Ombud for Financial Services Providers: briefing

Meeting report

PUBLIC FINANCE COMMITTEE

Office of the Ombud for Financial Services Providers (Presentation One)
Office of the Ombud for Financial Services Providers (Presentation Two)
Office of the Ombud for Financial Services Providers (Presentation Three)
Office of the Ombud for Financial Services Providers Annual Report 2003/04 (email [email protected])

Website: www.faisombud.co.za

SUMMARY
The Office of the Ombud for Financial Services Providers (FAIS) gave its first briefing to the Committee on its activities. The FAIS Ombud had became jurisdictionally competent on 30 September 2004, although it had been operational before that date. By 30 September 2004, financial service providers should have been registered at the Financial Services Board in order for the FAIS levy to be raised from them. As a result of delayed applications, the FAIS Ombud had had to raise a loan from the Financial Services Board in order to fund its operations.

Members probed the high number of complaints dismissed but it was explained that many complaints had to be dismissed as they related to events before 30 September 2004 and could not be dealt with by this Office. While some members from the opposition parties strongly voiced their disappointment over the low number of cases resolved, the rest of the Committee were largely in agreement that the FAIS Ombud was performing well, given the length of operating time as a jurisdictionally competent institution. Both the Committee and the FAIS Ombud committed themselves to establishing criteria according to which the Ombud could be meaningfully evaluated in the future.

MINUTES

Ombud for Financial Services Providers briefing
Mr Charles Pillai (FAIS Ombud) noted that since the early 1980s, there had been a number of voluntary bodies that dealt with consumer complaints over financial service providers (FSPs). These were established and funded by subscribing members of the financial services industry. The Office of the Ombud for Financial Service Providers (FAIS Ombud) was the first statutory body to serve such a function. It had been brought into being by the Financial Advisory and Intermediary Services Act of 2002, in response to the Masterbond saga.

Its emphasis was on resolving complaints in an informal, economical and expeditious manner. The FAIS Ombud strove to lend support to FSPs who underpinned their operations by morally accepted values. More than a hundred presentations had been made to FSPs to educate and get their ‘buy-in’.

FAIS Ombud challenges were identified as follows:
- the creation and maintenance of a performance-driven culture;
- the clarification of consumer and industry confusion;
- the establishment of procedures for the day-to-day management of the office; and
- the technical nature of its work.

Opportunities included the current favourable external climate for the development of the FAIS Ombud; the imminent strategic mapping and profiling of its office; and the entrenchment of its powers in the industry.

Assistant FAIS Ombud briefing
Ms Noluntu Bam (Assistant FAIS Ombud) continued that the office had received 1 403 complaints since its inception. Though it became jurisdictionally competent on 30 September 2004, the FAIS Ombud had started resolving complaints before that date. It did this through conciliation and by obtaining express consent from the parties involved. Still, a large number of the 879 complaints had been dismissed because the FAIS Ombud was not jurisdictionally competent at the time.

Of the remaining complaints, 251 were still pending, 30 were currently being investigated and 162 had been referred to other forums. Eighty-one complaints had been resolved in favour of the consumer resulting in R1.04 million finding its way back to the consumers’ pockets. Since obtaining jurisdictional competence the FAIS Ombud had made two judgements. Both were against one of the country’s commercial banks. The bank had notified the FAIS Ombud that it would be appealing at least one of the judgements.

Trends indicated that some FSPs had little regard for clients’ interests and some had little understanding of the products they were selling. A strong commission bias amongst some FSPs also meant that consumers often received inappropriate advice, leading them to purchase products that they did not need. For the same reason, FSPs were sometimes deliberately misleading clients about product or product option specifics.

