ARTICLES

Bespoke justice? On financial ombudsmen, rules and principles

Geregtigheid na maat? Oor finansiële ombudsmanne, reëls en beginsels

Daleen Millard

Bluris LLB LLM LLD. Associate Professor, Department of Private Law, University of Johannesburg

OPSOMMING

Alternatiewe geskilbeslegtingsprosedures bestaan om diegene by te staan wat nie hulle regte in die howe kan of wil afdwing nie. Die spesifieke voordeel van ombudsmanne is dat hulle prosesse toeganklik, goedkoop, informeel en vinnig is. Hierdie artikel neem twee skemas onder die loep, naamlik die FAIS ombud in Suid Afrika en die Financial Ombudsman Service (FOS) in Engeland. Daar word gekyk na die wyse waarop die twee instansies reëls sowel as beginsels toepas, wat die jurisdiksie en prosedure van elk behels en hoe daar te werk gegaan word om geskille op te los. Die belangrikste verskil tussen die twee organisasies is dat die FAIS ombud se beslissings in elke wesenlike opsig dieselfde uitwerking as hofbeslissings het en dat dit volledig gerapporteer word, terwyl beslissings deur die FOS nie ten volle gerapporteer word nie en ook nie presedente daarstel nie. Die FOS streef uiteraard daarna om geregtigheid te laat geskied tussen individuele partye, weliswaar binne die bestaande regsraamwerk, maar met die veronderstelling dat billikheid die belangrikste oorweging moet wees. Hierdie werkswyse kan geregverdig word omdat individuele oplossings nie op ander sake van toepassing gemaak word nie. Die FOS of 'n verweerder word deur wetgewing gemagtig om sake na 'n hof te verwys waar daar sprake is van 'n belangrike of nuwe regsvraag. Die beslissing in so 'n saak stel dan 'n presedent daar. Die Suid-Afrikaanse FAIS ombud bereg ook sake binne die bestaande regsraamwerk en moet soos die FOS seker maak dat alle beslissings billik is. Die gevaar is egter dat die FAIS ombud nie verplig is om sake na 'n hooggeregshof te verwys nie, met die gevolg dat 'n beslissing wat in der waarheid oorwegend billik is vir die spesifieke partye tot die geding, presedentele waarde het. Hierdie tekortkoming in die FAIS Wet gee aanleiding daartoe dat die FAIS ombud soos 'n tweede reguleerder word en die gevaar is dat verkeerde interpretasies van die wetgewing tot onbillike resultate vir ander partye tot 'n dispuut kan lei. Hierdie aspek behoort deur die wetgewer aangespreek te word.

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1 Melville "Has Ombudsmania Reached South Africa? The Burgeoning Role of Ombudsmen in Commercial Dispute Resolution" 2010 SA Merc LJ 50 54;         [ Links ] McVea and Cumper "The Financial Ombudsman Service and Disputes Involving 'Wider Implications' Issues" 2007 Lloyd's Maritime and Commercial Law Quarterly 246 247.         [ Links ]
2 Melville 50.
3 Ibid.
4 Idem 51.
5 Idem 53, 55.
6 37 of 2002.
7 These include inter alia the Banks Act 94 of 1990, the Collective Investment Schemes Control act 45 of 2002, the Consumer Affairs (Unfair Business Practices) Act 71 of 1998, the Financial Advisory and Intermediary Services Act 37 of 2002, the Financial Institutions (Investment of Funds) Act 39 of 1984, the Financial Institutions (Protection of Funds) Act 28 of 2001, the Financial Intelligence Centre Act 38 of 2001, the Financial Services Ombud Schemes Act 37 of 2004, the Insider Trading Act 135 of 1998, the Long-term continued on next page Insurance Act 52 of 1998, the Medical Schemes Act 131 of 1998, the National Credit Act 34 of 2005, the Participation Bonds Act 55 of 1981, the Pension Funds Act 24 of 1956, the Security Services Act 36 of 2004, the Short-term Insurance Act 53 of 1998, the South African Reserve Bank Act 90 of 1989 and the Stock Exchanges Control Act 1 of 1985. Then there are various acts dealing with tax, labour law and business entities.
