Financial Sector Regulation Bill: briefing; Credit, Banking & Insurance Ombuds on Bill's impact

Meeting report

Introduction by the Chairperson
The Chairperson noted that the day’s meeting was part of taking the FSRB through various phases. He welcomed the Ombuds family. It was the first time that the Ombuds would be met with, also for the Appropriations Select Committee. That Committee had the same Members, with only a different Chairperson. The Ombuds had to comment on the effect that the Twin Peaks legislation would have on it. He welcomed National Treasury (NT) and noted that Mr Roy Havemann informed him that he was out of the country. He said that NT would take the Committee through amendments to the FSRB. It had already been done on Friday 3 February, but all Members were not present then. There was an apology from Ms B Mathebula (EFF, Limpopo). He introduced the Members of the Committee present and said that he represented the Northern Cape. The Northern Cape was the biggest province in SA, but the population could fit into the Cape flats. It was a reality that had to be dealt with, and NT was aware of challenges like service delivery distances. He invited NT to take the floor first.

National Treasury: Revisions to the Financial Sector Regulation Bill (FSRB)
Ms Katherine Gibson, Chief Director: Financial Sector Conduct and Ms Jeannine Bednar-Giyose, Director: Financial Sector Legislation and Regulation, National Treasury, presented. There were three revisions that were adopted by the Committee, but were not included in Bill 34-2015 as adopted by the National Assembly. The change from the original formulation for 58(2) was related to the Financial Sector Conduct Authority regulation and supervision of a financial institution’s conduct in relation to the provision of credit under a credit agreement. The term only was added (in respect of those matters referred to in section 108).

The revision to 106(5) resulted in a reformulation that read: 106(5)(a) in relation to a credit provider regulated in terms of the National Credit Act, a conduct standard may only be made in relation to a financial service provided in relation to a credit agreement and matters provided for in section 108. (b) A conduct standard referred to in paragraph (a) may only be made after consultation with the National Credit Regulator.

There was an insertion under Schedules – Financial Markets Act, which resulted in the new formulation: (b) manage and process the transactions from the date the central counterparty interposes itself between the counterparties to transactions becoming the buyer to every seller and seller to every buyer to the date of fulfilment of the legal obligations in respect of such transactions;
 
The Finance Standing Committee had deliberated on the issue of the need for reasons to be provided to financial customers when an account was closed, or when a financial institution refused to provide a financial product. The proposed amendment would result in clause 106(3)(c)(v) including (aa): that disclosures had to be made to the financial customer; and (bb) that any refusal, withdrawal or closure had to be reported to a financial sector regulator.

The Finance Standing Committee was currently reconsidering the provisions relating to inspections in terms of section 45B of the Financial Intelligence Centre Act, 2001. Changes relating to inspections and investigations might be proposed to the Finance Select Committee during deliberations.

Discussion
Mr T Motlashuping (ANC, North West) remarked that it was not only regulation that had to be talked to, but also services to the people. South Africa had a bitter past. Regulation also had to change lives, for the better, also for South Africans in the future. He felt that regulation could have an impact in future to improve socio-economic conditions and help create better lives for people. One could not tell a constituency that regulation applied only to some sectors. He asked about the impact of change, and what could be achieved.

Ms Gibson replied that 10 million people had started to default on debt, of which three or four million were heavily indebted. There was extreme lending abuse. She said that the Credit Regulator was working with NT and the Department of Justice to curb such practices. The Credit regulator was taking actions that looked like small changes, but it ensured that where there were multiple regulators and this ensured that the jurisdictional boundaries were clear. There could be gaps if credit was not regulated holistically or duplication if two regulators were setting similar task standards. It had to be clear which authority had the powers to set standards for credit providers. Regulated financial institutions had standards to protect.

The Chairperson noted that the issue would be taken to public hearings. He welcomed staff from the Ministry. He remarked that the term “Ombudsman” was used. He asked why the term “Ombud” was not used instead. He asked that it be included in the minutes that future oversight visits also had to include visits to the Ombuds. It could be fitted in during the visit to the Reserve Bank in Gauteng.

