an open and democratic society based on human dignity, equality and freedom. In the absence of such right the justiciability of the rights enshrined in the Bill of Rights would be defective; and, absent true justiciability, individual rights may become illusory. In Beinash and Another v Ernst & Young and Others 23 Mokgoro J, on behalf of a unanimous Court, said:

    'The right of access to courts protected under s 34 is of cardinal importance for the adjudication of justiciable disputes. When regard is had to the nature of the right in terms of s 36(1)(a), there can surely be no dispute that the right of access to court is by nature a right that requires active protection.'"

  4. It is for this reason that we have proposed an independent Ombud Appeal Tribunal which we consider would ensure compliance with the dictates of section 34, or at the very least, in our view, meet the limitation test in section 36(1).

  5. Whilst the position of the Commissioner for the South African Revenue Service ("the Commissioner") when he makes administrative decisions concerning the rights of taxpayers is somewhat different to that of an Ombud fulfilling his functions, it may be useful to have regard to the approach of the Constitutional Court to his function in the context of the appeal process under the tax legislation. Of course we envisage a far more streamlined and expeditious procedure with only one appeal stage for the Ombud. In this regard the Constitutional Court’s decision in Metcash Trading Ltd v Commissioner South African Revenue Service & Another, 2001 (1) SA 1109 (CC) is instructive. At issue in that case was whether certain provisions of the Value Added Tax Act ("VAT Act") unjustifiably limited the right of access to the Courts. These provisions may for present purposes be conveniently summed up as the "pay now argue later" rule in favour of the fiscus.

  6. The Constitutional Court declined to strike down this rule as being unconstitutional, on account of the "special appeal" procedure created by sections 33 and 33A of the VAT Act. Kriegler, J., at 1130C in para. [33], summed up the legal position thus:

    7. "[33] It is important to have clarity about the effect of the mechanism created by ss 33 and 33A of the Act. Were it not for this special 'appeal' procedure, the avenues for substantive redress available to vendors aggrieved by the rejection of their objections to assessments and decisions by the Commissioner would probably have been common-law judicial review as now buttressed by the right to just administrative action under s 33 of the Constitution, and as fleshed out in the Promotion of Administrative Justice Act. Here, however, the Act provides its own special procedure for review of the Commissioner's challenged decisions by specialist tribunals. But, and this is crucial to an understanding of this part of the case, the Act nowhere excludes judicial review in the ordinary course. The Act creates a tailor-made mechanism for redressing complaints about the Commissioner's decisions, but it leaves intact all other avenues of relief."

  7. The Constitutional Court viewed the proceedings before the Special Court not as appeals in the forensic sense of the expression, but as proceedings in terms of a statutory mechanism specially created for the reconsideration of the administrative decisions of the Commissioner by a specialist tribunal, clothed with the power to take appropriate corrective action.

  8. The Ombud Appeal Tribunal which we propose in order to protect the ombudschemes against constitutional attack, can be similarly viewed as an independent specialist tribunal. Together with the inherent power of judicial review which would exist side by side with the appeal procedure, this would in our view suffice to render the Ombud process constitutional.

  9. The position of the Pension Funds Adjudicator bears scrutiny. He is a creature of Chapter VA of the Pension Funds Act, No. 24 of 1956, which was introduced to the statute book by Act No. 22 of 1996. The format set out in sections 30A to 30X has not been replicated in the drafting of the FAIS and FSO Bills, probably because (so we are instructed), in practice, the Pension Funds Adjudicator has found that an ever increasing proportion of his time and effort is spent litigating in the High Court, rather than on the adjudication of complaints. It is nevertheless clear that the object of the Pension Funds Adjudicator legislation is much the same, namely, to dispose of complaints by affected parties in a procedurally fair, economical and expeditious manner. The delays and expense involved in High Court litigation are obviously counter-productive and should be avoided if the ombud schemes envisaged in the Bills now under consideration are to operate successfully. This is a further reason for creating a specialist appellate tribunal which will satisfy the requirements of section 34 without the disadvantages of litigation in the High Court with its attendant delays and expense.

