Financial Services Ombud Schemes Bill: Informal briefing

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Finance Standing Committee

17 August 2004
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
18 August 2004
FINANCIAL SERVICES OMBUD SCHEMES BILL: INFORMAL BRIEFING


Chairperson:
Dr R Davies (ANC)

Documents handed out
Presentation by National Treasury on Financial Services Ombud Schemes Bill
Financial Services Ombud Schemes Bill - as certified by the State Law Advisor

SUMMARY
The presentation by National Treasury outlined the history of the Bill, the characteristics of an ombud scheme, the objectives of the Bill, operational and institutional issues in the Bill and an overview of important sections of the Bill.

During the discussion Members sought clarity on the formulation of Clause 5 which dealt with the number of members of the Council, the independence of the Council if it fell under the Financial Services Board (FSB), the merits and demerits of housing the ombud within the FSB and the steps the Council could take to properly deal with a delinquent financial institution. Clarity was sought on whether the Bill obliged the sector to make its clients aware of the appropriate ombud to approach in the case of a dispute, whether the Bill placed a limitation on the remuneration received by Council members, whether the penalty for delinquent Council members could be increased and the quorum requirements of meetings of the Council.

MINUTES
Presentation by National Treasury
Mr Baron Furstenburg, Deputy Director: Financial Services, conducted the presentation (document attached) which outlined the history of the Bill, the characteristics of an ombud scheme, the objectives of the Bill, operational and institutional issues in the Bill and an overview of important sections of the Bill. He made the following additional points:

Clause 10: Requirements for recognition
He stated that an important characteristic of an ombud scheme in Clause 10 was that the decisions made would be binding on the financial institution but not the consumer, and thus his right of redress to a court of law is not impeded. In a situation in which the obmud makes a ruling against a company but it refuses to abide by the ombud's decision, each ombud has various forms of redress such as expelling that member from the entire ombud arrangement.

Clause 13: Jurisdiction
This clause was inserted following the Minister's instructions for a clear demarcation of jurisdiction between statutory and voluntary ombuds, because he didn't want the case where their jurisdiction overlapped because this caused confusion for the consumer. Furthermore, the uncertainty as to which ombud had jurisdiction to hear the matter would create forum arbitrage because the consumer could then take his complaint from ombud to ombud. This situation of forum shopping between different ombuds was unacceptable.

Discussion
The Chair asked whether the institution must be recognised by the Financial Services Ombud Scheme Council (the Council) to be able to function as an ombud scheme.

Mr Furstenburg answered in the negative. He stated that the ideal of the Bill was that the institution must be recognised in order to operate. The Bill contained a transitional provision which allowed voluntary schemes that were currently in operation to continue to function for a period of 18 months after the promulgation of the Bill.

Mr Y Bhamjee (ANC) stated that no reference was made to the number of people that would constitute the Council, yet the presentation referred to five members.

Mr Furstenburg responded that this was addressed in Clause 5(3). He stated that Mr Bhamjee was correct that it did not stipulate the exact number that must be part of the Council, but only stipulated the minimum members.

Mr K Moloto (ANC) sought clarity on the independence of the Council if it functioned as a committee of the FSB.

Mr Furstenburg replied that the important points here were that the functions of the FSB were to regulation the financial services industry for all, but especially for the consumer. Secondly, this was an arrangement of voluntary schemes established by the industry players themselves. The important issue was that the Council was independent from those very institutions who were subscribing to the arrangement. The FSB was not a subscriber to the arrangement and sat outside the arrangement as the regulator or overseer.

Mr Gerry Anderson, FSB Deputy Executive Officer: Market Conduct and Consumer Education, responded that the FAIS ombud was financed by the FSB, and the statutory ombud was in fact "the FAIS ombud with another hat". The financing of the small additional operation that must be financed and maintained would, pragmatically and logically, be financed by the FSB. The ombud would be financed by the entities that currently were financed by the entities that were currently being licenced in terms of the FAIS Act as part of the annual levy.

