Financial Advisory and Intermediary Services Bill: hearings & deliberations

The Council for Medical Schemes was opposed to the inclusion of health brokers in FAIS. It was submitted that the medical schemes environment first needs to be stabilised before the two environments are brought together. The regulatory framework for the medical schemes environment is currently being addressed and is at an advanced stage. The Chair ruled that this could not be resolved now and asked the FSB and the CMS to get together to come up with a solution.

The Financial Services Board presented its response to the constitutionality issues. The FSB addressed all the constitutional concerns of Adv Marcus and only disagreed with one of his views relating to the constitutionality of the respondent not having the choice to have the dispute heard by the ombud or a court of law. The deliberations then continued with the FSB taking the committee through the definition section and pointing out the proposed amendments.

MINUTES
South African Insurance Association (SAIA)
The submission was presented by Ms Caroline Da Silva, the Deputy Chief Director of SAIA.

As a background the presenter introduced SAIA as a trade association for short term insurers. There are 55 members that account for 95 % of the industry. The annual premiums collected by these members is R20 billion. SAIA has been in existence since 1973 and as the Insurance Council of SA since 1905.

SAIA supports the Bill. The Policy Protection Rules (PPR) represented the first step for consumer protection and until then there had been no regulation for the distribution channel of short term insurers business. i.e. the contact with the consumer was not regulated. Consumer education and protection is important for consumers but also for industry. There is a low level of consumer confidence and this is one of the main reasons why such a low number of cars and household are insured in South Africa.

The presenter went on to illustrate how the terminology in FAIS relates to the short term insurance industry. The insurer is the product provider. If the insurer has its own employees as representatives then the insurer is also an FSP (financial service provider). The general practice in the industry is that the Insurer is the product provider and independent broker companies are the FSPs. The FSPs employ reps and they are also called brokers or intermediaries. It is clear that in the short term industry there is no contact with the consumer.

Regarding the Relationship between PPR and FAIS, SAIA submitted that clarity is needed as to what parts of PPR will remain to ensure that industry clearly know what their obligations are.

The giving of advice is complex and covers a wide range of products and services. Health brokers do not only sell medical aid but also other kinds of health products. For this reason SAIA submits that health brokers must be included in FAIS. Holistic regulation is more effective and less costly.

All the other issues had been raised before and the presenter said she was not going to raise them again. One concern involved the fit and proper requirements. At the moment a broker may not collect premiums if there is no guarantee to protect the premiums collected. Under FAIS the only requirement is that the assets must exceed the liabilities. SAIA proposes that a dual solvency approach needs to be adopted. One standard for those who collect premiums and another for those who do not. FAIS therefore needs to be strengthened if the broker handles client or insurer funds. This is because it will be costly if insurers say brokers cannot collect premiums as FAIS is not strict enough.

Discussion
Ms Hogan commented that the FSP will be responsible for the representative. She asked if emerging brokers will have a problem with getting up to speed.

Ms Da Silva replied that insurance companies do educate brokers about the products.

Ms Hogan said that she did not refer to the broker but to the reps who would need to be educated.

Ms Da Silva clarified and said that when training is done for the FSP it is essentially the reps who receive the training.

Prof Turok wanted to know if SAIA does any self regulation.

Ms Da Silva said that the industry was not ready for self regulation and that SAIA does not do self regulation.

Dr Rabie asked if there are any international examples of the dual solvency approach.

Ms Da Silva said that in other countries there will be strict credit check but the guarantee facility was unique to SA.

Mr Wessels (FSB) said that the dual solvency will be considered in the code of conduct.

Ms Hogan wanted to know how the presenter felt about the dual solvency approach being in the regulations.

Ms Da Silva said she had no problem with that but the regulations thus far do not deal with it well enough.

Dr van Zyl (FSB) said that Clause 8(1)(b) refers to the financial soundness of categories of service providers so as a category the short term industry can be dealt with more strictly.

Da Silva commented that it must go further to deal with brokers who do not handle any money and to adopt strict measure for those who do.

