Ombud Council publishes new FAIS Ombud Rules for comment

The proposal to increase the limit on the compensation the FAIS Ombud can award complainants who have suffered financial prejudice is a step closer to becoming a reality with the publication this month of the draft Rules for the Ombud for Financial Services Provides.

The Ombud Council published the draft Rules in terms of the Financial Sector Regulation Act (FSRA). They will repeal and replace the FAIS Ombud Rules made under the Financial Advisory and Intermediary Services (FAIS) Act.

The current compensation limit of R800 000 was set in 2004.

The World Bank Group, following a National Treasury-commissioned study of South Africa’s ombud system, published a report in 2021 that recommended a speedy review of the FAIS Ombud’s compensation limit. The report highlighted that, indexed to Consumer Price Inflation, R800 000 would have been equivalent to more than R2 million in 2020.

The FSCA, in July 2022, published a communication inviting comment on a proposal to amend the Ombud Rules and increase the limit to R3.5m.

But after engagements between the FSCA and the Ombud Council, the FSCA’s power to make rules under section 26 of the FAIS Act was reconsidered, considering the rule-making powers and statutory objective of the Ombud Council, according to a statement published by Leanne Jackson, the Chief Ombud and the chief executive of the Council.

The Ombud Council and the FSCA concluded it was more appropriate for the Council to take responsibility for the scope and content of the FAIS Ombud Rules, as Ombud Council Rules, she said.

The new Rules proposed by the Council will give effect to the compensation limit increase previously consulted on by the FSCA.

The Ombud Council’s objective, per section 176 of the FSRA, is to assist in ensuring that customers have access to and can use affordable, effective, independent, and fair alternative dispute-resolution processes for complaints about financial institutions in relation to financial products, financial services, and services provided by market infrastructures. The Council has the power to make rules for ombud schemes aimed at ensuring this objective is met.

The proposed new Rules largely retain the substance of the previous Rules. However, the revocation of the previous Rules presents an opportunity to remove outdated terminology and references, refine aspects of the FAIS Ombud’s jurisdiction, and make procedural improvements based on the Ombud’s experience, Jackson’s statement said.

Some of the new Rules, and the reasons for the changes, are described below.

Why inflation is not the only factor in setting the compensation limit

The Council supports the FSCA’s motivation for increasing the compensation limit to R3.5m, as stated in its communication of July 2022, Jackson said.

In particular, the Council agrees with the Authority’s statement that the proposed R3.5m limit is appropriate when “considering factors such as the market realities of consumers’ risk exposure and the fact that a very low financial limit for awards to complainants jeopardises the restitution outcome of determinations”.

The Council oversees seven financial sector ombud schemes. Aside from the FAIS Ombud, two other schemes have compensation limits. The Ombudsman for Banking Service has a maximum of R2m, and the Ombudsman for Short-term Insurance has maxima of R6.5m (buildings insurance) and R3.5m (other insurance). The remaining four schemes – the Pension Funds Adjudicator, Credit Ombud, JSE Ombud Scheme, and Ombudsman for Long-term Insurance – have no maxima.

“The FAIS Ombud’s current limit of R800 000 is clearly out of line. This misalignment creates the further anomaly that where a complaint relates to the financial product concerned, a complainant is potentially eligible for compensation significantly in excess of the maximum compensation available where the complaint relates to advice or intermediary services in relation to the same product,” Jackson said.

The increased limit is therefore necessary to ensure that the compensation the FAIS Ombud is empowered to award:

• takes account of changes in the value of money and market realities since the compensation limit was first set nearly two decades ago;
• is somewhat more consistent with the compensation levels available from other financial sector ombud schemes; and
• does not compromise the effectiveness of the ombud system by inappropriately restricting financial customers’ access to affordable, effective, independent, and fair alternative dispute-resolution for complaints against financial services providers and representatives, leaving them to have to resort to formal litigation to seek redress.

The FAIS Ombud is already empowered to deal with complaints involving amounts higher than R800 000 if the complainant abandons the amount above 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 Ombud is unable to order fair compensation, Jackson said.

“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.”

Jackson said most submissions in response to the FSCA’s call for comment queried the basis on which the proposed compensation limit of R3.5m had been calculated, pointing out it was more than the inflation rate over the period. Some commentators proposed the increase should be limited to an inflationary increase.

But she said inflation was not the only factor considered in proposing the revised limit. The other factors are the market realities faced by consumers, including their exposure to financial risk, and misalignment with the compensation approach of other ombud schemes.

A complaint must relate to an authorised FSP

Rule 4(d) of the previous Rules grants the FAIS Ombud jurisdiction to deal with complaints where advice or intermediary services were provided by persons illegally operating without the requisite authorisation, in contravention of the FAIS Act.

Jackson said this has proved problematic in practice. Ombud schemes are typically not capacitated to conduct the level of investigation required to determine the extent and impact of this type of unauthorised conduct, nor do they have the necessary powers or capacity to secure the co-operation of unauthorised respondents. Predictably, such illegal operators usually refuse to co-operate with the FAIS Ombud’s efforts to resolve such complaints.

“In practice, on receipt of such a complaint, the FAIS Ombud has therefore been able to do little more than refer the matter to the FSCA for enforcement action and pass such information as the Ombud has managed to ascertain over to the FSCA, which has the necessary enforcement and investigative capacity.

“The FSCA rightly emphasises the importance of dealing with FAIS-authorised financial services providers and intermediaries in its consumer education messaging. One of the benefits of doing so is to grant financial customers access to the dispute-resolution services of the FAIS Ombud,” Jackson said.

The new Rules therefore introduce a different approach.