8 For a general discussion on financial regulation, see Chiu "Enhancing Responsibility in Financial Regulation - Critically Examining the Future of Public-private Governance: Part II" 2010 Law & Financial Markets Review 286 287, 292-303.
9 "Financial Rules: Why they Differ, Where We Got them Wrong and how to Fix Them" 2010 Law & Financial Markets Review 279 280.
10 Athanassiou 280. The writer argues that financial law is crucial because "the welfare of millions of people and the stability of entire economies depend on getting its rules right and on administering them properly and vigilantly."
11 Athanassiou 280.
12 Ibid. See also Moolman et alFinancial Advisory & Intermediary Services Guide (2010) 1-5.
13 Raz "Legal Principles and the Limits of Law" 1981 Yale Law Yournal 823 838;         [ Links ] Dworkin Taking Rights Seriously (1977) 24-28.
14 Refer to the Treating Customers Fairly Discussion Paper, which was released for discussion by the Financial Services Board during May 2010 (http://www.fsb.co.za accessed on 2011-07-01).
15 Clause 8(1)(a) General Code of Conduct (GCC) for Authorised Financial Services Providers and Representatives, published in terms of the FAIS Act under Board Notice 80 of 2003-08-08.
16 Nobles "Rules, Principles and Ombudsmen: Norwich and Peterborough Building Society v The Financial Ombudsman Service" (2003) The Modern LR781 787.
17 Moolman et al 12-13 mention the Masterbond scandal that saw the Masterbond Group defraud investors of a billion Rand. The autors also refer to Chinza Holdings (Pty) Ltd which operated a forex trading scheme and robbed investors of R30 million.
18 Moolman et al 6 state: "What really distinguishes financial products from other products is the self-serving exclusive design, the complex rules and the ever-changing characteristics of the products designed by the industry to ensure that it remains as a preserve and a repository of a small minority whilst it needs the life and blood of the ignorant majority to keep it alive. Because of the ignorance of consumers, the complexities associated with financial products, the incorporeal nature, the medium through which they are sold and the fact that a client is at the mercy of an intermediary, there is a tendency for unscrupulous intermediaries to exploit unsuspecting members of the public."
19 Van Zyl Financial Advisory and Intermediary Services Manual (2004) 1-8. The FSB was established by the provisions of the Financial Services Board continued on next page Act 97 of 1990. See also Wille et al Principles of Financial Law (2007) 149150.
20 Hattingh & Millard The FAIS Act Explained 3 state that that the FSB is currently in control of the Collective Investment Schemes Control Act 45 of 2002 (CISCA), the Financial Services Board Act 97 of 1990 (FSB Act), Financial Institutions (Protection of Funds) Act 28 of 2001 (FI Act), Financial Supervision of the Road Accident Fund Act 8 of 1993 (FSRAF Act), Friendly Societies Act 25 of 1956 (FS Act), Inspection of Financial Institutions Act 80 of 1998 (IFI Act), Long-term Insurance Act 52 of 1998 (LTIA), Pension Funds Act 24 of 1956 (PFA), Short-term Insurance Act 53 of 1998 (STIA),
21 Hattingh & Millard 5.
22 Date of commencement of the FAIS Act. Before the enactment of the FAIS Act various statutes existed which had dealt with a variety of financial products such as insurance and pensions but the FAIS Act specifically deals with the way in which intermediary and advisory services in respect of certain financial products are rendered.
23 Hattingh & Millard 163. It is submitted that it is more correct to use the term "ombudsman" However, the legislator had opted to use the term "Ombud" in the FAIS Act and therefore "ombud" will be used throughout where the South African system is discussed.
24 Moolman et al 196.
25 Van Zyl 1-24; s 20(3) FAIS Act.
26 S 1(1)(a) FAIS Act, sv "complaint".See also Hattingh & Millard 159-160.
27 Hattingh & Millard 160.
28 Ibid.
29 Hattingh & Millard74-76. See also Havenga The Law of Insurance Intermediaries (2001) 4.
30 Act 52 of 1998.
31 Act 53 of 1998.
32 Havenga 4.
33 Ibid. See also Reinecke et al General Principles of Insurance Law (2002) at 348.
34 Board Notice 80 of 2003 published in Government Gazette 25299 of 8 August 2003, s amended. See Moolman et al 3-4.
35 "FAIS and Professionalism: A challenge for the Financial Services Sector" FSB Bulletin (2008) 4. Emphasis as per the original text.