Mr Mguni (ANC) asked how the consumer is protected if the broker does not hand over premiums to the insurer and the goes insolvent.

Ms Da Silva replied that this is fraud. The most likely reason that the broker kept the premiums is because he thought that he could cover claims himself. He was acting like an insurer.

Mr Wessels said that if an FSP is acting in this way the FSB will demand that fidelity cover and guarantees are obtained.

Ms Da Silva commented that if the broker places the business with the insurer then payment to the broker is deemed to be a payment to the insurer. In this scenario the consumers claims are covered. But if the business is not placed with the insurer then a fraud has been committed and the FSB would have to deal with this.

Ms Hogan asked if insurers have laid charges of fraud in such circumstances.

Ms Da Silva replied that there has been no fraud committed against the insurer.

Ms Hogan followed up her question and asked how the consumer would be protected.

Mr Wessels said that the fidelity guarantee covers this.

Ms Da Silva said that professional indemnity is for negligent advice and the fidelity guarantee is to protect the insurers money when business is placed with the insurer. If the FSP commits fraud there is a gap.

Mr Wessels said that if the FSB tells the FSP to get fidelity cover then all types of dishonesty will be covered.

Ms Hogan asked if there is a point where the insurer confirms that the business has been placed with them.

Ms Da Silva replied that PPR obliges the broker to disclose where the business is placed. Insurance companies communicate to consumers through intermediaries. Sometimes documents will be mailed straight to the consumer but everything is done through the intermediary. At the end of the day there is always going to be a problem with fraud and this is where the FSB comes in with professional indemnity and fidelity cover.

Council For Medical Schemes (CMS)
The delegation consisted of the Registrar for Medical Schemes, Mr Harrison the Head of Research and Monitoring and Mr Van den Heever. The submission was presented by Mr Harrison.

It was submitted that the reasons for the presentation was that FAIS has significant implications for the Medical Schemes Act (MSA) and the medical schemes environment. FAIS states that a health service benefit is a financial product and the CMS submits that this inclusion must be removed because the implications of the framework needs to be properly assessed.

The key concerns are the adequacy of the checks and balances and the process that has been followed in the development of the legislation and that there has not been enough consultation on the impact of it on the medical schemed environment.

The key issues are the following:
• There must be an arms length relationship between the regulator and the regulated
• There must be even participation by all parties in the development of the primary and secondary legislation
• The strengths of the regulatory framework depends fundamentally on the:
- the independence of the regulator
- the powers allocated to the registrar
- the degree to which external stakeholders can direct the decisions of the registrar
- the evenhandedness in the primary and subordinate legislation as far as the process is concerned.

The topics that the CMS covered were:
Anti - Competitive behavior
Delegations
Ombud
Exemptions
Subordinate legislation
Conflict with the Medical Schemes Act
Cost benefit analysis

In the legal opinion obtained by CMS it is stated that the definition of advice leads to unintended regulation of health administrators. The health sector and the department of health at the moment is developing the regulatory framework for health brokers.

In relation to the Medial Schemes broker market there is a legal framework that that accredits health brokers. Currently there are 7000. Administrators report that there is pressure to increase commissions to accommodate new entrants into the market. Currently a max commission of 3% plus vat is allowed. CMS is concerned that member movement is linked to broker remuneration. This is more important if groups of members move. There is no clear evidence that links member movement to broker activity but broker remuneration and incentives play a clear role. The data show that there is large scale churning.

The issue of health brokers need to be addressed in the context of the health benefit environment. Strengths and weaknesses needs to be identified within the environment. FAIS undermines this holistic approach. Structures do exist under the MSA which means that FAIS is not cost effective.

All reference to the registration of medical scheme brokers and intermediaries must be removed from the Bill. The FSB's proposal to include health brokers must be disregarded. The Use of the Ombud should be considered through amending the MSA and should not be dealt with under FAIS as far as health brokers are concerned.

Discussion
Ms Hogan wanted clarity on the position of the CMS towards a person who only sells health products and one who sells all the financial products.