Ms R Taljaard (DA) asked Treasury to explain the merits and demerits in housing this ombuds scheme within the FSB, and whether any tensions arouse between the existing ombuds and the FSB in the process of making that decision.

Mr Louis Wessels, FSB: Legal Department, replied to both Ms Taljaard and Mr Moloto's previous question by stating that it was a sound constitutional principle that ombudsmen should be distanced from the regulator and from government, and it was for this reason that there was an 'extra layer' between them as referred to by Ms Taljaard. He stated that he himself questioned whether the Bill should in fact stipulate that the Council would be a committee of the FSB. There were other examples of such proposed arrangements which function as committees, such as the Insider Trading Directorate. This should be relooked.

Mr Anderson added that the fact was that the FSB was not funded by the state. In the case of the Pension Fund Adjudicator was that a small portion of the levies levied on pension funds for regulatory purposed is set aside to fund the Pension Fund Adjudicator's Office. The same approach has been followed in terms of the FAIS ombud, and there would thus not be a budget vote and the finances do not emanate from the state.

Mr Furstenburg stated that Treasury has already arranged with other institutions that operated under the FSB banner. This was a better arrangement than establishing a whole new body because this would in fact impose greater cost on the consumer, whereas the institutional arrangement was already present under the FSB in other arrangements.

Mr Moloto stated that he had very little information on consumer bodies in South Africa, and asked how Treasury would ensure that representatives of clients would also be part of the Council.

Mr Furstenburg replied that the current formulation of the Bill, as was the case in many other pieces of legislation, the Minister would use his discretion in deciding who would be appointed. He exercises the best judgement he can. The majority of the Council members must not be part of industry, but this does not necessarily mean that they must be part of a consumer body as it was not an "either/or" provision.

Mr Moloto stated that it was a struggle to get some of the reports of the ombuds in Parliament, and this must be looked into especially as the Bill stipulated that the reports would go to the Minister and the Financial Services Board (FSB).

Mr Furstenburg responded that he doubted whether the Minister would object to forwarding those reports to Parliament.

Mr Jonathan Dickson, Chief Director: Financial Sector Policy Unit, asked whether Mr Moloto suggested that this should be included in the draft Bill or whether it was a process issue.

Mr Moloto stated that Parliament's clerk of papers informed him that Parliament did receive annual reports from various institutions, but no reports have been received from the long-term- and short-term insurance ombudsmen nor the pension- and banking adjudicator. It was very difficult to get these reports in Parliament.

The Chair stated that the issue was that the voluntary schemes were currently not obliged to report to Parliament, and this was now required in the Bill.

Ms Taljaard stated that the existing ombuds were funded by their members, and questioned whether this really amounted to independence within the ombud if they were reliant on the sector which they were supposed to regulate.

Mr Anderson responded that the FAIS ombud as well as the Pension Fund Adjudicator had terms of reference which would regulate its functioning. An FSB Board Committee was involved here which consisted of a majority of outside people, similar to the proposal regarding the composition of the Council in the Bill. This FSB Board Committee only looked at the operations and not at the adjudication aspect, otherwise it would not be regarded as impartial in terms of the Constitution. It was quite important to note that, in determining the terms of reference for the FAIS ombud, there was no intention to interfere in the determination or the legal powers or responsibilities of those statutory recourse mechanism offices. It served merely to look over the funding and the operations and, in the case of the FAIS ombud, the FSB has assisted in setting up an office, has provided administrative backup and it was obliged in terms of the FAIS Act to ensure that that office was adequately funded. The FSB Board has been very careful in engaging with the two statutory ombuds' offices that have been established to date.

Mr Bhamjee stated that the quorate requirements for meetings of the Council must be spelt out in the Bill.

Mr Furstenburg replied that Clause 6(3) dealt with the circumstances under which the decisions taken by the Council would be valid or invalid.