36 Own emphasis.
37 Moolman et al 196.
38 Ibid.
39 Ibid.
40 Ibid.
41 S 1(1)(a) & (b) FAIS Act, sv"advice". See also Moolman et al 197. The writers explain that a recommendation is an idea or suggestion presented to the client which is deemed suitable for a particular purpose. Where guidance is given, the advisor attempts to resolve a client's problem (Moolman et al 198) and a proposal is where a client is presented with a plan, suggestion or an idea (Moolman et al 198).
42 S 1(1)(a) & (b). See also Hattingh & Millard 5-6.
43 S 1(1)(d)(i) sv "advice".
44 S 1(1)(d)(ii) sv "advice".
45 S 1(3)(a)(i)(aa). See Moolman et al 199.
46 S 1(3)(a)(i)(bb). See Moolman et al 199.
47 S 1(3)(a)(i)(cc). See Moolman et al 199.
48 S 1(3)(a)(i)(dd). See Moolman et al 199.
49 S 1(3)(a)(i)(ee). See Moolman et al 199.
50 Hattingh & Millard 7. Other exceptions include the following, namely: An analysis or report on a financial product without any express or implied recommendation, guidance or proposal that any particular transaction in respect of the product is appropriate to the particular investment objectives, financial situation or particular needs of a client (s 1(3)(a)(ii); Advice given by the board of management or any board member of any pension fund organisation or friendly society to members of the organisation or society on benefits enjoyed or to be enjoyed by such members; Advice given by the board of management or any board member of any pension fund organisation or friendly society to members of the organisation or society on benefits enjoyed or to be enjoyed by such members; Advice given by the board or trustees of any medical scheme or any board member to the members of the medical scheme on health care benefits enjoyed or to be enjoyed by such members; or any other advisory activity exempted from the provisions of the FAIS Act by the Registrar, after consultation with the Advisory Committee, by notice in the Gazette.
51 Act 59 of 1980; see s 1(1)(a)(i) FAIS Act.
52 S 1(1)(a)(ii) FAIS Act.
53 S 1(1)(a)(iii) FAIS Act.
54 Act 36 of 2004. See s 1 (1)(a)(v) FAIS Act.
55 S1(1)(a)(v) FAIS Act. See also Van Zyl 1-14.
56 S 1(1)(b) FAIS Act.
57 S1 (1)(c) FAIS Act. Policies and contracts as envisaged here are those policies and contracts provided for by the Long Term Insurance Act 52 of 1998 and the Short Term Insurance Act 53 of 1998.
58 Act 24 of 1956.
59 S 1(1)(d)(i).
60 Act 25 of 1956.
61 S 1(1)(d)(ii).
62 Act 94 of 1990. See s 1(1)(f) FAIS Act.
63 Act 131 of 1998. See s 1(1)(gg FAIS Act.
64 S 1(1)(h) FAIS Act. See Hattingh & Millard 16.
65 S 1(1)(i) FAIS Act.
66 S FAIS Act. Hattingh & Millard 16. See also Van Zyl at 1-14.
67 Hattingh & Millard 16.
68 Rule 4(a). The fourth requirement implies that a complainant should first attempt to resolve the matter with the respondent before approaching the Ombud. The meaning of this will become apparent in the discussion in the next paragraph that deals with claims procedures.
69 Rule 4(b) Ombud rules.
70 S 29 Magistrates' Courts Act 32 of 1944. It is submitted that a regional court would have jurisdiction in matters which may be interpreted a s adispute over "movable or immovable property" where the amount is less that R300 000, according to the Jurisdiction of Regional Courts Amendment Act, 31 of 2008 which took effect on 2010-08-09.