Mr Van Den Heever replied that to the extent that health products are sold these persons must be covered by the MSA and the sale of other financial products must be covered by FAIS.
The summary of the CMS submission is that for the mean time health brokers must not be in FAIS. But even if they are not in FAIS the structure of the Ombud could still be improved. The medical schemes environment must first be sorted out in relation to health benefit policy.

Ms Hogan asked the CMS to explain why health benefit advisers must be out of FAIS.

The Registrar answered that the medical schemes industry first needs to be stabilized then the industry could move into a regulatory framework. There was a joint committee of the FSB and the CMS that was working well but that needed more meetings to get a strategy in place so that the FSB, medical schemes and the Department of Health could move into a regulatory environment.

Ms Hogan commented that fundamentally the CMS agrees that an overall regulatory environment is needed but first the industry needs to be stabilized and in the future it will be brought into the regulatory framework.

Mr Harrison said that in the meetings referred to by the Registrar there was an agreement reached in respect of demarcation but that the agreement till had to be implemented. The stabilization of the health environment in the context of health policy is a prerequisite for the two environments being brought together in the future. Rules exist in the medical schemes environment that are different from the rules in the short and long term insurance environment. An example is that there can be no discrimination on the basis of age. So far as the marketing of products in a health environment is concerned separate regulation is needed to ensure that the different rules are adhered to. There is no contradiction if there must be an adherence to standards applicable in different environments.

Ms Hogan referred to the case study of the Association of Health Benefit Advisers and asked the CMS how they would deal with it.

Mr Van den Heever replied that such a situation will not be dealt with in the medical schemes environment. What will be dealt with is if a product is sold for a value but the product was not worth that value. The Ombud would deal with the situation where the advice is questioned.

Mr Harrison said that the Ombud must have judicial independence and the rules that establish the ombud must not affect the independence. The requirements for independence are that:
- the ombud must have security of tenure
- there must be no interference by the executive in appointing the ombud
- there must be a degree of financial security from arbitrary interference by the executive
- there must be institutional independence with respect to matters that relate directly to the exercise of the tribunals judicial function.

Under the current framework the FSB appoints the ombud, removes the ombud, makes the rule and the ombud is financially accountable to the Board. This is different to the pension funds ombud where financial accountability is to the Auditor - General, is appointed by the Minister, the Minister cannot define a complaint and the Minister makes regulations. In the case of FAIS the Board makes rules after consultation with the advisory council.

The CMS recommends that the Ombud should be audited by the auditor - general , the Minister must appoint the ombud, there must be no relationship to the advisory committee, the minister should make regulations.

It was submitted that the ombud is a useful instrument provided that he concerns of the CMS are addressed. Then in principle the CMS would have no objection if the ombud deals with medical scheme complaints. But this must still be dealt with in the MSA and not in FAIS.

Ms Hogan asked what was contained in FAIS that was not in the MSA.

Mr Van Den Heever took the Committee through the following portion of the written submission:
"Taking account of the above, the following are not regulated by the Medical Schemes Act and would by default fall into the ambit of the FAIS Bill:
Chapter 3 of the FAIS Bill dealing with the qualifications of representatives of and the duties of authorised financial services providers in that regard.

Chapter 4 of the FAIS Bill dealing with codes of conduct regulating the conduct of financial service providers: At present no provision is made in regulation for a code of conduct for brokers and administrators, these stand to be regulated under the FAIS Bill. It should be noted that a code of conduct relating to medical scheme brokers is in draft regulation in terms of the Medical Schemes Act and will shortly be published for comment.

The appointment of compliance officers and the maintenance of records as referred to in Chapter 5 of the FAIS Bill.
The accounting and auditing requirements as referred to in Clause 19 of the FAIS Bill. Although the provisions of the Medical Schemes Act extensively deal with the requirements of auditing regarding medical schemes, the Act and the regulations promulgated thereunder do not deal extensively with the auditing requirements of medical scheme administrators.

The Medical Schemes Act and the regulations promulgated thereunder contain no provisions regulating auditors of medical scheme brokers. Such auditors would be fully dealt with in terms of the provisions of the FAIS Bill.