Rule 4(1)(g) provides that for a complaint to be considered by the Ombud, it must relate directly or indirectly to a financial service rendered by a person authorised as a financial services provider or by a person on their behalf.

Rule 10(2) obliges the Ombud to refer complaints relating to such unauthorised business, including relevant supporting information, to the FSCA to consider appropriate action, and to advise the complainant of the referral.

“This approach does not change the current practical role of the FAIS Ombud in relation to complaints about unauthorised conduct. It mitigates the risk of raising unrealistic expectations and false hope of financial customers that the FAIS Ombud can secure compensation for damages they may have incurred due to illegal conduct, which is typically not achievable. It also alleviates the burden on the FAIS Ombud’s office of using resources to attempt to address complaints which are unlikely to be resolved by the office,” Jackson said.

Failure to co-operate will be reported to the FSCA

The previous Rules granted the grant the Ombud discretion to dispose of a complaint on the available facts and information where a party to a complaint fails to respond timeously. Rule 8(3) in the new Rules expands this to include where a party otherwise fails to comply with the Rules.

Jackson said this is necessary to allow the Ombud more flexibility to resolve complaints, where appropriate, despite a lack of co-operation from one of the parties.

Rule 10(1) is a new provision that requires the 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 a representative.

Such conduct is inconsistent with a financial adviser or representative’s general obligation under the General Code of Conduct to render financial services honestly, fairly, with due skill, care, and diligence, and in the interests of clients. It is also inconsistent with their specific obligations under Chapter XI of the General Code regarding complaint management and engagement with the FAIS Ombud, Jackson said.

Case fee for respondents scrapped

The existing Rules enable the FAIS Ombud to charge respondents a non-refundable case fee of up to R1 000. In practice, the Ombud does not charge such fees, and the provision is considered superfluous, Jackson said. Therefore, the new Rules remove this provision.

Ombud cannot refuse oral complaints

The previous Rules allow the FAIS Ombud to receive non-written complaints in any manner that conveys the complaint in comprehensible form, but only “in circumstances deemed appropriate”.

The low levels of literacy in South Africa, particularly among the most vulnerable financial customers, mean that a requirement for complaints to be submitted in writing could render ombud schemes inaccessible to these complainants. For this reason, the World Bank study recommended that a standard definition of “complaint” should apply to all financial institutions and ombud schemes and should include an oral expression of dissatisfaction and not require a complaint to be in writing. The Ombud Council supports this recommendation, Jackson said.

The definition of “complaint” proposed in the draft Conduct of Financial Institutions Bill, which is expected to apply to complaints dealt with by all financial institutions and ombud schemes, also proposes the inclusion of oral complaints.

Rule 5(1) therefore makes it a requirement for the FAIS Ombud to receive non-written complaints that reasonably convey the complaint in comprehensible form, explicitly including oral complaints.

Attempts at resolution with the respondent

Rule 4(1)(c) in the new Rules largely retains 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.

Jackson said the requirement is unduly restrictive on complainants and has been replaced with more flexible provisions.

She said 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.

These provisions will enable the FAIS Ombud to adopt a relatively more flexible approach to resolving complaints, while retaining the requirement that the complainant first seek resolution directly with the respondent, and still enabling the Ombud to have access to the respondent’s response, either from the complainant or the respondent, Jackson said.

Three-week response deadline removed

The new Rules retain the requirement for a respondent to acknowledge a complaint as soon as reasonably possible but do not stipulate that this only applies after three weeks.

The requirement to advise the complainant within six weeks that he or she may approach the FAIS Ombud is retained.

Dismissal and summary dismissal of complaints

Rule 7 of the previous Rules, titled “Summary dismissal of complaints”, sets out the circumstances in which the FAIS Ombud may dismiss a complaint without referral to another party.

In practice, the Ombud may become aware of several of these circumstances at a later stage once investigation of the complaint has already commenced, Jackson said.

The title of the corresponding Rule 7 in the new Rules has therefore been updated to refer to “Dismissal of complaints”, and provision for dismissal at any stage (on the same grounds as would have warranted summary dismissal) has been provided for in new Rules 7(3) and 7(4).

Rule 7(2) now also describes summary dismissal as including dismissal of a complaint “without consideration of its merits”. This change is to align the wording of the Rule with that of the enabling provision in section 26(1)(a)(vii) of the FAIS Act. The provision will ensure greater alignment with the enabling provisions of the FAIS Act and confirm the stages at which the Ombud can dismiss complaints on the stated grounds, Jackson said.

Clarification of reconsideration applications

The new Rules remove provisions dealing with the process for making appeals against determinations by the FAIS Ombud, including provision for the Ombud granting leave for such appeals.

They are replaced by a single rule requiring the Ombud, when making a final determination, to advise all parties concerned that a person aggrieved by the decision may apply to the Financial Services Tribunal (FST) for reconsideration of that decision, in accordance with section 230 of the FSRA.

The provisions of the previous Rules are outdated because they envisage the appeal board processes that had existed under the former Financial Services Board. Those processes were replaced by the FST reconsideration process provided for in the FSRA some years ago.

To remove doubt, the new rule also confirms that a decision by the FAIS Ombud to dismiss a complaint is regarded as a final determination by the Ombud, as contemplated in section 28(1)(a) of the FAIS Act.

A decision to dismiss a complaint also constitutes a “decision” for the purposes of the FST provisions in Chapter 15 of the FSRA. It confirms therefore that dismissal decisions may also be subject to reconsideration by the Tribunal.

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Click here to download the draft rules.

Comments on the draft rules must be submitted to the Ombud Council by 16 October 2023 to admin@ombudcouncil.org.za.