Briefing by the Long-term Insurance Ombudsman
Judge Ron Mclaren, Long-term Insurance Ombudsman, noted that the voluntary financial ombudsman scheme was recognized by statute. He said that there was an independent Ombudsman Council. Complaints arising from policies which included insured life, funeral, credit, disability, health and investment policies were resolved free of charge. The Ombudsman was independent and committed to equity through jurisdiction principles. He explained that rules regulated the resolution process which was through mediation, failing which determination would take place. He said that 37% of cases and transfers were resolved wholly or partially in favour of complainants. There were challenges related to poor complaints handling by insurers. The FSRB was aimed at improvement through prescribing fair customer treatment and policy holder protection rules.

Discussion
The Chairperson remarked that chapter 14 of the FSRB prescribed that the Ombudsman function had to be cooperative and coordinated. He said that NT could reply later about the role of the Ombudsman Council. The Ombudsman Council had a Chair and a function, but the Bill did not state who else served on the Council therefore NT could reply to that.

Briefing by the Banking Services Ombudsman
Advocate Clive Pillay, Banking Ombudsman, said that the aim of the Banking Services Ombudsman was to provide banks and customers with a quick and effective resolution service. The assessment of a case involved looking at international good banking practice, and case law. He said that complaints had a timeframe to be resolved within four months but 74 % of complaints were resolved during the assessment stage, which was within 35 days. All cases were closed within a maximum of 52 days. Ombud services could be accessed by walking in or through referral or the call centre. He said that as banking became electronic, internet complaints were bound to escalate. It had to be assessed whether the bank had treated the customer fairly. The biggest complaint was about the lack of clear and understandable information. Banks were visited and informed about that. It acted as an early warning system. The Banking Services Ombudsman did not report to the bank, but to an independent Board of Directors. Simpler cases could be dealt with by telephone, and electronic mediation was currently possible.

Briefing by the Short-term Insurance Ombudsman
Advocate Deanne Wood, Short-term Insurance Ombudsman, highlighted that the Ombud provided a “no-risk” mechanism, free to consumers. It was an independent entity and insurers and consumers could appeal to an internal appeal tribunal. She said that it was not legal advice. The Ombud had limited jurisdiction, as it could only deal with claims under R2 million, except for home owners, where the limit was R4 million. Insurance was mostly for homes and home contents, and motor insurance. She said that there was good participation by insurers, as it was obligatory. The turnaround time for complaints resolution was 91 days. Consumer education and awareness was encouraged and there was publication in the media and advertising. She noted that the staff workload was among the highest in the world. Funds were limited, as the Ombud was an Non-Profit Organization (NPO). Insurance statistics were published in the Annual Report, which could be found on the website. She felt that the Ombud had an impact on the industry.

Briefing by the Credit Ombudsman
Mr Nicky Lala-Mohan, Credit Ombudsman, said that the Ombud concentrated on credit in the non-banking areas. He said that blacklisting was politically charged, and it had to be changed. The Ombud was accountable to an independent council and the majority of the council was not industry people. The rights of consumers were balanced with those of subscribing members. Members had to abide by Ombud recommendations, but consumers could seek redress elsewhere. He said that an amount of R10 million was saved for the consumer in the previous year. The Ombud worked with poor people who were vulnerable to reckless lending. The average days to close cases were 52. He felt that a bad credit record could keep a person out of the economy. The credit provider had to disclose for the credit record to be fixed. Consumers did not know their rights. He stated that South Africa was a consumption based society where people bought on credit. A total of 10 out of 21 million credit active consumers were over-indebted. Consumers had to be assisted with historical debt.

Mr Lala-Mohan briefed the Committee on the impact of the FSRB. He said that the Bill would support a unified regulatory approach, and ensure continuity of service to the financial customer. He said that the raising of awareness among laypersons was enshrined in the Bill. Industry Ombuds had to inform members of the scheme. He highlighted that financial institutions had to provide information about Ombud schemes and financial services had to belong to Ombud schemes. The Chief Ombud had the right to do site inspections and the Ombud Council could assign complaints to a scheme. The Ombuds had objected to the term Chief Ombud. It was mostly an administrative function. The Chief Ombud did not have the capacity to deal with cases.

Discussion
The Chairperson remarked that it was an informative first engagement. He asked how the message of the Ombud was being spread in rural areas, in the northern and Eastern Cape and KZN.

Mr S Mohai (ANC, Free State) said that he appreciated the information, which gave insight into how the Ombud operated. He said that with reference to the last presentation, Parliament could take legislation forward. Issues were spelled out and there was substantive information for Parliament to deal with the issues. The Ombud had to appreciate that finance, banking and insurance were historically untransformed. Insurance was often predatory. There were issues of profit maximisation and there were areas where consumers did not understand their rights. Insurance had robust marketing strategies and the Ombud played an important recourse role. He said that the question was what recourse there could be if there was no agreement. When matters were taken to court, issues of resources came into play as people failed to understand the details of agreements. He referred to the Ombudsman Office structure and asked if services were rendered by outside attorneys, or if there was internal capacity.

