Ombud for Financial Services Providers 2006/7 Annual Report briefing

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Finance Standing Committee

15 May 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
16 MAY 2007-05-16
OMBUD FOR FINANCIAL SERVICES PROVIDERS 2006/7 ANNUAL REPORT BRIEFING

Chairperson: Mr N Nene (ANC)

Documents handed out:
The Office of the Ombud for Financial Service Providers (FAIS) Annual Report 2006/07 [Part 1][Part 2]
Ombud for Financial Service Providers (FAIS Ombud): Annual Report 2006/7 briefing
Finance Committee Programme for 2008

Audio recording of meeting [Part 1][Part 2]

SUMMARY
The FAIS Ombud’s team briefed the Committee on its Annual Report.
Complaints and enquiries to the FAIS Ombud had grown significantly from 2004, with an increase of 98% in the last financial year. 4% of complaints were received without sufficient information. Only 29% of complaints received fell within the jurisdiction of the FAIS Ombud, and the remainder were referred to the appropriate body. There was an overlap of jurisdiction between the various pieces of legislation, giving rise to some confusion. There was a need for greater public awareness to enable consumers to make informed decisions about their finances and lifestyles. A common independent platform was proposed for the resolution of disputes, which enjoyed widespread trust and credibility. The Ombud described briefly its work in the Leaderguard case involving forex, the problem of warranties on second hand vehicles, and codes of financial practice, and compliance to these codes. It was noted that there were challenges in the huge increase of workload.

The Committee was appreciative of the work done by the FAIS Ombud. Questions from the Committee focussed on targets of the Ombud, turnaround time for complaints, financial figures reported in the Annual Report, short-term insurers, funding of consumer awareness, prioritisation of complaints, independence of the FAIS Ombud, value of the successes of the FAIS Ombud, use of small print in the contracts and the LeaderGuard case. The Ombud was requested to furnish written answers to all questions concerning the financial statements.

MINUTES
Ombud for Financial Service Providers (FAIS Ombud): Annual Report 2006/7 briefing
Mr Charles Pillai, FAIS Ombud, and his team
and briefed the Committee on the Annual Report for the FAIS Ombud.

It was noted that complaints and enquiries to the FAIS Ombud grew significantly from 2004, and there had been an increase in the past financial year from 3 806 (2005/06) to 4 484 complaints. 4 % of complaints were received by the Office with insufficient information. A total of 29% of complaints received fell within the jurisdiction of FAIS and were in various stages of investigation and determination. The 67% of complaints that fell outside the FAIS jurisdiction were referred to the appropriate forums.

A single independent system was proposed by the FAIS Ombud to prevent the current confusion regarding the jurisdictions of the various Ombuds in existence. Currently, a large number of complaints was referred to a range of ombuds and there was no way to ensure that the different institutions dealt with those complaints.
The range of other ombuds in existence included Ombuds for Long-term and Short term insurance, Banking, Credit Information, and the Pensions Fund Adjudicator.

The work of the FAIS Ombud was considered to be of enormous benefit to the financial services industry, and it could not be quantified by the simple addition of value of determinations made in favour of complaints, but had significant broader effects as the practices of those who had been non-compliant were being brought in line with the FAIS Act.

Some complaints reported to the FAIS Ombud, which were also printed in the newspaper, were quickly solved by the bank involved. Those who were not financially literate were usually the target of financial scams.

The FAIS Ombud dealt with seven cases connected to the failed and defunct forex investment scheme known as LeaderGuard. The complaints that the FAIS Ombud investigated revealed that the LeaderGuard product was wholly inappropriate to the needs and circumstances of the clients. In almost all the cases, the provider was not licensed in terms of the FAIS Act to render services in forex investment instruments, and failed to disclose this to the clients. The providers did not understand the product they were recommending and communicated incorrect information. There was failure to display due skill, care and diligence by the providers, who also failed to appreciate the nature of the investment into which they had placed their clients’ money.

The FAIS ombud also focused on warranties sold at the motor dealers’ floors, where problems were experienced. There was also a failure by insurance providers to explain material terms and exclusions. Some employees struggled to discontinue unauthorised policies. The consumer did not know that a debit or stop order was put on his or her account and there were unnecessary long procedures when trying to discontinue stop orders for unauthorised policies. Problems were also experienced with life insurance issued by some financial services providers.