FAIS Ombud General Manager briefing
Mr Michael Gcwabaza (FAIS Ombud General Manager) said that the FAIS Ombud had three main sources of funding: the FAIS levy, case fees and funding from special projects such as donor funding. The FAIS levy had been collected from registered FSPs by the Financial Services Board (FSB). As a result of delays in this process, the FAIS Ombud had had to obtain a loan from the FSB to finance its operations. The loan of R7.7 million would be repaid over a two-year period. It was expected that the FAIS Ombud would enventualy experience a budget surplus rather than any shortfalls, as was the case at the moment.

The FAIS levy funded both the FAIS Department within the FSB, as well as the FAIS Ombud. The FAIS Ombud’s annual operating budget would come into effect subject to the approval of the FAIS Committee of the FSB only. The FAIS Ombud might charge case fees to implicated FSPs of R1 000 per case. Donor funding would be pursued on a need basis. A public relations official would be appointed for this purpose in April 2006.

The FAIS Ombud’s financial year ran from April 1 to March 31 in accordance with most public institutions. According to the FAIS Act, the Ombud was the accounting officer and the FSB the accounting authority. For the 2003/04 financial year the FAIS Ombud’s accounting function was outsourced to Price Waterhouse Cooper’s and the FSB. Internal capacity had since been created and the accounting function was now being performed in-house. The FAIS Ombud had received unqualified audit reports for both the 2003/04 and 2004/05 financial years. An internal audit function was currently being developed in conjunction with the FSB and external auditors.

Discussion
Mr M van Dyk (DA) asked for clarification on the "wrong-doings" of FSPs that the FAIS Ombud was referring to in its 2003/04 Annual Report. He noted that the figures supplied indicated that the FAIS Ombud had resolved only 5.7% of the complaints it received; and, that the value of its resolutions was equal to the price of one house only. He put it to the FAIS Ombud that it was ineffective and questioned the need for its existence.

Mr Pillai replied that the kind of "wrong-doings" referred to, were the kind of negligence and ‘mis-selling’ seen in the Masterbond saga. He played down the relevance of the number of complaints resolved in relation to the number of complaints that had been received. Instead, he emphasised both the importance of procedural correctness in dealing with complaints, and the significance of the number of cases that had been processed, regardless of their outcome.

Mr S Asiya (ANC) asked whether there were any cases beyond arbitration. He said that there were supposed to be consumer courts, and asked where they were. He also wanted to know where and how the FAIS Ombud was educating consumers about their rights.

Mr Pillai responded that consumer education was the statutory responsibility of the FSB, not the FAIS Ombud, but that the two did liaise and cooperate in this regard. The FSB had a dedicated consumer education department. Different educational booklets had been distributed to Life Standard Measurement (LSM) groupings one to four, five to seven and eight to ten, respectively. In addition, the FAIS Ombud saw to it that the determinations of cases that they presided over got published as widely as possible. They had also participated in consumer education road shows with the FSB.

Mr I Davidson (DA) asked how many FSPs were registered and asked for an estimate on how many were not registered. He related his impression that there was an extensive backlog in the processing of applications for registration by FSPs and wanted to know why this was so. He then asked for an explanation of the ramifications for FSPs that were not registered. Were any licences revoked of the FSPs who were ruled against in those 81 complaints? Finally, he questioned the ethics behind the FAIS Ombud’s expected, eventual budget surplus, given that the FAIS levy was in all probability being downloaded onto the consumer by FSPs.

Mr M Malimabe (FAIS Head of Department: FSB) responded that while the FAIS Act was being drafted, the estimate was that there were between ten and twenty thousand FSPs operational in the country. Regardless of its efforts to educate and communicate the importance of registration to the industry, applications had come in very slowly at the beginning of the registration campaign. Then, towards the effective date (30 September 2004), the FSB was inundated with applications regardless of the exemption of penalty for late applications. The FSB did create extra capacity to deal with the applications, but the process had been slow.

In total, fourteen thousand applications had been received. Of these three thousand applications had yet to be finalised. These consisted mostly of bad quality applications, made just before the cut-off date. Follow-up communication by the FSB had met with little response from these applicants. The requirement of proof of educational qualifications of FSPs seemed to be the prohibitive factor for these late applicants. Of those applications that had been finalised, six thousand licences had been issued. Of the eighty applicants that had been rejected, two appeals had been lost by the FSB.