Mr F Essack (DA, Mpumalanga) referred to slide 3 of the Long-term Insurance Ombudsman presentation. Reference was made to an independent external assessor. He asked who would be liable for the cost, and where the money would come from. He asked if there were terms for measurement of quality control. He asked Adv Pillay what was implied by equity jurisdiction. Slide 4 stated that the percentage in favour was 24%. The Ombuds had explained that materialism had become a way of life and there was no culture of savings. Children had to be educated at school. There had to be on-going communication on how to achieve that.

Mr Motlashuping remarked that the trend to materialism did not matter to the have-nots. South Africa was not a normal society. He referred to slide 7 of the Banking Ombuds presentation. He asked how Ombud services were utilised in a province like North West. It was said that the Ombuds worked with the Post Office because they provided banking services. Oversight of the Ombuds was part of the Committee programme. He asked that with regard to long term insurance, if offices were only accountable to the Ombud Council. He asked about the powers and functions of the Council and how Parliament could play a role. He asked to what extent the Ombuds had to account to the Public Finance Management Act (PFMA) over the preceding five years of operations.

Mr O Terblanche (DA, Western Cape) remarked that the briefings were informative, but he was concerned when he looked at results with regard to complaints made. He asked if market research was done to determine customer satisfaction. Dealing with financial services had become cumbersome. Funeral cover topped the list. Parliament was getting complaints about it. He referred to the second presentation. The figure for formal mediation was only four. There was only one provisional recommendation and zero final recommendations. The public was not getting the assistance it needed. He referred to the third presentation. A total of R90 million was claimed back and he asked what the percentage was. For good practice worldwide 60% was a ballpark figure.he felt that if a person had to wait 60 or 90 days they could get discouraged.

Mr L Gaehler (UDM, Eastern Cape) remarked that people signed agreements without looking at the fine print. People were in trouble because of that. He himself did not have time to read the fine print. Where he was from, in the rural areas, a young man would get a credit card and use it without knowing the risks he was taking. Missing the fine print was destroying people. People who paid late were not taken off the blacklist. Companies who provided services had to remove them. He said that a lot of pensioners were the victims of card schemes. People were told to go to the police, but rightly they had to go to the bank, because it was their system. With regard to funeral schemes, he remarked that people would pay for 30 years and miss one payment, and fail to get benefits. He asked how it could be made sure that people were not overcharged and how they could be made aware of that.

Mr Lala-Mohan replied that he would deal with general questions, and leave specific ones to his colleagues. With regard to rural outreach, there was a PR team, with one in Mpumalanga, Eastern Cape and KZN. There was broad based education throughout the country. It was not specific to Gauteng. Workshops were done and there was a double impact in that staff members were also trained. The Ombud wanted a footprint in the rural areas. He said that the FSRB prescribed direct contact centres. There were statistics related to different areas, that could be given in writing but he felt that the Ombud could do more.

The Chairperson advised members to read again what was heard in Mexico.

Mr Lala-Mohan continued and said that with regard to quality control, world best practice was referred to. Independent audits were done by a retired judge. As to knowing where to go to when in trouble, the Bill stated that financial service providers had to put a name in a contract. Concerning Parliament and the PFMA, he noted that the Ombuds were funded by the industry; there was no money from government. The Bill created the Ombudsman Council. Credit providers had to pay and it was not subject to the PFMA. Accountability was to an independent board. He said that the Bill prescribed compliance with the laws of the land but the Ombudsman was not a statutory body. Such bodies had to account to Parliament. The Ombudsman interacted voluntarily with Parliament. Over-indebtedness was proved by the fact that the Department of Trade and Industry was discussing debt forgiveness.

