The Ombud Council is facilitating the introduction of “early warning” systems that will help to prevent another property syndication complaints scenario, where the FAIS Ombud ended up closing its files on 1 000 such complaints without resolving them.
Read: Why the FAIS Ombud is closing its files on property syndication complaints
The Ombud Council has supervisory jurisdiction over the statutory ombud schemes – the FAIS Ombud and the Pension Funds Adjudicator – and the recognised industry schemes: the Ombudsman for Long-term Insurance (OLTI), the Ombudsman for Short-term Insurance (OSTI), the Credit Ombud, the Ombudsman for Banking Services (OBS), and the JSE Ombud.
The main lesson from the FAIS Ombud’s inability to resolve the complaints, which arose more than a decade ago, is that the Ombud should have decided much earlier that the ombud system was not the appropriate forum for resolving these disputes, the Council said in a statement released on 7 August.
The Council is holding discussions with all the ombud schemes to ensure each scheme implements a consistent reporting system that will track various elements of its complaints statistics, including identifying trends and spikes in the volume of different types of complaints and complaint-handling backlogs. The data will help an ombud scheme to identify, early on, cases that should be dealt with by the courts or other dispute-resolution forums.
Leanne Jackson, the Chief Ombud and the chief executive of the Council, told Moonstone the discussions with the ombud schemes about the reporting systems were part of a larger discussion about improving the effectiveness of the ombud system, including when it is appropriate for a matter to be referred to court or other forums.
She said the right balance must be found between ombud schemes not ending up in the same position as the FAIS Ombud did with the syndication complaints and the ombud system being compromised because schemes too readily decide that cases are too difficult to resolve and refer complainants to court, which would defeat the entire purpose of the system.
The reporting system discussions also include the FSCA, to ensure the information provided will also enable the FSCA to identify emerging conduct risks. The Authority will then be able to decide whether these risks should be addressed through more intensive supervision, enforcement action, or regulation.
Jackson’s appointment as Chief Ombud took effect on the same date as John Simpson’s appointment as the FAIS Ombud: 1 November 2022. Both offices had been filled by interim heads.
The Council conducted a formal on-site inspection of the Office of the FAIS Ombud in December last year, and the property syndication complaints were a key topic in the discussions about the risks and challenges facing the Office. The Council did not provide the FAIS Ombud with guidance on how to address the complaints, as this is not its role, but they did discuss the potential options, Jackson said.
Jackson emphasised that the Council does not have the authority to intervene in how the ombud schemes should handle cases or decide complaints, including whether complaints should be dismissed.
The Council, which started operating in 2021, is not an appeal body to which consumers who are unhappy about the outcome of a complaint can escalate their cases.
Its oversight responsibilities relate to ensuring that the various ombud schemes are abiding by their own rules and the relevant legislation and to monitoring the effectiveness and efficiency of the ombud system in general.
Need for an integrated ombud system
The difficulties that arose with resolving the property syndication cases reinforce the argument for the consolidation of the ombud system and for the FAIS Ombud not to be separate from the ombud schemes that address complaints specifically related to product providers, Jackson said.
As Moonstone reported earlier this year, the Credit Ombud, the OBS, the OLTI, and the OSTI are aiming to merge into one ombud scheme by 1 January 2024.
The amalgamated scheme, likely to be known as the National Financial Ombud, will later include the JSE Ombud and, once the necessary legislation is passed, the FAIS Ombud.
Read: Single Financial Ombudsman scheme set to go live in 2024
The amalgamation is in line with the findings of a diagnostic study of the financial ombud schemes in South Africa conducted by the World Bank in 2020, at the request of National Treasury.
The results of the study, which were published in 2021, recommended that the fragmentary ombud system – comprised of statutory schemes and voluntary industry schemes – be consolidated into a single scheme, with the temporary exclusion of the Pension Funds Adjudicator.
An integrated ombud system operating according to the same principles is particularly necessary in the context of complaints relating to financial advice, which involve at least three parties: the consumer, the adviser, and the product provider. When adjudicating these complaints, it may be difficult to draw a distinction between which aspects of the case relate to the advice and which to the product, particularly in the context of the complex and interconnected distribution models used in South Africa, Jackson said.