A range of comprehensive codes of practice for financial services was established in South Africa. There were different bodies to ensure that service providers adhered to the established codes of practices. The Financial Advisory and Intermediary Services Act, The Financial Services Ombud Schemes Act and the National Credit Act were applicable to financial services. There was an overlap of jurisdiction between the various pieces of legislation. Consumers who were not familiar with the legislation became confused with this overlap. Greater public awareness was crucial to enable consumers to make informed decisions about their finances and lifestyles. A common independent platform was proposed for the resolution of disputes, which enjoyed widespread trust and credibility.

Other problems identified were that financial service providers did not always provide adequate information to vehicle buyers, which resulted in them not being paid when they claim for insurance. Service providers did not always properly explain warranties sold to consumers on purchasing second hand vehicles. Brokers sometimes also did not know that they should comply with existing regulations and others preyed on ignorant consumers. Consumers needed to have confidence in the advice they received and in the products they purchased.

Only 2% of complaints received by FAIS were related to forex but the impact of forex scams had an enormous impact on the lives of South Africans. Another trend identified was that short-term insurers thought that they did not need to comply with the existing code of conduct. Long-term insurers were more compliant. About 26% of complaints came from Gauteng, 15 % from Kwazulu Natal and 12 % from the Western Cape.

77% of all complaints received by the FAIS Ombud had been referred or closed. The FAIS Ombud had a small team and had been experiencing a 98% increase in their workload. It was expected that the amount of complaints would increase significantly. New employees would be hired in order to deal with higher workloads but this would still not be sufficient for the peak times of workloads.

Discussion
The Chairperson wanted to know what targets the FAIS Ombud set for itself. He referred to the meetings with stakeholders and asked if interaction with stakeholders was by invitation only. Mr Nene asked if the FAIS Ombud had any outreach programmes to consumers.

Mr Pillai said that the Registrar of the Financial Services Board (FSB) had the function of consumer education, although the FAIS Ombud would work in conjunction with the Registrar. The FAIS Ombud therefore did not have a budget for consumer education. The FAIS Ombud reported to its Committee and on occasion had to ask for funding in order to put advertisements in newspapers. Consumer education was done on an ad-hoc basis, but the FAIS Ombud tried to communicate with consumers through various media.

The Chairperson asked what the average turnaround time was for complaints.

Mr Eugene Oakes, Case Manager, FAIS Ombud, said that complaints had increased by 100% in 2006 and that in 2007/08 a 170% increase was expected. Jobs had been advertised in order to improve the capacity of the FAIS Ombud. Each case manager should ideally deal with about 50 to 60 cases, but the FAIS Ombud did not have the budget to employ enough people. The Ombud also required a database of financial products in order to keep staff informed. Mr Oakes indicated that the current turnaround for complaints was about one per year. The United Kingdom Ombud received between 100 000 and 200 000 complaints each year and they had about 1 000 employees.

Miss
Noluntu Bam, Deputy Ombud, FAIS Ombud, said that the FAIS Act was drafted to ensure that a six-week period was set out from the time that a person complained, to allow the person complained against to respond. Complaints were received by the Ombud and stamped. The company against whom a complaint was made would also sometimes brief lawyers, who had endless questions and who also might threaten to take the Ombud to the High Court. It was difficult to adhere to the six-month target turnaround time, given the different challenges being faced by the office.

Mr S Asiya (ANC) referred to the accumulated surplus of the FAIS Ombud, which was rising and asked if the liabilities of the FAIS Ombud would continue to accumulate.

Miss Bam said that the Ombud was financed through levies, which were collected through the Financial Services Board.

Mr Pillai also said that the Ombud’s Chief Financial Officer would provide a written response to Mr Asiya’s question.

Mr Asiya asked what recommendations could the FAIS Ombud give to resolve problems with short-term insurers.

Mr David Davidson, Assistant Ombud, FAIS Ombud, said that there were some areas that did not fall in the jurisdiction of the FAIS Ombud and therefore it could not give determinations on them. The Ombud aimed to focus on systemic issues.

Ms J Fubbs (ANC) said that there was recognition of the need for consumer awareness. She asked where funds were located for addressing consumer awareness. She also wanted clarity on the mobilising of the media that had been mentioned by the FAIS Ombud.

Miss Bam said that consumer education was not the FAIS Ombud’s responsibility but that the office had asked the FSB for a budget to do consumer awareness when necessary.