Part 1 of Chapter 6 of the FAIS Bill making provision for an ombud for financial service providers. Such ombud has the power to make a determination which is deemed to be a civil judgement of a court of law (Clause 28(4) of the FAIS Bill), the Medical Schemes Act and the regulations thereunder do not provide for an ombud or a person comparable with an ombud having the powers of the ombud as contained in the FAIS Bill. Medical scheme administrators and brokers would therefore be subject to the powers of the ombud as referred to in the FAIS Bill. This could in due course erode the powers of the Registrar of Medical Schemes or the Council for Medical Schemes to effectively deal with any complaints relating to medical scheme administrators or brokers as the powers of the ombud established in terms of the FAIS Bill, are far reaching.

In terms of the definition of "complaint" as contained in section 1(1) of the Medical Schemes Act, same in any event does not include a complaint relating to the action of brokers. As the FAIS Bill is worded at present, all complaints relating to brokers would therefore be dealt with in terms of the structures set up by the FAIS Bill.

Clause 33(2) of the FAIS Bill providing for the Registrar of Financial Services Providers to institute action in any court against a financial services provider for payment of an amount determined by the court as compensation for losses suffered by any person in consequence of a contravention of the Act. No comparable clause is in the Medical Schemes Act.

Clause 34 of the FAIS Bill providing for the Registrar of Financial Services Providers, after consultation with the Advisory Committee, to declare a particular business practice to be undesirable. A similar provision exists in the Medical Schemes Act. Given that the guiding principles of the two Acts differ, a conflict could exist between what is regarded as an undesirable business practice in the two environments.

Clause 38 of the FAIS Bill providing for no application for the acceptance of a voluntary surrender/resolution relating to the winding-up of an authorised financial services provider, having no legal force, unless a copy of same has been lodged with the Registrar of Financial Services Providers and said Registrar has declared that satisfactory arrangements have been made to meet all liabilities under transactions entered into with clients prior to the sequestration/winding-up, or if said Registrar has declared said application or resolution being contrary to the Act.

Insofar as the rendering of financial services by medical scheme administrators and brokers is not regulated in terms of the provisions of the Medical Schemes Act and the regulations promulgated thereunder, said rendering of financial services is regulated by the provisions of the FAIS Bill. In due course this could lead to the effectiveness of the regulation of the actions of medical scheme administrators and brokers in terms of the provisions of the Medical Schemes Act and the regulations promulgated thereunder, being affected."

Mr Van den Heever noted that the code of conduct for the MSA will be published shortly for comment.

Mr Harrison said that there are discussions in respect of strengthening the regulatory framework for health brokers.

Ms Hogan commented that this whole thing is confusing and starting to sound like a mess.

Mr Harrison replied that it was confusing because in so far as the health brokers are not covered in the MSA they are covered in FAIS. The simple solution would be to remove heath brokers from FAIS.

Ms Hogan said that if they are excluded then the differences in the two regulatory environments would be confusing to the public. The main point is the protection of the consumer and it now seems that the whole problem is becoming unmanageable.

Mr Harrison replied that if it is not removed the confusion will be exacerbated because the regulatory framework will continue to develop under the MSA.

Mr Van den Heever said that most of the issues in FAIS will be dealt with in the medical schemes environment and that there will be a code of conduct.

Ms Hogan suggested that this was a turf battle because it seemed as if the MSA will be the same as FAIS.

Mr Harrison replied that if the CMS relinquishes the responsibility of achieving stability at this time it would be relinquishing an important part of its mandate and that it was not a turf battle.

Ms Mgidi asked what the time frame was for consultation and implementation I respect of the issues not covered in the MSA.

The registrar said that many things are in place and that it will be debated in the portfolio committee on health on 19 October 2001. Hopefully before the end of the year the code of conduct will be published by the Minister of Health and public comment will be open for 3 months and will come into effect in the first quarter of next year.

Ms Hogan wanted clarity on what exactly the FSB stance is now.

