Changes to aspects of FAIS Ombud’s approach to handling complaints

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The Ombud Council this week published the finalised new Rules for the Ombud for Financial Services Providers, better known as the FAIS Ombud.

Click here to download the new rules.

The Rules came into effect on 1 July 2024 and replace the previous Rules on Proceedings of the Office of the FAIS Ombud, which had been in operation since 2004.

The Ombud Council published the draft Rules and Statement of Need for public comment in September last year.

Read: Ombud Council publishes new FAIS Ombud Rules for comment

The most significant change in the new Rules is increasing the amount of compensation the FAIS Ombud may award for financial prejudice or damage from the previous maximum of R800 000 to R3.5 million, Leanne Jackson, the Chief Ombud, said in a statement.

The R3.5m compensation limit excludes any costs and interest the Ombud may award.

The new limit does not apply retrospectively; only to complaints received on or after 1 July 2024.

“The increase is necessary to ensure that the compensation the FAIS Ombud is empowered to award recognises changes in the value of money and market realities since the compensation limit was first set two decades ago. It is also somewhat more consistent with the compensation levels available from other financial sector ombud schemes,” Jackson said.

The compensation limits for complaints submitted to the National Financial Ombud Scheme (NFO) are R5m for non-bank credit or banking complaints; R10m for complaints about homeowner’s insurance and R5m for complaints about other types of insurance. There is no cap on complaints about long-term insurance products. In addition, the NFO can award up to R50 000 as compensation for material inconvenience or distress or for financial loss suffered by any complainant because of an error, omission, or maladministration.

“The outdated previous limit compromised the effectiveness of the ombud system by unreasonably restricting access to free, effective, independent alternative dispute resolution and forcing several customers prejudiced by poor financial advice to resort to expensive formal litigation to seek redress,” Jackson said.

The Office of the FAIS Ombud said in a statement this week that complaints involving retirement advice, particularly transactions involving annuities, can often exceed R800 000. The effect of inflation since 2004 has also seen complaints relating to financial planning advice increasingly exceed the original R800 000 jurisdictional limit.

The Office said it has been able to resolve complaints for amounts above R800 000 because financial services providers agreed to the Office’s jurisdiction being exceeded. “We acknowledge and appreciate the efforts of FSPs to treat customers fairly in this regard.”

The new Rules similarly provide that a complaint can exceed a claim for more than R3.5m if an FSP agrees to the limit being exceeded or the complainant abandons the amount exceeding R3.5m.

The South African Insurance Association (SAIA), in its submission on the proposed Rules, welcomed the increase in the jurisdictional limit but expected this will result in the FAIS Ombud receiving far more complaints. It was concerned the Office may not have the capacity to resolve the additional matters expeditiously.

SAIA noted that, according to the Statement of Need accompanying the Rule changes, the Ombud Council must ensure the FAIS Ombud has the capacity to deal with the consequences that result from changes to its jurisdiction.

In its response, the Ombud Council said the FAIS Ombud is already empowered to deal with complaints involving amounts higher than the maximum limit if the complainant abandons the amount exceeding the limit or if the respondent agrees to the limit being exceeded. The limit increase will therefore not necessarily significantly increase the number of complaints submitted to the Ombud but will reduce the number of cases where the FAIS Ombud is unable to order fair compensation.

“To the extent that the amendment may result in an increase in complaint volumes, the Ombud Council believes this would be indicative of the relevance and need for the change. We also point out that the Ombud Council would expect responsible FSPs to welcome the opportunity to have disputes resolved through an ombud scheme, with the option of applying to the Financial Services Tribunal for reconsideration of the Ombud’s decision, rather than facing the prospect of litigation,” the Council said.

In its statement, the Ombud’s Office said the higher limit may result in an increase in the number of complaints it receives and investigates “but is confident it will meet the challenge”.

Ombud must report unco-operative FSPs to the FSCA

Jackson drew attention to two other provisions introduced by the Rules.

First, the Rules create clearer consequences for FSPs that do not co-operate with the FAIS Ombud.

A new Rule – Rule 10(3) – requires the FAIS Ombud to advise the FSCA of material contraventions of the Rules, or persistent or material failure to co-operate with the Ombud by an FSP or representative. Such conduct is inconsistent with a provider’s obligations under the FAIS Act, and reporting this conduct to the FSCA will enable the Authority to consider appropriate enforcement action, Jackson said.