Mr Pillai said that the media should play a role in raising consumer awareness.

Mr N Singh (IFP) acknowledged the view of the FAIS Ombud that there was jurisdictional confusion regarding the different financial services ombuds in existence. He suggested that the various Ombuds be brought together in order to resolve this issue.

Mr Singh asked for clarification on large increases reported in the Annual Report for cell phones.
He indicated that nothing was showed for accounting fees for 2007 and he wanted to know if that was shown under audit fees. He also wanted more information on leases.

The Chairperson noted that the team did not include the Chief Financial Officer and he therefore requested the Ombud to respond in writing to the questions on financial matters.

Mr Asiya said that it was unacceptable that the Chief Financial Officer was not present when an Annual Report was presented to the Committee.

Mr Singh asked for clarification on insurance for buildings, where insurers would value homes but the banks granting the bonds would have a different valuation system. Some valuations were based on replacement value.

Miss Bam said that there were some cases that the FAIS Ombud dealt with that focussed on market value and replacement value. Short-term insurers needed to educate their clients.

Mr Singh also asked for clarification on identity numbers that were illegally used by other people in order to purchase goods on credit.

Miss Bam said that illegally used identity numbers were sometimes used with unauthorised policies. She indicated that one could approach the National Credit Regulator or the Credit Information Ombud.

Mr Singh asked how did the FAIS Ombud prioritise complaints received, given that it did not have sufficient staff.

Mr Pillai said that there was a case assessment department, which dealt with complaints before they would be sent to the case manager. The Office also aimed to deal with systemic issues that strategically dealt with cases.

Mr Singh said that the FAIS Ombud should be using regional broadcasters, in particular radio stations.

Mr Pillai said that the Ombud would use radio stations whenever possible.

Miss Fubbs asked for clarification on the high increases for loans as indicated in the Ombud’s Annual Report.

The Chairperson asked for clarification on media coverage of R 7.2 million indicated by the Ombud.

Mr Pillai said that the public relations company determined the value of publicity for the Ombud. The reported R7.2 million referred to the value of publicity as determined by their public relations company.

Mr B Mnguni (ANC) asked for clarification on the FAIS Ombud view that they should be independent.

Mr Pillai said that the Ombud should be independent and answer only to parliament.

Mr Mnguni asked what action had been taken with regard to compliance officers who provided misleading information.

Mr Pillai said that compliance officer had to be fit and proper in terms of the FAIS Act. The Financial Services Board would take action if a compliance officer was not fit and proper.

Mr Mnguni also asked for clarification on products that even actuaries did not understand.

Mr Davidson said that financial products were very complex, with different nuances.

Mr Oakes said that the South African market tended to want more complex products.

Mr Mnguni asked how many other forex cases, besides the LeaderGuard case, had been investigated by the FAIS Ombud and how much money was involved.

Mr M Johnson (ANC) asked what the value of the successes of the FAIS Ombud was in rands and cents.

Mr Pillai said that the value of determinations that went back into the hands of consumers was reported as R10 million.

Mr Davidson said that the impact of the FAIS Ombud was significant, but that it was difficult to quantify.

Mr Johnson asked how the Committee could ensure that offices like the FAIS Ombud, the Financial Services Board and others be brought closer to communities.

Mr Pillai said that after the confusion regarding jurisdictions had been dealt with then it was possible to start looking at regional offices.

Mr Johnson asked for clarification on the increase of the salary of the FAIS Ombud.

Mr Pillai said that the Financial Services Board reviewed the salary of the FAIS Ombud, and that the Ombud had no say on his own salary.

Mr M Mbili (ANC) asked what could be done to get rid of the fine print in contracts that consumers did not understand.

Ms Bam said the FAIS Ombud knew that some people were unhappy with the fine print in contracts. The Ombud had been pointing out to some service providers that their fine print was too small and should have been larger, given the requirements in the FAIS Act.

Mr Mbili asked if the LeaderGuard case had been resolved.

Mr Davidson said that there were seven determinations for LeaderGuard. The main LeaderGuard complaint was settled and some criminal investigations were going forward.

Ms Fubbs asked what could be done to strengthen the relationship of the FAIS Ombud with the prosecuting authority.

Mr Pillai said that the FAIS Ombud had meetings with the National Directorate of Public Prosecutions.

Committee Business
The Committee adopted its Committee Programme for 2008.

The meeting was adjourned.

 

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