Mr Wessels said that there is a new proposal that accreditation be taken out of the MSA and put into FAIS.

The Registrar said that this is the first time he has heard of this, the Dept of Health has not heard of this and there will be serious implications for health policy in SA.

Ms Hogan commented that it was unfortunate that 2 regulators could nor agree and that the issues come to the legislature in this unfinished fashion. The loser at the end of the day is the consumer. She asked for the parties to sort their problems out and come back to the committee. The bill has to go through and the lack of progress is an indictment on government. For the way forward we could look at passing the Bill and then attend to amendments next year. We do not want to hold the Bill back because of a squabble between the regulators.

Mr Van den Heever said that the Health Portfolio Committee is in favour of the proposals before them. The problem arose because initially the CMS was told the health brokers would be excluded and was therefore not involved in the changes that took place.

There were no further questions or comments and the Chair thanked the CMS.

FSB Presentation on the Constitutional Issues in FAIS
Mr Wessels advised that Adv Marcus (SC) had drafted a private opinion but that in the presentation the opinions of the Advocate will be referred to. As far as the constitutional submissions of the Free Market Foundation are concerned, half of them are not valid in the opinion of the Advocate, and the rest were covered in this presentation:

Clause 34 - Undesirable practices
Adv Marcus was of the opinion that this clause is unconstitutional because the registrar can prohibit business practices. This clause contravenes the guidance principles because it is too wide. Guidance must be given to the registrar to exercise this power. The FSB has therefore amended clause 34 and the amendments are taken directly from the Van Rensburg case. The constitutional court. The following principles have been included:
- the registrar must have a reasonable suspicion
- the registrar must have a reasonable apprehension that without such declaration the interests of clients or the public are prejudiced
- that if the practice were allowed the objects of the Act may be defeated.

Clause 4(3)(a)
This deals with the power of the registrar to tell an institution to stop publishing advertisements or documents that are contrary to the public interest. The Advocate was concerned that this was unconstitutional because again the guidance principles were contravened. Public interest is too wide and open to any interpretation. The FSB has amended this section to say that the material must be misleading and confusing.

Clause 8(4)(a)
This deals with the imposing of conditions on the license by the registrar is unconstitutional according to the Advocate because no guidelines are given as to how to exercise the power. The FSB has now included guidelines. The Registrar must have regard to all the facts and information available pertaining to the Applicant, the type of financial service the applicant wants to render and the category of financial service providers in which the applicant falls.

The definition of financial product is in the opinion of the Advocate to probably be unconstitutional because it empowers the registrar to declare a product a financial product in a manner that contravenes the guidance principles. Sub clause (h) in the definition is too open ended. In the opinion of the FSB and the State Law Advisers the sub clause must stay in because the registrar cannot simply act he must consult with the advisory council.

Part 1, Chapter 6 Ombud Chapter
The Advocate says that this is unconstitutional because it obliges the Respondent party to have the dispute resolved by the Ombud if the Applicant decides to use this mechanism. Because the ombud operates in the field of the public service the advocate doubts whether it is independent and impartial. An amendment is suggested by the FSB. A new clause 20(4) is added that says that when dealing with complaints the ombud is independent and impartial. Further, the current 23(4) is deleted and the new sub (4) states that the ombud is accountable to the Board only in respect of the administration of the office.

In respect of the Advocate's concern that the complainant can go the Ombud or a Court and that the respondent should also have this right. The FSB disagrees with this view and submits that if complaints are not dealt with speedily the purpose of the Bill will be defeated. The FSB is not part of the public service and the Ombud has an appeal procedure. The FSB Appeal Board is a three person board. One is a retired judge, the other is a practicing acountant with Price Waterhouse Coopers and the other is a Professor of Actuarial Science at UCT. The FSB submits that the Advocate is wrong on this point and does not propose any amendments.

Ms Hogan said that the constitutional issues have been referred to the Parliamentary Law Advisers.

Mr Wessels confirmed that the matrix is an agreed matrix that has been sent to the LOA, registrar of medical schemes, the Banking Council and other role players. All parties that made recommendations are covered in the Bill.