    10.  

    THE APPLICABILITY OF SECTION 33 OF THE CONSTITUTION:

  10. Section 33(1) of the Constitution provides:

    11. "Everyone has the right to administrative action that is lawful, reasonable and procedurally fair."

    In addition, section 33(2) provides that everyone whose rights have been adversely affected by administrative action has the right to be given written reasons. These guarantees must be read in conjunction with the provisions of the promotion of Administrative Justice Act, No. 3 of 2000 which is designed to give effect to the constitutional right to just administrative action.

  11. The functions of the Ombud under the FAIS Bill and as statutory Ombud under the FSO Bill, would in our view, constitute administrative action for the purposes of section 33 of the Constitution. The reason for this is that the Ombud’s role involves the exercise of a public power and the performance of a public function in resolving disputes between consumers of financial service products and financial service providers and institutions. This, in our view, clearly qualifies the Ombud as an "organ of state", that term being defined in section 239 of the Constitution to include any functionary or institution other than a Court or a judicial officer exercising a public power or performing a public function in terms of any legislation.

  12. It is the nature of the power exercised and not the question whether a functionary is a member of the executive arm of government that determines whether particular conduct constitutes administrative action. See President of the Republic of South Africa and Others v South African Rugby Football Union and Others, 2000 (1) SA 1 (CC) at 67, para [141]. Moreover, the definition of administrative action in section 1 of the Promotion of Administrative Justice Act, recognises that administrative action means any decision or failure to take a decision, whether by an organ of state, or a person other than an organ of state "when exercising a public power or performing a public function" in terms of any legislation. See also Transnet Limited v Goodman Brothers (Pty) Ltd, 2001 (1) SA 853 (SCA) at 865B-866E; Cape Metropolitan Council v Metro Inspection Services (Western Cape) CC and Others, 2001 (3) SA 1013 (SCA) at 1023B-1024B. We have no doubt that even though some of the Ombud’s duties may be quasi-judicial in nature, his role in implementing the legislation is not that of a judicial officer and his actions and decisions would be administrative in nature. He would accordingly have to observe the dictates of administrative justice in performing his functions. See the exclusions set out in paragraph (ee) of the definition of "administrative action" in section 1 of the Administrative Justice Act and Carephone (Pty) Ltd v Marcus N.O. & Others, 1999 (3) SA 304 (LAC) at 312, paras. [18] –[20];

  13. In our view it follows that, apart from the question whether section 34 is infringed by the current provisions of the Bills and the appropriate means to neutralise a constitutional attack, it must be accepted that the Ombud would be bound by the provisions of section 33(1) and (2) of the Constitution, as well as the provisions of the Administrative Justice Act in performing his functions. His conduct would be required to conform to the principles of procedural fairness and reasonableness in all respects. Failing such compliance, the actions and decisions of the Ombud would be vulnerable to constitutional attack.

    14.  

    ANSWERS TO SPECIFIC QUESTIONS POSED:

  14. We turn now to the summary of the issues on which our advice is sought in order to deal directly with the questions raised in paragraph 15 of our instructing attorney’s instructions to us, read with paragraph 3 of his letter to us of 23 November 2001.

 

A. Are the objections to the constitutionality of the initial version of the Bill well-founded?

In the light of the decision in Lesapo’s case and those which follow it, as well as our analysis of the legal position as set out above, we are of the view that the answer to this question is yes .

  1. If so, have the amendments in the version of the Bill dated 7 November 2001 met the objections effectively?

    2. For the reasons set out above, we are of the view that the amendments do not effectively remove the objections to the constitutionality of the Bills. In assessing the constitutionality of the provisions relating to the functions and status of the Ombud, the Court will have regard to substance over form.

     

  2. If not, what suggestions for the further amendment or adjustment of the Bills do we have?

In this regard we refer to our aforementioned proposal for the creation of an Ombud Appeal Tribunal consisting of three judges which would function to hear appeals in the wide sense of that term and to consider applications for leave to appeal in cases in which the Ombud has refused leave to appeal.

