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FAIS Act and the Ombudsman System in South Africa

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Continuing our series of posts on Consumer Protection, this post studies an important South African legislation aimed at consumer protection and also looks at the overall landscape for consumer recourse in the South African Financial Services sector.

Financial Advisory and Intermediary Services (FAIS) Act

One of the important legislations regulating the financial services industry in South Africa is the Financial Advisory and Intermediary Services Act. This Act seeks to regulate the provision of financial services and advice. The FAIS Act can be summarised to have three distinct components: One is the licensing conditions that a financial services provider must adhere to, second is the codes of conduct which lay out best practices for the industry and the third is the appointment of the Ombudsman for Financial Services Providers.

Licensing: In terms of this Act, nobody is allowed to render financial services as a regular feature of his/her business without being authorised as a financial services provider or appointed a representative of an authorised provider. In order to obtain this authorisation, the Act demands that a person or organisation seeking to provide financial services or advice must comply with, among other requirements, the ‘fit and proper’ requirements which include:

– Honesty and integrity
– Competency
– Operational ability
– Financial soundness

In addition, financial advisors have come under increased scrutiny, with the Financial Services Board (FSB) introducing examinations which test advisors on their knowledge of products and regulations governing the financial services industry.

Codes of Conduct: The FAIS Act also sanctions codes of conduct for financial services providers. The codes of conduct can be categorised into the general code of conduct which is applicable to all financial services providers and other codes of conduct, applicable to specific financial services providers rendering financial services in respect of specific financial products. These codes of conduct regulate the conduct of financial services providers and their representatives in the rendering of financial services. The codes of conduct ensure among other obligations, that the financial services providers and their representatives make the necessary and relevant disclosures to clients in order to enable the clients to make informed decisions on the financial services rendered.

Dispute Resolution: The Act makes a provision for the appointment of an Ombudsman for Financial Services Providers, or the FAIS Ombudsman to consider and dispose of complaints by clients against financial service providers in terms of the FAIS Act. The Financial Services Ombudsman Scheme Act (FSOS Act) further extended the jurisdiction of the FAIS Ombudsman through enabling the FAIS Ombudsman office to addresses cases against financial institutions where no other ombudsman has jurisdiction and to take a decision where uncertainty exists over jurisdiction. Contraventions of the Act which may be referred to the FAIS Ombudsman include providers conducting business using unauthorized persons (representatives who are not ‘fit and proper’) as well as non-compliance with Codes of Conduct and relevant Regulations.

Landscape for Consumer’s Recourse in South Africa’s Financial Services Sector

Apart from the Ombudsman for Financial Services Providers (FAIS Ombudsman), there are several other voluntary Ombudsmen created by the financial services industry who also deal with financial disputes, which makes the landscape for customer recourse confusing. We look at overall ombudsman system in South Africa in a little more detail.

Apart from the FAIS Ombudsman, another statutory scheme is that of the Pensions Fund, created in terms of the Pensions Funds Act. Apart from the statutory schemes, there are four voluntary schemes that are recognized by Financial Services Ombudsman Schemes Act (the FSOS Act), which was in fact introduced as a compromise to a super ombudsman in an attempt to simplify, standardise and co-ordinate the dispute resolution landscape in South Africa. Complaints against financial institutions that do not fall within the jurisdiction of the four voluntary schemes or where there is uncertainty over jurisdiction will fall under the jurisdiction of the FAIS Ombudsman.

The four voluntary Ombudsman schemes recognised by FSOS Act are:

• The Ombudsman for Long-term Insurance (the OLTI)
• The Ombudsman for Short-term Insurance (the OSTI);
• The Ombudsman for Banking Services (the OBS); and
• The Credit Ombudsman (the CO).

Avenues for consumer recourse in South Africa’s financial services sector

A few important features common to the voluntary schemes recognised by FSOS Act:

  • The consumer is not obliged to make use of the scheme concerned, but may instead sue the industry member in court. If the consumer does make use of the scheme he will in any event not be bound by a determination (ruling) by the ombudsman, but will still retain the right to sue the industry member in court.
  • A determination is binding and as such enforceable, however, on the industry member.
  • The ombudsman enjoys security of tenure, and may not be dismissed for being unpopular with the industry members, or because of dissatisfaction with the office’s recommendations or determinations. The ombudsman is therefore able to act independently and objectively, taking instructions from no-one.
  • The ombudsman seeks to resolve disputes by conciliation, mediation or recommendation, failing which by determination.

1. The Financial Advisory and Intermediary Services (FAIS) Act, 37 of 2002
2. Landscape for Consumer Recourse in South Africa’s Financial Services Sector, FinMark Trust, 2007

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