71 Published in Board Notice 80 in Government Gazette 25299 of 8 August 2003, as mended.
72 Clause 16(2)(a) GCC; clause 11(2)(a) Short-term Deposit Code ("SDC").
73 Clause 16(2)(b) GCC; clause 11(2)(b) SDC.
74 Clause 16(2)(c) GCC; clause 11(2)(c) SDC.
75 Clause 16(2)(d) GCC; clause 11(2)(d) SDC.
76 Clause 16(2)(e) GCC; clause 11(2)(e) SDC.
77 Clause 17(a) GCC. Hattingh & Millard 161 n 15 explain that this complaints policy should outline the provider's commitment to, and system and procedures for, internal resolution of complaints.
78 Clause 17(b) GCC. Hattingh & Millard 161 n 16 comment that this serves to ensure that clients have full knowledge of the procedures for resolution of their complaints.
79 Clause 17(c) GCC. This entails that the provider should ensure the existence of easy access to internal dispute resolution procedures at any office or branch of the provider. It can also be done through additional postal, fax, telephone or electronic helpdesk support. See Hattingh & Millard 161.
80 Clause 17(d) GCC. According to Hattingh & Millard 161 n 18, "fairness" in this context means that the process should be even-handed to clients and the provider and its staff alike.
81 S 28(1)(a) FAIS Act.
82 See also Hattingh & Millard 1 71.
83 S 28(1)(b)(i). See also Hattingh & Millard 172.
84 S 28(1)(b)(ii).
85 S 28(1)(b)(iii). See also Hattingh & Millard 172.
86 According to Hattingh & Millard 172: "A final determination may also include a cost order. Normally, a cost order in a civil suit follows the result of the case. In other words, should a matter be decided in favour of a complainant, the Ombud may rule that the respondent is responsible for the payment of the complainant's legal costs. What is also interesting is that the Ombud may also grant a cost order against a complainant in favour of the Ombud or the respondent if the Ombud is of the opinion that the conduct of the complainant was "improper" or "unreasonable" or where "the complainant was responsible for an unreasonable delay in the finalisation of the relevant investigation". See s 28(2)(b)(iii)(aa) and s 28(2)(b)(iii)(bb) FAIS Act.
87 Hattingh & Millard 1 72.
88 Rule 2(a), s 31(b)(i) & (ii).
89 As embodied in rule 2(b) Ombud rules.
90 S 39 FAIS Act.
91 Moolman et al 225.
92 http://www.faisombud.co.za.
93 Case FOC5452/07-08/EC (1).
94 Par 3.
95 Par 4.
96 Ibid.
97 Par 5.
98 Case FOC 2243/07-08 (KZN) (1).
99 S 1(1)(h) FAIS Act.
100 Par 19.
101 Ibid.
102 Par 11.
103 Pars 21-22.
104 Par 24. The ombud states: "Jordaan, on the other hand, not only went on a frolic of his own by advising clients to invest in financial products that he was not authorised to market by his employer but went further and advised the complainant to invest in a product that he, as a registered FSP, knew was not a financial product as defined and then raises that very point in his own defence."
105 Moolman et al 196.
106 Par 11.
107 The FOS in England operates differently;see Par 3.2 below.
108 Case FOC1291/07-08/EC(1); all further references will be to the discussion of the case by Moolman et al.
109 Moolman et al 240.
110 Ibid.
111 Moolman et al 241.
112 Ibid.
113 This was also the case for Marna and George Rossouw who gave an amount of R210 000 to the same Willie Jordaan to invest while he was an employee of Sanlam. They were in fact informed that their invesment was in Fidentia and not in Sanlam, which is why Jordaan was held personally liable to the Rossouws for lack of due skill, care and diligence. See Marna and George Rossouw v Willie Jordaan Case FOC 816/07-08/EC (1) as discussed by Moolman et al 241.
114 Moolman et al 196-197.
115 Morris in Winckler ed A Practitioner's Guide to he FSA Handbook (2006) 1.
116 S 2(4)(a) Financial Services and Markets Act (FSM Act) 2000.
117 S 2(4)(b) FSM Act 2000.
118 S 2(4)(c) FSM Act 2000.
119 S 2(4)(d) FSM Act 2000.
120 S 2(1) FSM Act 2000.
121 S 3 FSM Act 2000.
122 S 4 FSM Act 2000.
123 S 5 FSM Act 2000.
124 S 6 FSM Act 2000.
125 In terms of Part XIV and Schedule 17 FSM Act 2000.
126 Melrose "Consumer relations: Complaints and compensation" in A Practitioners Guide to the FSA Handbook (ed Winckler) (2006) 612.