With regards to the revocation of licences, Mr Pillai cited a case where the victim of the illegitimate practice had not wanted to lodge a complaint. Not being able to act as a result, but having had knowledge of the case, the FAIS Ombud referred it to the FSB, with the result that the implicated FSP's licence was revoked. There was at least one other similar case. The FSB took notice of all determinations of the FAIS Ombud, and took the necessary action when it was deemed necessary.

Mr Gcwabaza pointed out that his earlier reference to a budget surplus was incorrect. He meant that on the repayment of the loan, the organisation would be experiencing no deficit and would be operating a balanced budget. The funding allocated to the FAIS Ombud by the FSB would be sufficient to cover its annual operating budget only.

Both Mr Davidson and Ms B Hogan (ANC) required further clarification on the reasons behind the loan that the FAIS Ombud had had to raise from the FSB.

Mr Pillai stated that the loan was necessary, mostly because of the slow progress in finalising the FSPs applications for registration. The Office of the FAIS Ombud expected a large amount of funding to be transferred from the FSB in November and it expected to pay off the loan over the next two years.

Ms Hogan noted that the institution had been operational for only less than a year and did not deal with the registration of FSPs. The need now was to establish criteria by which an ombud’s office could be evaluated, and she asked the FAIS Ombud what these would be. Noting that a high number of the dismissed cases were because of jurisdictional issues, Ms Hogan expressed her concern that there were still a high number of disaffected consumers that did not have recourse to an entity with the necessary jurisdiction to address their particular problem. Finally, she expressed her reservations about the pursuit of donor funding, citing the high probability for conflicts of interest to arise.

Mr Pillai committed the Office of the FAIS Ombud to engage with the Committee on establishing criteria for its future evaluation and asked the Committee for its guidance on the process that should be followed. He explained that since it had been such a short time since the Office of the FAIS Ombud had became jurisdictionally competent, it still regularly had to dismiss cases on the basis that they related to events before 30 September 2004. Furthermore, included in the 879 dismissed cases were a number of complaints that the FAIS Ombud had received before 30 September, but could not resolve as it could not obtain the express consent of the implicated FSPs. Mr Pillai stated that the issue of donor funding would be approached with great circumspection, and would be subject to the approval of the FSB and the FAIS Committee.

Both Ms Hogan and Mr M Stephen (UDM) acknowledged the importance of the FAIS Ombud’s role in restoring financial services consumer confidence.

Mr Stephen asked why so many cases referred to other forums. He expressed the opinion that most retirement annuities were mis-sold and asked what the FAIS Ombud’s stance was on this. Finally, he wanted to know if the rulings of the FAIS Ombud had had any effect on the way that FSPs did business, or the products that they sold.

Mr Pillai responded that the industry had been adjusting its behaviour, and that they had also received positive feedback about the clarity that the FAIS Ombud had provided on the issues at stake in the complaints with which it had dealt.

Ms Bam told the Committee that if complaints resulted because of consumer dissatisfaction related strictly to conditions of service and indicated no possibility of wrong doing on the side of the FSP, then these would be referred to relevant, industry sponsored ombudsman. Due to the relationships that the FAIS Ombud had established with other ombudsmen (such as the Short Term Insurance Ombudsman, the Long Term Insurance Ombudsman and the Banking Services Ombudsman), it had become easier to refer these complaints directly to them, rather than leave it to the complainants to do so.

As the FAIS Act specifically denied the FAIS Ombud to have the mandate to provide advice about, or make pronouncements over, specific products offered to consumers by FSPs, it would be inappropriate to do so. In the absence of a complaint, the FAIS Ombud could not become involved. There were, however, instances of FSPs modifying their products as a result of the FAIS Ombud’s resolutions.

The meeting was adjourned.