In order to add some substance to the provisions of clause 20(4) of the FAIS Bill, it would be appropriate to improve the drafting in Chapter VI, Part I, in the following respects:

 

    1. It would be preferable for the Minister of Finance after consultation with the Board, to exercise the power to appoint the Ombud and Deputy Ombuds set out in clause 21(1) of the FAIS Bill.

    2. Similarly the independence and status of the Ombud is adversely affected if his remuneration and other terms of appointment are determined by the Board. It would be preferable for the Minister, after consultation with the Board, to fulfil this function. The Ombud should also be given some form of security of tenure, as the duration of his appointment and notice provisions would obviously be terms of his appointment and could now conceivably be even less than the 3-year period previously provided for, but now expunged from the Bill.

    3. It is instructive to compare section 30C(5) of the Pension Funds Act with the appointment provisions of the Bill. In terms of the former, the Minister is empowered to remove the Adjudicator from office on the grounds of misbehaviour, incapacity or incompetence, whereas under clause 21(4) of the latter the Board is given that power. The funding of the office under clause 22 also compares unfavourably with section 30R of the Pension Funds Act which gives the Adjudicator greater control of the funds for his office.

    4. As far as accountability goes, clause 23(4) could profitably be recast by deleting "administration" and substituting "financial affairs".

    5. The general administrative powers of the Ombud are, under clause 24, only exercisable "with the prior concurrence of the Board" which is destructive of his institutional independence and status.

    6. Similarly, we can see no reason why the Board should have the power to make rules as contemplated in clause 26(1)(a) and feel that it would be better if this were left to the Ombud himself, perhaps in consultation with the Ombud Appeal Tribunal. Clause 26(2)(a) appears to pay lip service to the notion of the independence of the Ombud, in the context of the Board’s control of the Ombud. This provision can be criticised as elevating form over substance if regard is had to the fact that it is the Board that makes the rules and controls the purse strings.

    7. As far as receipt of complaints is concerned, we consider that it would be wise to tighten up the definition of "complaint", so as to provide that complaints have to be in writing and in order to relieve the Ombud of unnecessary and vague complaints. It would be wise to follow the format used in section 30A of the Pension Funds Act which requires that the complaint should be made in the first instance to the institution complained against and only referred on to the Ombud (or Adjudicator) if it is not dealt with satisfactorily within a 30-day period. A complaint form to assist and guide prospective complainants could be most useful, especially for unsophisticated consumers.

    8. If our suggestion in relation to an Ombud Appeal Tribunal is accepted, the appeals procedure in the Bill will have to be brought into line and amended consequentially. (See in particular clause 39 and clause 28). Appeals in the wide sense and the leave to appeal mechanism will have to be covered.

    9. As far as the rules are concerned, we would suggest that the word "presumption" in clause 4(e) be deleted and substituted with the word "case" or "indication" (the same criticism applies to the Ombudsman for Life Assurance rules where the same expression is used in rule 2.4).

    10. The provisions of clause 5(e) of the rules should be reconsidered in the light of our reservations concerning the definition of "complaint" and because of the importance of formally receiving a complaint in a manner which can be recorded for the purposes of suspending prescription and putting the machinery of the Ombud’s office into motion.

    11. As far as the rights and duties of the responding party are concerned, it is probably preferable not to stipulate "reasonable times", but to stipulate a period sounding in days in the rules.

    12. It seems to us that Draft rule 11(c) belongs more properly in the body of the Act itself.

    13. The appeal rules will have to be adjusted if our recommendation in relation to the appellate tribunal is accepted.

    14. As far as the FSO Bill is concerned, we repeat our reservations in regard to the definition of "complaint" in clause 1.

    15. We foresee problems with clause 2(9) of the FSO Bill if there is an even number of committee members in office at any given time, because a simple majority may not be attainable if the committee divides equally on any decision it is required to make. An even number of committee members is possible under the provisions of clause 2(2) and the chairperson should at least be given a casting vote.