Deliberations on the Bill
Mr Wessels took the committee through the definition section of the Bill highlighting the proposed amendments:

"advice"
The FSB proposes to change the definition of advice to clarify that advice refers to advice of a financial nature.

"client"
The definition of client is amended to make it clear that the a client is person to whom financial advice is rendered intentionally. Without this change did not make it clear that a client is a particular person targeted for financial advice. The LOA was concerned that the amendment proposed by the FSB would exclude intermediary services rendered to groups of persons. To Accommodate the concern the FSB proposes that after "a specific person" the words or groups of persons must be inserted.

"complaint"
The LOA proposed that sub clause (c) of the definition be deleted because "has treated the complainant unfairly" is too broad and vague. The FSB is opposed to this deletion because the sub clause is inserted on the recommendation of the ombud for the long term insurance industry and is linked to clause 16(1)(d) that states that clients should be treated fairly.

There were no amendments proposed to the definition of complainant but Mr Nene (ANC) was concerned that the definition excluded a person who is complaining about an unauthorised FSP.

Mr Wessels said that it was not the intention and it will be sorted out.

Dr Van Zyl suggested that the words "in respect of an authorized FSP" be left out.

Mr Wessels said the burden on the Ombud has to be taken into account, he could be flooded with complaints.

Mr Nene said that most of the abuse takes place with the unauthorised FSPs and questioned the point if people wronged by this category of FSP cannot complain to the ombud.

Ms Hogan asked if all FSPs had to be registered.

Mr Wessels said there would be strong consequences if a FSP fails to register. If the ombud is to deal with complaints outside the regulatory net then the Board can make this decision.

Mr Nene replied that if the Board does not allow this then he wanted to know how a complaint outside the parameters of this Bill will be addressed.

Mr Wessels said that the registrar will come down heavily on an unauthorised FSP. We must be weary of giving these complaints to the ombud to deal with. Also the registrar has the power to institute a civil action on behalf of the consumer who has suffered damages in terms of clause 33.

Mr Nene wanted to know what do we call this person who will complain to the registrar.

Mr Wessels replied that the Bill does not need to cater for this.

Ms Hogan commented that people get crooked by those operating outside of the law and wanted to know how do these people get to the registrar.

Mr Wessels replied that there is no specific route necessary that tells people to follow a specific route.

Ms Hogan asked if there was then no provision in this Bill that would help a person who has been crooked.

Mr Van Zyl replied that in the draft rules an ombud will entertain certain complaints against unregistered FSP's.

Ms Hogan raised the concern that it was unclear in the Bill.

Mr Wessels noted the concerns and said he will see what can be done.

"financial product"
The LOA proposes that in sub clause (e) the words 'investment instrument' be replaced by 'financial product' because the words investment product is not defined and could lead to ambiguity. The FSB disagrees with this.

Ms Hogan referred to the inclusion of 'health service benefit' in sub clause (g) and said that if it is not here then if the broker is not accredited then the MSA does not apply and FAIS does not apply and therefore the FSB argues for the retention.

Mr Wessels said that was correct. He gave an example and said stock brokers are exempt from the Bill but any person giving advice on your shares will be included.

Ms Hogan the commented that the stock brokers are exempted because they are regulated and if the CMS is up to speed with the regulation then it would be fine to exempt them.

Mr Wessels said that there would have to be a major revision of the MSA to get to the level of FAIS.

Ms Hogan said that a decision cannot be made now but at least there is clarity on how the definition relates to the exclusion.

"Financial Service Provider"
The FSB proposes that the phrase 'regular feature of the business' is common in our law so the words 'part of a regular' should be replaced by 'a regular feature of the'.

"Licensee"
Only a linguistic improvement is effected to this definition.

A committee member asked that why under the definition of person there is an inclusion of municipality but no reference to provincial and local government.

Mr Wessels said that if the committee wanted the provincial and national spheres to be included then the committee should just say so.

The committee agreed that it should be included.