127 Ibid.
128 Melrose 611.
129 Rules pertaining to the compulsory jurisdiction of the scheme are made with the consent of the FSA. See also Melrose 612.
130 DISP Rule 1.1.10. See also Virgo & Riley Compliance Officers Handbook
(2004) 113.
131 S 226 FSM Act 2000. See also Schlueter Banks as Financial Advisers: A Comparative Study of English and German Law (2001) 143.
132 S 138 FSM Act 2000 authorises the FSA to make rules. These rules are published as part of the FSA Handbook in a separate chapter entitled: Dispute Resolution: Complaints. All further references will be to "DISP Rules". The latest version of these rules is available at http://www.fsa.co.uk (accessed on 2011-07-01).
133 According to DISP Rule 2.6.1R, the FOS's Compulsory Jurisdiction covers only complaints about the activities of a firm (including its appointed representatives) or of a payment service provider (including agents of a payment institution) carried on from an establishment in the United Kingdom.
134 DISP 2.3.1R. See also Virgo & Riley 117.
135 DISP 2.3.1R(1).
136 DISP 2.3.1R(1A).
137 DISP 2.3.1R(2).
138 DISP 2.3.1R(3).
139 DISP 2.3.1R(4).
140 DISP 2.3.1R(5).
141 DISP 2.3.1R(6).
142 See Virgo & Riley 117.
143 Rule 2.5.1R.
144 Emphasis in the original.
145 Virgo & Riley 112.
146 Ibid.
147 Ibid.
148 Ibid.
149 Virgo & Riley 113. See also Melrose 613.
150 See par 2.3 above.
151 Virgo & Riley 111-112. DISP Rule 1.4.1 states as follows: "Once a complaint has been received by a respondent, it must: (1) investigate the complaint competently, diligently and impartially; (2) assess fairly, consistently and promptly: (a) the subject matter of the complaint, (b) whether the complaint should be upheld; (c) what remedial action or redress (or both) may be appropriate; (d) if appropriate, whether it has reasonable grounds to be satisfied that another respondent may be solely or jointly responsible for the matter alleged in the complaint; taking into account all relevant factors; (3) offer redress or remedial action when it decides this is appropriate; (4) explain to the complainant promptly and, in a way that is fair, clear and not misleading, its assessment of the complaint, its decision on it, and any offer of remedial action or redress; and (5) comply promptly with any offer of remedial action or redress accepted by the complainant." Emphasis in the original.