Ombud schemes should be informal
Perhaps the overriding factor that resulted in the inability of the FAIS Ombud to resolve the property syndication complaints was that the Financial Services Tribunal did not believe the Ombud had adequately addressed the material disputes of fact, and it was necessary for causation to be determined according to established legal principles before an adviser could be found liable for a complainant’s loss. The same complaints were sent back and forth between the two bodies without their seeing eye to eye on either of these issues.
Moonstone asked Jackson whether this disagreement indicated that legislative or regulatory intervention was required to define how the FAIS Ombud and the Tribunal arrived at their conclusions.
Jackson said there has been a long-running debate over whether it is desirable for legislation to codify complex areas of the common law, and it was up to the relevant authorities to make a policy call in this regard. As the property syndication cases highlight, establishing the causal link between FAIS Act transgressions and consumer prejudice is one of the areas where these difficult legal questions arise.
But the defining principle of an effective and expeditious ombud system is its ability to resolve most complaints through processes that are much less formal than the courts – through conciliation, mediation, and engagement between the parties, she said.
Even having to issue a formal determination should be the exception, while appeals against determinations should be a last resort because the aim is to achieve finality within the informal processes of the ombud scheme.
The more rigid and prescribed an ombud scheme’s processes and jurisdiction, the less likely it is that the scheme will be able to finalise a complaint without reaching a formal determination.
The problem with the property syndication cases was that a number of complaints reached the Tribunal stage but still without finality being achieved, even if finality meant concluding that the complaint could not be resolved within the ombud system and should be referred to the courts, Jackson said.
It was also important to note that the property syndication complaints arose more than a decade ago when the regulatory framework for financial sector conduct was not as intensive as it is now – and it will be more intrusive once the Conduct of Financial Institutions Bill (Cofi) comes into force.
It was better for legislation to aim at preventing consumers from being harmed in the first place, by defining what is and is not appropriate conduct, instead of prescribing too rigidly what ombud schemes should and should not be doing, Jackson said.
Should the Tribunal have to remit decisions?
The Tribunal sent back the same determinations to the FAIS Ombud because, in terms of the Financial Sector Regulation Act (FSRA), it cannot set aside the Ombud’s decisions and substitute them with its own. Moonstone asked Jackson whether she thought the FSRA should be amended so that determinations that are set aside do not have to be remitted to the FAIS Ombud.
Jackson said this issue was among the policy discussions within Treasury as part of broader ombud system reform proposals, and deciding on a sensible approach was not as straightforward as one might assume.
Where the problems with a determination were clear cut, she said, it did not on the face of it make sense to remit a decision simply for the FAIS Ombud to reach the same conclusion as the Tribunal. This only resulted in unnecessary delays in achieving an outcome.
On the other hand, the process followed by the Tribunal was more formal and legalistic than that followed by the ombud scheme. The aim, as far as possible, is for decisions to be made within the scheme, particularly because the ombuds are required to give weight to achieving an equitable outcome rather than making a decision based solely on the letter of a contract.
A further consideration is that the staff of the ombud schemes should have practical industry-related expertise, and they can apply their knowledge of how financial products and services work when making equitable recommendations or decisions – which may not always be the case at Tribunal level, Jackson said.
A potential middle path would be to grant the Tribunal the discretion to close some cases and to remit others, based on prescribed criteria. With the latter, the Tribunal could state its concerns about a determination and provide an ombud scheme with direction on how to address them, Jackson said.
What must be avoided is decisions bouncing back and forth without either the Tribunal or the ombud changing their stance, she said.
Legislation required post-Cofi
The Credit Ombud, the OBS, the OLTI, and the OSTI decided voluntarily to consolidate in recognition of where things were moving, Jackson said. This voluntary amalgamation was taking place under the existing financial sector laws and did not require legislative amendments.
Treasury and the Council support the amalgamation because it aligns with the goal of a consolidated financial ombud system.
Amendments to legislation will, however, be required to bring the FAIS Ombud within a consolidated ombud scheme, and this is not planned to be achieved under Cofi.
Cofi will bring the FAIS Ombud and Pension Funds Adjudicator fully within the ambit of the FSRA instead of being governed by the FAIS Act and the Pension Funds Act, respectively, and will make some other changes to better align the statutory frameworks of the two schemes.
Treasury has indicated that only once Cofi is finalised will omnibus legislation be introduced to effect the amalgamation of the FAIS scheme and other ombud system reforms, Jackson said.
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