Mr Wessels agreed with Mr Bhamjee.

The Chair stated that this matter would be considered further at a later date.

Mr Bhamjee asked whether a limit was placed on the funds received by the Council and, if this was the case, how would it be monitored.

Mr Anderson responded that this would be the purpose of the Council. The Council would be required to draw up a budget which would be presented to the FSB, in the same manner that the FAIS ombud and Pension Fund Adjudicator submits their budget. The FSB would then in consultation with either the Chairperson of the Council or its remuneration committee, agree on the budget and the FSB would then be obliged to fund it in terms of the enabling legislation. The FSB was a statutory body and its reports would be tabled in Parliament, and any extravagance would then be spotted by the checks and balances in place in the Parliamentary process.

Ms R Joemat (ANC) asked Treasury to explain the steps that the Council could take to really protect the consumer against delinquent financial institutions.

Mr Furstenburg replied that each ombuds scheme had certain rules that a subscribing member agreed to and those rules also contained provisions which penalised the financial institution if it did not comply. These included expulsion from the voluntary arrangement. The Council would then approach the scheme and request redress, but if the institution still refused to take action the Council could threaten the entire scheme.

Mr Wessels replied that he doubted whether a financial institution would renege on its firm undertaking towards its particular scheme to honour any adjudication or adjudication. Yet should this happen, Mr Furstenburg was correct that it would be dealt with by the Council. In practical terms the offending member would be expelled from the voluntary scheme and the complainant would then be entitled to have his complaint reinstituted with the FAIS ombud, and it would be an easy matter for the statutory ombud to determine because there would have been a determination by the voluntary scheme already. He assured Ms Joemat that the offending financial institution would not get away.

The Chair suggested that if an award was made on a scheme were the members agreed to bind, presumably the individual complainant would have a remedy to go to court and get a judgment to execute the decision. Perhaps the Bill should also consider whether the scheme itself should have some obligation to proceed in court on behalf of the complainant against the institution.

Mr Furstenburg stated that this was a valid point and would be taken under advisement.

The Chair asked whether either the Bill or the regulations would oblige the players in the sector to make their clients aware of the appropriate ombuds to approach.

Mr Furstenburg responded that this duty was not stipulated in the Bill but it was implied. The scheme and the Council were under a duty to inform the customer of the appropriate dispute resolution forums.

Mr Dickson added that perhaps, when looking at the conditions that a scheme would have to satisfy in order to be recognised, one of those conditions could be that they have specific steps in place that their members must make education and awareness of the scheme available.

Mr Wessels suggested that this power could perhaps be extended to the Council to ensure that this was done. He stated that the FSB had a call centre to deal with such matters, and it would inform the public of such matters.

Mr Anderson stated, although it was disparate, there were numerous efforts in different areas that addressed this issue. The policy holder protection rules were currently being provised, and they required the insurance company to state where the recourse mechanisms were. The same was done in the FAIS codes. The FSB Act as amended in 2000 placed an obligation on the FSB to ensure that consumers were informed. He stated that there were thus measures in place, but agreed with the Chair that the power could perhaps be placed on the Council.

The Chair stated that the Bill stipulated that a voluntary scheme would come into operation when a majority of the members agreed to it, and asked whether this referred to a numerical majority and not to the market power they might have.

Mr Furstenburg replied that he agreed with the Chair that the adjudicator would have to refer the complaint to the appropriate forum rather than simply say "its not us", and this should be taken on board.

Mr Wessels stated that attempts were made when formulating the principles of the Bill to retain the voluntary nature of the schemes, which was the manner in which they operated at the moment. There will not be a problem if a complaint was lodged against a non-participating member to the scheme, because automatically that complaint would fall to be dealt with by the statutory FAIS ombud.

Dr P Rabie (DA) sought clarity on the meaning of the term "reasonable expenses" in Clause 7.