Adv Pillay answered Mr Essack about equity jurisdiction. He said that it was to ensure fairness between parties. If the relation between the parties was governed by contract, and the Ombud found a clause that could cause hardship, that clause could be ignored. He said that the reason why only 24% was in favour of consumers was that the Ombud adjudicated disputes and to arrive at an answer there had to be fault or maladministration. If the consumer was at fault, the finding would be against him. There were a number of claims where the bank was not at fault. He said that there were an increasing number of complaints from debt-stressed people who wanted to change the structure. Such were referred to a debt counsellor. He said that with regards to only one provisional recommendation and zero final recommendations, an assessment was done first. If both parties accepted, it ended there. If not, there would be a provisional recommendation. Only after that would there be a final recommendation. Of these cases, 74% were solved before recommendations, which indicated customer satisfaction. The Ombud adjudicated disputes, bank performance was not assessed. The Ombud only assessed its own performance. He stated that customers were asked to complete a customer survey, which was published annually. Fair mediation between bank and customer was not always possible. Parties could be not inclined to mediate and not all matters were suitable for mediation. Compromise had to be accepted in a dispute.

Adv Wood replied that rural outreach for short term insurance was usually a contract between two parties. She said that where there was rejection of a claim, consumers were invited to approach the Ombud, and access details were given. There were workshops and the use of radio and the media, but more could be done. The road show option was explored, but funding was hard to come by. As recourse, the Ombud was an alternative to going to court. She explained that the Ombud office procedure dealt with a complaint to the last point. It could be escalated up the line and finally end up with her. If the complainant was still unhappy, there could be an appeal. There was no outsourcing for attorneys as the Ombud had experienced attorneys. The Ombud had to be a Senior Counsel or retired judge and details about the Board of Directors could be found on the website. There was a turnover rate of 27% of all complaints. The industry had schemes within itself. Some insurers employed retired judges. She highlighted that some complaints did not have a case for example if an accident occurred because of drunkenness, insurers did not have to pay. In a repressed environment there were desperate complaints. She answered Mr Terblanche about turnaround time, that due process had to be allowed for. The more complex the process, the more time was needed. A short turnaround could benefit the industry, but if there was not enough time for adequate consideration of a claim, a longer turnaround time could be to the customer’s advantage. There was money at play and the Ombud took it seriously, although it could be frustrating to the customer. Complex matters required expert and detailed consideration.

Adv Mclaren noted that the independent assessor was a retired high court judge. The judge dealt with cases on an ad hoc basis, and was appointed by the Council. When the Bill was enacted that role would fall away. Independent assessment was part of quality control as well as provisional and final recommendations. Surveys were sent out to insurers and customers about Ombud performance. He highlighted that it was not about whether customers liked the Ombud or not. The results of the last survey were published in the 2014 Annual Report, and were on the website. He endorsed what Adv Pillay had said about equity jurisdiction. A customer could pay 30 years on a funeral policy, and miss one payment, and in strict terms of the contract would not have a claim. Equity jurisdiction ignored that. Equity jurisdiction was designed so that the Ombud was not bound by the strict terms of the contract. He explained that Section 196 of the present Bill required that when an Ombud scheme was set up, principles of equity jurisdiction had to be applied. A carry-over from the Financial Services Ombud Schemes Act made it a statutory imposition that all the Ombuds adhere to that. The Board of Directors was composed of people in the community. The Board was chaired by Judge Juliana Theron, who was a member of the bench and the Supreme Court of Appeal. He had brought a copy of the 2015 Annual Report along, which contained photographs of Board members, and a brief description of their background. He would hand a copy to the Chairperson after the meeting.

Mr Nceba Sihlali, Assistant Ombudsman, said that it was important to read the funeral policy contract if there was one. He explained that some insurers had provisions for a premium holiday. If the consumer could not pay, premiums could be skipped and some insurers provided a grace period. During the time when the consumer was unable to pay, one premium could be skipped, and then there would be a double deduction. He said that Ombud marketing was done through local radio stations, TV shows and road shows, which explained what the Ombud service entailed. Most insurance companies had Ombud names. He felt that funeral policy complaints had come to an end and the majority of funeral policies were owned by black people, because funeral policies were cheap.

Ms Gibson said that it was highly important to have an awareness drive. She said that the percentage of people affected was small but the industry and the Ombuds had to recognize that there had to be coordinated impact. About reading fine print, she noted that the Ombud was just one component of consumer protection. Funeral policies had to be fairly designed.

Mr Gaehler remarked that Mr Pillay got him wrong about over-indebtedness. It was uneducated people that were being dealt with.

The Chairperson noted that there were amendments to the NCOP programme. Parliament was going through the constituency period and people had to be informed about what Parliament did. Poor households had to be informed. He advised members to read chapter 69 of the Constitution about who the NCOP could call.

The Chairperson adjourned the meeting.