    16. Clause 6(2) of the FSO Bill should be re-cast so that the introductory clause reads:

      17. "The statutory ombud may deal with a complaint against a financial institution if any one or more of the following apply:"

    17. It is advisable to define what is meant by "official receipt" of a complaint – see clause 6(5).

  1. Our general comments on the ombudsman provisions in the Bills and our suggestions on amendments, methods or steps which could be taken to place the proposed legislation beyond effective constitutional attack by disaffected parties are requested.

    2. We have dealt fully with these aspects above.

  2. The Banking Adjudicator and the Banking Council would like to be advised, whether, in the event that the Banking Adjudicator assumes powers which authorise him to act in the same manner as the Ombud provided for in the FAIS Bill, his rulings would be subject to successful constitutional challenge.

    3. In the light of the advice which we have given in respect of the unconstitutionality of the provisions of the FAIS Bill which deprive financial services providers of their constitutionally entrenched rights of access to a fair public hearing in the Courts or before an independent and impartial tribunal, we are of the view that the Banking Adjudicator could well find himself on the receiving end of successful constitutional challenges, should he seek to act in the manner which the FAIS Bill envisages for its proposed ombud.

     

  3. What is the position of members who have subscribed to the rules of the Ombudsman for Long-Term Insurance Scheme and have voluntarily bound themselves to accept the ombudsman’s decisions.

In our view, the agreement by subscribers to the scheme to accept the Ombudsman’s decision as final amounts to a waiver by them of their entitlement to access to the Courts. This waiver may be compared to an agreement between contracting parties to submit their dispute to arbitration. It must be borne in mind that the rules of the Ombudsman for Life Assurance, effective from 1 January 1998, provide that the Ombudsman’s primary role is that of conciliator and mediator and that express provision is made for the appointment of a panel of adjudicators in complex or large matters, on the basis that the panel’s decision is final and binding on the relevant subscribing member.

By participating in the voluntary ombudsman scheme, the members have waived their rights to insist on compliance with section 34 and to the extent that the scheme falls short of the access envisaged by section 34, they can have no complaint. In addition the rules do in fact contain a complaints resolution process which is administratively fair; they specify an informal appeals procedure; and the administration of the scheme is subject to judicial review by the Courts, if there is a departure from the rules. Accordingly we consider that the subscribing members would not be able to complain that their constitutional rights have been infringed. We should, however, point out that there is as yet no authoritative decision by the Courts as to whether an in what circumstances the fundamental rights protected under the Bill of Rights of the Constitution can be waived. In Transnet Ltd. v Goodman Brothers, supra, at 868, paras. [45] – [48] the Supreme Court of Appeal suggested that a waiver of fundamental rights would have to adhere strictly to the provisions of section 36(1) of the Constitution. We have difficulty in envisaging how participation in a voluntary ombudsman scheme by large financial institutions would not pass constitutional muster, despite the difficulty of applying the limitation analysis to such participation.

As far as complainants are concerned, the system enables them to proceed to Court should they not be satisfied with the outcome of the referral of the complaint. Though implied, this should perhaps be spelt out in Rule 3.5 of the Ombudsman for Life Assurance Rules by adding a sentence to the effect that, should the complainant not agree to be bound by the advice of the Ombudsman or the panel, such complainant would be at liberty to seek legal redress against the subscribing member.

CONCLUSION

To sum up, it is our opinion that the proposed structures for an Ombud and the recognition of existing ombudschemes contained in the two Bills with which we have been briefed, are vulnerable to constitutional attack, in both their original and present amended form. We consider that the decisions of the Ombud should be subject to an appeal by the complainant or the respondent to an independent and impartial Ombud Appeal Tribunal consisting of High Court judges with specialist skills. The adoption of this proposal would ensure the efficacy of the of proposed ombudschemes and minimize the possibility of successful constitutional challenge.

 

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MILTON SELIGSON, S.C.

 

 

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R.P. HOFFMAN, S.C.