In their submissions on the draft Rules, Absa and the Banking Association South Africa said the Ombud’s Office should be required to notify an FSP or representative of its intention to refer the contravention or material failure to co-operate the FSCA, to allow the provider or representative an opportunity to respond before the referral.

The Ombud Council disagreed with this proposal. It said the new Rule is aligned with section 217(3)(a) of the Financial Sector Regulation Act, which obliges an ombud scheme to report contraventions of financial sector laws by financial institutions to the FSCA and does not require the ombud scheme to advise the financial institution of such report.

In practice, it is likely the Ombud will typically resort to the Rule 10(3) procedure where efforts have already been made to secure co-operation but have been unsuccessful.

Once the Ombud has identified a material contravention or lack of co-operation, it is not the Ombud’s role to consider any arguments the provider or representative may wish to raise in its defence; it is the role of the FSCA. The FSP or representative will be granted an opportunity to state its case to the FSCA before the Authority takes regulatory action, the Ombud Council said.

The Rules also grant the Ombud the discretion to dispose of a complaint based on the available facts and information where a party to a complaint fails to respond timeously, or otherwise fails to comply with the Rules. This gives the Ombud some flexibility to resolve complaints, where appropriate, despite a lack of co-operation from one of the parties, Jackson said.

A complaint must relate to an authorised FSP

Second, the FAIS Ombud will no longer deal with complaints where the advice or intermediary services were provided by persons operating without authorisation.

“An important purpose of financial legislation is to ensure that financial institutions are properly licensed, and consumers deal only with those licensed entities,” Jackson said.

The new Rules state that for a complaint to be considered by the FAIS Ombud, it must relate directly or indirectly to a financial service rendered by or on behalf of an authorised provider.

Jackson and the FAIS Ombud said this provision reinforces why it is important for consumers to verify they are transacting with authorised financial advisers. Consumers forfeit access to the Ombud’s dispute resolution service if the complaint relates to unlawful unregistered entities.

The Rules oblige the Ombud to refer complaints about unauthorised business to the FSCA, which has the necessary enforcement and investigative mandate and capacity to consider appropriate action.

Complainants do not have to produce a final response

The new Rules largely retain the previous requirement that the complainant must endeavour to resolve the complaint with the respondent, and the respondent must have failed to address the complaint satisfactorily within six weeks before the FAIS Ombud will deal with the complaint.

But the new Rules remove the requirement that the complainant must produce the final response (if any) of the respondent, together with its reasons for disagreeing with the response, as a strict prerequisite for having their complaint dealt with.

In the Statement of Need, Jackson said the requirement was unduly restrictive on complainants,

She said revised Rule 4(1)(c) must be read with Rule 5(2), which requires the Ombud to advise the complainant that he or she must, where necessary, provide available documentation, including correspondence with the respondent; and the complainant is entitled to submit further information and must do so if requested by the Ombud.

In addition, Rule 6(3)(c) requires the respondent to disclose relevant information or documentation to the Ombud, where the Ombud deems this necessary.

Calls for more prescriptive approach rejected

According to the Public Consultation Report, several commentators made proposals about the scope of the matters the Ombud should be permitted to consider in making determinations, and the types of determinations the Ombud should be empowered to make. These included obliging the Ombud to determine legal and factual causation; that determinations must be objective and based on the merits of the complaint; and there should be limitations on the types of relief granted and on how the quantum of relief is calculated.

The Ombud Council disagreed with these suggestions. It said the objectives of the FAIS Ombud include dealing with complaints informally and equitably.

It is appropriate to the nature of an ombud service that it can adopt a more general and flexible approach to the relief it can grant and the awards it can make. It is not appropriate to prescribe how the Ombud should consider legal principles in dealing with a complaint, or to prescribe how the Ombud should determine the quantum of a financial award, the Council said.

There are sufficient other provisions in the FAIS Act and the Rules to ensure that the Ombud acts fairly and lawfully, and indicating the factors the Ombud should consider. The Financial Services Tribunal reconsideration mechanism provides further protection to ensure that relevant legal principles are properly considered and applied.

The Ombud Council’s responses to all the submissions it received can be found in the Public Consultation Report.

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