A committee member asked if pyramid schemes would be covered in FAIS.

Mr Wessels would get back to the committee with an answer.

"Product supplier"
The FSB proposes that the reference to client be deleted especially sine the definition of client has also been changed.

Exclusions
The paragraph that excludes deposits from the ambit of the act in clause 1(3) is deleted.
Then a new 1(4) is added that states that FAIS is not applicable to deposits shorter than 12 months but that these deposits will be regulated in a code of conduct in terms of clause 15(2)(b).

Mr Wessels confirmed that the Banking Council is happy with the amendments.

Ms Hogan asked what was in the banking code of conduct.

Mr Wessels advised that it deals with disclosure but not with the needs analysis. But the code will not be adopted as is if it is deficient there would be additional provisions added. This code will only apply to short term deposits.

Ms Hogan was happy that this approach does provide reasonable protection for short term deposits.

There was nothing left in the definition section to discuss and the meeting was closed.

Appendix:
FINANCIAL SERVICES BOARD

FINANCIAL ADVISORY AND INTERMEDIARY SERVICES BILL

FSB RESPONSE TO THE CONSTITUTIONALITY ATTACKS ON CERTAIN CLAUSES OF THE BILL
1. The FSB has taken due consideration of the legal opinion by Adv G.J. Marcus SC and counsels motivation for his advice that certain clauses of the Bill may violate the Constitution.

2. In his concluding paragraph, Adv Marcus summarises the conclusions reached in the course of his opinion and suggests that the provisions of five clauses of the Bill are unconstitutional.

3. Before dealing with those conclusions, it should be stated that Adv Marcus either has not dealt with any other alleged unconstitutional aspects of the Bill or in any event does not agree with the submissions made to PCOF by Mr Leon Louw on behalf of the Free Market Foundation that as many as ten clauses of the Bill are unconstitutional. The FSB, therefore, believes that the only clauses relevant to the constitutional challenge are those referred to by Adv Marcus in the concluding paragraph of his opinion.

4. Having considered the five clauses to which Adv Marcus refers as being unconstitutional, the FSB has decided to address four of these clauses through amendments which the FSB believes will cure the possible constitutional problems which the provisions in their present form may present. The additions and alternative wording proposed in each instance are such that the FSB is satisfied that the re-wording of the clauses concerned now ensures their constitutionality.

5.1 The main difference of opinion between the FSB and the opinion delivered by Adv Marcus relates to the determination of complaints by the ombud as dealt with in Chapter VI Part 1 of the Bill (clause 20 up to and including clause 32).

5.2 For reasons which appear more fully from the opinion, Adv Marcus has come to the conclusion that in order to remove the constitutional defect as perceived by him, it will be necessary to amend the Bill so as to provide that the responding party may elect to have a complaint resolved by a court of law rather than by the ombud. (The complainant has such a right.) Of course, if this point of view will prevail, it will destroy the entire ombud mechanism as in most instances responding parties will prefer recourse to a court of law knowing full well that many complainants cannot afford the costs and time constraints incidental to an ordinary judicial process. A firm view should therefore be taken on the correctness or otherwise of the opinion of Adv Marcus in this respect.

5.3 The FSB respectfully disagrees with Adv Marcus that the ombud procedure enforceable at the hands of the complainant will violate the constitutional right of a responding party to have any dispute that can be resolved by the application of law decided before a court or some other independent forum. The FSB holds the view that the ombud office and its procedures as appear from the Bill in fact amount to an independent forum and process as postulated by the Constitution.

5.4.1 In debating whether the ombud is an independent and impartial tribunal within the meaning of section 34 of the Constitution, Adv Marcus leans heavily on a judgment of the Constitutional Court (referred to and discussed in paragraph 66 of the opinion) which in turn borrowed from the dicta of a Canadian Supreme Court judgment.

5.4.2 The Canadian judgment made clear that independence will be impaired if the tribunal in its institutional or administrative relationships is not independent from the executive and legislative branches of government.