Mr Bhamjee asked whether the Bill imposed a limit on the remuneration received by Council members.

Mr Wessels responded to these two questions by stating that just about all the laws administered by the FSB that there was some or other independent Committee or Council in some form, which assists. It was an oversight committee in which the FSB was very astute in trying to arrive at a good mix of expertise and independence, so that the FSB was not the sole authority. These members have to be paid and were usually not members of the civil service. The Minister controlled this process. The FSB proposed that an hourly tariff be employed which would be reasonable, and this would have to be approved by the Minister. These were the checks and balances in place to regulate the payment of members.

Mr Anderson added that "reasonable expenses" related to travel expenses for example, and it would not apply to extravagant expenses.

Mr L Gabela (ANC) stated that it was important that the Council not be required to hold meetings when the decision taken may not hold because the meeting was not quorate.

Secondly, Mr Gabela asked whether it was the custom with the other similar FSB ombuds that the Registrar was the ex officio member of the Council, as was the case in the Bill. This arrangement blurred the accountability arrangement.

Mr Wessels responded that he was against this arrangement even in the FAIS ombud. It must be remembered that the Council in the Bill would be a part-time council and would meet possible three times a year, and the Registrar would provide the continuity. The previous version of the Bill contained a clause which stipulated that the FSB would in fact be doing the administration of the Council, which was very convenient. The FSB's Registrar as such would of course not normally serve on such a committee, but to have the person involved on a day-to-day basis as a Council member should be guarded against.

Mr Anderson added that, as mentioned earlier, there were numerous advisory committees and basically the process was fair and it has not led to any criticism or otherwise during the 13 years of the existence of the FSB. The Registrar was usually defined as the executive officer, but in FAIS matters he would appoint his deputy to sit in his stead. The Registrar was currently an ex officio member of all the existing advisory bodies, and he was also the only executive that was also a member of the FSB board to ensure liaison and inter-activity.

Mr Moloto stated that Clause 5(1)(d) stipulated the conditions under which a member of the Council would be asked to resign. He sought clarity on the situation in which a member commits an offence outside South Africa and would thus have to resign in terms of the Bill, when that act did not constitute a crime in that country.

Mr Elias Phiyega, FBS Head: Legal Department, replied that the intention of the current formulation was to ensure that there were members of Council who were fit and proper to serve. The wording would have to be revisited to tighten it or make it clearer, but the intention of the wording was to ensure that fit and proper people served on the Council. He stated that the drafters would have to be guided by South Africa's international obligations.

The Chair stated that the suggestion perhaps by Mr Moloto was for the drafters to go back and check other comparable institutions, because the Bill cannot make the bar higher to be a member of the Council of an ombuds scheme that it is to be a Registrar of Banks, for example.

Mr Furstenburg stated that this would be looked into.

Mr Moloto stated that he was under the impression that some of the offences listed in Clause 5(1)(d) were adequately covered in the Corruption Act, and questioned the need to have it specifically included in the Bill.

Ms Taljaard agreed with Mr Moloto.

Mr Furstenburg responded that this would be corrected in the Bill.

Ms Moloto stated that the fine of R100 in Clause 5(1)(d) was way too low to merit the resignation of the member of the Council.

Mr Phiyega replied that the FSB believed this was an absurdly low penalty, and should be increased.

Mr Wessels added that the current wording was decided on by the State Law Advisors (SLA) and they must have done so for a reason. He stated that his interpretation of the provision was that all the offences contained related to dishonesty, and thus mere traffic fines would not be covered here, unless they included some form of dishonesty.

Ms J Fubbs (ANC) asked whether the Bill demands the recusal of a Council member when dealing with a complaint related to a field in which that Council member is actively involved.

Mr Wessels replied that it was such a well known principle of corporate governance that one must refrain from a matter in which one has an interest, but unfortunately if this does not happen in practice it must then be spelt out in the Bill. This must be guarded against in the Bill.