152 DISP Rule 1.6.1(1).
153 DISP Rule 1.6.1R(2).
154 DISP Rule 1.6.2R(1).
155 DISP Rule 1.6.2R(2). See also Virgo & Riley 113.
156 Virgo & Riley 119.
157 Ibid; DISP Rule 2.8.2R(1).
158 Virgo & Riley 119; See DISP Rule 2.8.2R(2)(a).
159 Virgo & Riley 119; See DISP Rule 2.8.2R(2)(b).
160 Virgo & Riley 119; DISP Rule 2.8.2R.
161 In accordance with DISP Rule 3.3.4R, The Ombudsman may dismiss a complaint without considering its merits if he considers that: "(1) the complainant has not suffered (or is unlikely to suffer) financial loss, material distress or material inconvenience; or (2) the complaint is frivolous or vexatious; or (3) the complaint clearly does not have any reasonable prospect of success; or (4) the respondent has already made an offer of compensation (or a goodwill payment) which is: (a) fair and reasonable in relation to the circumstances alleged by the complainant; and (b) still open for acceptance; or (5) the respondent has reviewed the subject matter of the complaintin accordance with: (a) the regulatory standards for the review of such transactions prevailing at the time of the review; or (b) the terms of a scheme order under section 404 of the Act (Schemes for reviewing past business); or (c) any formal regulatory requirement, standard or guidance published by the FSA or other regulator in respect of that type of complaint; (including, if appropriate, making an offer of redress to the complainant), unless he considers that they did not address the particular circumstances of the case; or (6) the subject matter of the complaint has previously been considered or excluded under the Financial Ombudsman Service, or a former scheme (unless material new evidence which the Ombudsman considers likely to affect the outcome has subsequently become available to the complainant); or (7) the subject matter of the complaint has been dealt with, or is being dealt with, by a comparable independent complaints scheme or dispute-resolution process; or (8) the subject matter of the complaint has been the subject of court proceedings where there has been a decision on the merits; or (9) the subject matter of the complaint is the subject of current court proceedings, unless proceedings are stayed or sisted (by agreement of all parties, or order of the court) in order that the matter may be considered under the Financial Ombudsman Service; or (10) it would be more suitable for the subject matter of the complaintto be dealt with by a court, arbitration or another complaints scheme; or (11) it is a complaint about the legitimate exercise of a respondent'scommercial judgment; or (12) it is a complaint about employment matters from an employee or employees of a respondent; or (13) it is a complaint about investment performance; or (14) it is a complaint about a respondent's decision when exercising a discretion under a will or private trust; or (15) it is a complaint about a respondent's failure to consult beneficiaries before exercising a discretion under a will or private trust, where there is no legal obligation to consult; or (16) it is a complaint which: (a) involves (or might involve) more than one eligible complainant; and (b) has been referred without the consent of the other complainant or complainants; and the Ombudsman considers that it would be inappropriate to deal with the complaint without that consent; or (16A) it is a complaint about a pure landlord and tenant issue arising out of a regulated sale and rent back agreement; or (17) there are other compelling reasons why it is inappropriate for the complaint to be dealt with under the Financial Ombudsman Service." Emphasis in the original.
162 DISP Rule 3.3.5R. See par 3.4.2 below.
163 Winckler 629, DISP Rule 3.6.1R.
164 DISP Rule 3.6.4R(1)(a).
165 DISP Rule 3.6.4R(1)(b).
166 DISP Rule 3.6.4R(1)(c).
167 DISP Rule 3.6.4R(2).
168 See par 2.2 above and more specifically, s 20(3) FAIS Act.
169 DISP Rule 3.7.4R.
170 DISP Rule 3.7.5G.
171 DISP Rule 3.7.6G.
172 S 229 FSM Act.
173 Winckler 631.
174 Winckler 631-632.
175 Winckler 632.
176 Ibid.
177 This particular feature of the FSM Act is very interesting and forms the subject of an independent discussion. The South African position is quite continued on next page
178 Lord Hunt Opening up, reaching out and aiming high: An Agenda for Accessibility and Excellence in the Financial Ombudsman Service 2008.
179 Idem 50.
180 Ibid.
181 Ibid.
182 Ibid.
183 Ibid.
184 Ibid.
185 Ibid. Lord Hunt 4 states: "I do not, however, want the FOS ever again to be accused of 'making it up as it goes along', to quote a phrase used by one of the more thoughtful and respected respondents to this Review. There must be more transparency on both cases and practices, which will help set realistic expectations for consumers and their advisers, spread best practice within the industry in order to prevent complaints coming to the FOS in the first place, and also achieve greater consistency in decision-making without compromising the current jurisdiction."
186 Ibid.
187 Blackmore "AIFA fears second tier regulation via FOSBook" (2008) Moneymarketing (http://www.moneymarketing.co.uk/analysis/aifa-fears-second-tier-regulation-via-fosbook/165002.article accessed on 2011-07-01).
188 See par 3.4.3 below.
189 DISP Rule 3.3.5R (2). McVea and Cumper 263.
190 DISP Rule 3.3.5R(1)(a); McVea and Cumper 263.
191 DISP Rule 3.3.5R(1)(b); McVea and Cumper 263.
192 DISP Rule 3.3.5(2)(a); McVea and Cumper 263.
193 Nobles 790.
194 Idem 787.
195 February/March 2011. This publication can be accessed at http://www.financial-ombudsman.org.uk (accessed on 2011-07-01)
196 Ombusdman News February/March 2011 5.
197 Ibid.
198 "The Financial Ombudsman Service: A Brave New World in 'Ombudsmanry'?" 2002 Public Law 640 641.
199 James & Morris 645 646.