5.4.3 Based on this approach and analysing the provisions of the Bill, Adv Marcus draws the conclusion that the ombud contemplated by the Bill "is an officer in the public service who answers to the Board". With reference to the Constitutional Court judgment the opinion continues to state "officers in the public service who answer to higher officials in the executive branch, do not enjoy the independence of the judiciary".

5.4.4 It would appear from these citations that Adv Marcus was not briefed on or for another reason did not have a sound comprehension of the true statutory nature of the Financial Services Board. In fact, nowhere in the opinion is there a reference to the Financial Services Board Act. Counsel was no doubt suffering from the misapprehension that the FSB forms part of the executive branch of government or else is part of the public service. For that reason and as the ombud is accountable to the FSB, the further conclusion is drawn that the ombud contemplated by the Bill will equally be "in the public service".

5.4.5 This misdirection continues when reference is made to the fact that the appeal procedure allowed by the Bill to the FSB Board of Appeal is equally flawed because the Board of Appeal is also not an independent tribunal within the meaning of section 34 of the Constitution. However, learned counsel does not refer to section 26 of the Financial Services Board Act, 1990 under which the Board of Appeal has been constituted. Had he done so, he would have gleaned from that provision that the Board of Appeal comprises three totally independent persons unconnected with the FSB, and operates absolutely independently from the FSB. The present Board of Appeal is chaired by the ex Judge President of the Cape Provincial Division of the High Court, the second member is a practising accountant at Price Waterhouse Coopers and the third member is an actuary who is a full time professor in actuarial science at the University of Cape Town.

5.4.6 However, to put the independence of the ombud beyond all doubt, the FSB will be suggesting two amendments to the existing clauses dealing with the position of the ombud. The one amendment is in the form of a new clause 20(4) which provides in so many words that in dealing with complaints in terms of sections 27 and 28, the ombud shall be independent and impartial. The second amendment amounts to a replacement of the existing clause 23(4) and states that the ombud is accountable to the Board only in matters relating to the administration of the office.

5.5 The model of the ombud office as conceived by the Bill, has been copied largely from those provisions of the Pension Funds Act, 1956 which establish the office of the Pension Funds Adjudicator. We were today informed by the latter office, which has been functioning for almost four years, that it has thusfar not received any intimation from any responding party that the provisions under which it operates are or may be unconstitutional. That office also does not believe that there would be any ground for such a challenge.

5.6 While it is true that the ombudsman concept was originally developed to balance the rights between the powerful State and the modest citizen, the concept has long ago been extended to do the same in the situation where the ordinary individual has to face the overwhelming power of a large institution. This has been particularly so in the field of the financial services industry where in most, if not all, developed countries ombud offices have been established to deal with consumer complaints against financial services providers. Most of the developed countries in which ombudschemes have been established, also have constitutions similar to our Constitution. There can be little doubt that if an ombud scheme was capable of being challenged on constitutional grounds, that that would already have happened in those jurisdictions more experienced than South Africa with regard to both constitutional law and ombud arrangements.

5.7 For these reasons the FSB will continue to promote the (amended) provisions of the Bill dealing with the office of the ombud. These provisions resemble
those of other ombud offices in other jurisdictions and have moreover been scrutinised and approved by the ombud of the voluntary ombudschemes presently existing in South Africa.

6. The only one clause branded unconstitutional by Adv Marcus, which the FSB does not wish to amend, is a relatively insignificant clause, namely sub-clause (h) of the definition of "financial product" (page 10, line 42).

This clause is open-ended to enable the registrar to add to the list of financial products and this discretion of the registrar is seen to be without the necessary guidance.

With respect, the registrar is guided by the provision in that the further product declared by him as such must be "similar in nature" to those listed in sub-clauses (a) to (g). The registrar cannot simply add any product to the list. Moreover, the registrar must consult with the Advisory Committee before such declaration. Lastly, any decision of the registrar will be subject to an appeal to the FSB Board of Appeal at the instance of any aggrieved party (section 26 of the Financial Services Board Act, 1990).

This type of open-ended clause is necessary because new products are continually being designed.

PRETORIA

4 October 2001