Ms Fubbs stated that quite often councils do fail because the membership becomes so low that it is very difficult to replace the member. She asked whether the Bill allowed for a nomination process or a kind of co-option when this arises.

Mr Furstenburg replied that the Bill did contain a provision which stated that no Council member was allowed to skip more than two meetings without leave of the chairperson. This was perhaps not strong enough and could be redressed. Members would be replaced at the discretion of the Minister, and would only be replaced in certain circumstances such as their resignation or commission of fraudulent activities.

Ms Fubbs asked for how long good governance principles allowed the Council to operate on a minimum quorum, especially if those members who constitute the quorum at the specific meeting were all members of industry.

Mr Furstenburg responded that this question was answered earlier and it would be considered further.

Ms Fubbs stated that Clause 16 does not really allow Parliament to exercise its oversight function, and asked whether the Bill required the scheme to make its annual report available to Parliament.

Mr Furstenburg replied that this matter was also covered earlier.

The Chair stated that he requested the tabling in Parliament was not a statutory requirement, but this would be discussed further.

Ms Fubbs asked whether the ombud would have sufficient staff and management to properly exercise its mandate.

Mr Furstenburg responded that this was an issue that ran beyond ombuds schemes and into many other areas of business and institutions. The FAIS ombud has just been established and, depending on the volume of complaints it receives, there may or may not be staffing problems. Treasury was taking all necessary steps. The FSB board itself must ensure that the ombud has the necessary operational and financial capacity.

Mr Anderson added that the Systems Amendment Bill was quite concerned with capacity and this was one of the reasons. In this specific case the FAIS ombuds structure will be in place but it was not sure what the extent of the complaints received will be. It was hoped that 12 000 - 14 000 licence holders would be involved and unknown territory was thus being entered into.

Ms Taljaard suggested that the fact that the Registrar was a member of the FSB and also an ex officio member of Council, and this could raise constitutional issues. A further constitutional issue arose in Clause 18 where the Minister only needed to consult the FSB when making exemptions, and did not have to consult the Council at all. The same applied to Clause 19 which allowed the Minister to make regulations without consulting the Council, as it only required the Minister to consult the FSB. This had to be remedied.

Mr Furstenburg replied that he did not believe it would detract from the purpose of the provision to add "in consultation with the Board and the Council". This was implied but should be stated explicitly for clarification.

Ms Taljaard questioned the prudence in allowing the Minister considerable discretion in granting exemptions in Clause 18(4)(a).

Similarly, Clause 19(b) was extremely broad in granting the Minister the power to make regulations, and questioned whether Parliament could delegate its legislative authority that far..

Mr Wessels replied that he agreed the provisions were possibly wider than similar provisions in other legislation, but in Clause 18 it may just become necessary to introduce a proper dispute resolution mechanism in relation to those financial institutions that were not subject to the Bill.

Ms Joemat proposed that the provision that dealt with the conditions that had to be satisfied to become a Council member were very vague, as it did not refer to the level of disclosure requirements to avoid conflict of interests nor the ethical code of conduct.

Secondly, Mr Joemat stated that one of the reports raised concern with nepotism within the scheme, and this must be addressed.

Mr Furstenburg responded that mechanisms must be built into the Bill to guard against this.

Mr Bhamjee stated that Point 5 of the Memorandum to the Bill stated that there would be no financial implications to the state, yet this seems to contradict the statements made during the presentation.

Mr Anderson replied that the FSB was not funded by the State. The FSB has to fund the Council and the extended statutory ombud. Funds were gathered by way of levies.

Ms Joemat asked whether this meant that the costs were then being passed onto the consumer.

Mr Anderson responded that the short answer was yes.

Concluding remarks by Chairperson
The Chair stated that issues raised during this meeting will be noted for further consideration. The public hearings on the Bill would only take place in the next Parliamentary session.

The meeting was adjourned.

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