PROPOSAL ON THE FUTURE CONSTITUTION, ROLE
AND FUNCTION OF OMBUDSMEN IN THE FINANCIAL SERVICES SECTOR
Prepared by the Financial Services Board
Date: 26 July 1999
This paper is the result of a short and limited consultative process with
parties that are directly involved in the present ombudsman arrangements in the
financial services sector. The proposals developed in that process are now being
circulated widely for comment by all interested parties.
Comments are invited on this proposal so as to enable progress towards
the establishment of such an institution in the sector. Alternative proposals to
those set out below, with reasons, may also be put forward in relation to any
Comments on this proposal can be made to -
The Head: Legal
P O Box 35655
(012) 347 7622
Comments must please reach the FSB by no later than 30 September 1999.
In this document the term "ombudsman" is used as the
internationally accepted non-gender specific name of an alternative dispute
resolution office, in favour of the previously used term
"ombudsperson". Comments are specifically invited as to the term that
should be used in future, particularly in the planned legislation, as gender
sensitivity has been expressed in relation to the word "Ombudsman".
There are presently four offices engaged in alternative dispute
resolution in the financial services sector, namely in the life insurance -,
short-term insurance-, banking- and retirement industries. Three of these are
Ombudsmen who function under the auspices of voluntary industry arrangements and
the fourth, the Pension Funds Adjudicator, is created in terms of a statute
(sections 30A - X of the Pension Funds Act, 1956).
The need for compulsory alternative dispute resolution was considered in
the light of the pending regulation of all financial advisers across the various
industry sectors by virtue of the Financial Advisersí Bill. This brought the
future constitution, role and function of ombudsmen across the financial sector
sharply into focus. During the process of investigation a number of significant
legal issues surfaced, the most important of which is whether or not ombudsmen
should receive statutory backing in order that -
all product providers and
financial advisers participate in an ombudsman scheme; and
the rulings of ombudsmen are
legally binding on the parties involved.
A number of legal problems will emerge if statutory backing is granted as
envisaged. These essentially go to section 34 of the Constitution, 1996, which
guarantees the right to have disputes resolved by the application of law in a
public hearing by a court. Statutory backing of the ombudsman and binding
rulings raise issues on for instance -
whether he is functioning as a
"court" as foreseen in the Constitution, 1996; and hence
the continued ability of an
ombudsman to apply considerations of equity in his decisions;
the ability of an ombudsman to
mediate in disputes;
the right of parties to have legal
representation and all the concomitant implications of time and costs; and
procedural issues, including
pleadings, the right of appeal and execution of rulings made by the ombudsman,
as well as evidentiary considerations; to name but a few.
It is feared that if ombudsmen lose their informality they will become
bogged down in legal technicality as a result of which the systemís efficiency
in dispute resolution will disappear.
3. OBJECTS OF THIS PROPOSAL
The objects of
this proposal are to:
shortly state the role and
function being proposed for ombudsmen in the financial sector;
propose how the office of the
ombudsman should be constituted;
propose that voluntary schemes be
conditionally exempted from the statutory regime;
deal with the enforcement of
decisions by the ombudsmen;
describe shortly the jurisdiction
being proposed for the ombudsmen;
propose how the independence of
the ombudsmen can be secured;
elaborate on various procedural
issues in relation to disputes resolution;
propose a way to fund the offices
of the ombudsman;
raise the position of the Pension
Funds Adjudicator in this context; and
deal with a number of associated
4. THE ROLE AND
FUNCTION OF OMBUDSMEN IN THE FINANCIAL SERVICES SECTOR
The mechanism of an ombudsman is essentially that of a voluntary,
alternative dispute resolution mechanism. It does not seek to duplicate a court
system of dispute resolution and therefore functions as an adjunct to the formal
legal system. The legal difficulties referred to arise as soon as it is
attempted to deviate from this fundamental role, for instance by attempting to
make the rulings of the ombudsmen binding by statute.
Fundamentally the need for an ombudsman in the financial sector derives
from the desire to provide the consumers of financial products with a dispute
resolution mechanism that is easily accessible, informal, quick, affordable and
effective, without affecting the right of the consumer to enforce his claims in
a court of law or of the product supplier to defend himself in the same court.
Arising from the foregoing it is proposed that the ombudsman considered
for the financial sector in the RSA should not be constituted for any different
purpose than the one stated and in the process become a unique office fraught
with legal problems. Instead it should follow international precedent in
relation to which the following basic approach, as articulated by the Vice
President of the European Ombudsman Institute, is proposed as the fundamental
guiding principles in relation to the future role and function of an ombudsman
in the RSA. It entails two concepts:
Ombudsman is endowed with investigative powers, but has no or only very limited
powers of enforcement. His means of enforcement are investigations, mediation
and persuasiveness. The means which he employs for this purpose are usually
described as soft law. How can it be circumscribed? It is a subject
matter which in its normativity is placed between "hard" law on the
one hand and equity as well as common sense on the other hand."
Ombudsmanís functions do not simply encompass a mere balancing of interests on
the level of co-ordination by recognising iustitia commutativa. Rather,
his job is to protect the weaker party: He should ensure equality in arms, more
precisely: eliminate an inequality in arms with a view to those, as the Swiss
(Insurance) Ombudsman once phrased quite graphically, who must face their
opponent with Ďa lance which is too shortí. "
(This refers to
fairness where the consumer is disadvantaged vis Š vis the product
supplier, eg as a result of his skill and knowledge of the matter in question,
and the ombudsman "equalises" this "gap". It does not in any
way suggest that the ombudsman has or should have any bias in favour of the
5. CONSTITUTING THE OMBUDSMAN
To achieve full
coverage of the financial sector, the following must be done:
An office of an ombudsman should
be statutorily created for each sector of the financial sector, subject to the
rules proposed later in relation to how it is established, funded and the
ombudsmen are appointed.
Participation in an ombudsman
scheme should be compulsory by virtue of the statute, both in relation to
product suppliers as well as financial advisers.
Exemption of voluntary schemes
schemes that exist at present work well in practice. It is the view of those
industries and the parties involved in the schemes, that the proposed
dispensation should recognise these schemes and their benefits. Recognition
entails that the scheme be conditionally exempted from the proposed statutory
framework if it complies with minimum criteria. The minimum criteria would be
a significant majority of product
suppliers in that sector of the industry subscribe to the scheme;
the rulings of the ombudsman,
which may be defined in terms of value, are accepted as binding on the product
suppliers which subscribe to the scheme;
the ombudsman is appointed by an
independent body to which he is accountable to afterwards and monitors his
the funding of the office is done
on a basis that preserves the independence of the office;
objective criteria are established
and applied in the appointment;
the jurisdiction (terms of
reference) conferred is not less than that proposed in the statutory system;
the basis of functioning is not
different from the statutory arrangements, i.e. that the client does not pay -
that it is informal and so on; and
that it demonstrates itself to be
a credible, functioning alternative to the statutory scheme on an ongoing basis.
If a voluntary scheme fails to comply with the conditions stipulated for
it, its exemption will be withdrawn and the product suppliers concerned will
automatically revert back to the statutory scheme.
Those product suppliers in a sector that do not subscribe to the
voluntary scheme will be subject to the statutory scheme. A client may not elect
to still use the statutory scheme if his product supplier subscribes to a
The foregoing proposal raises the anomaly that under the statutory scheme
participation is compulsory but compliance is not, whilst compliance is a
prerequisite for a voluntary scheme, thus implying a stricter regime for
voluntary schemes than for the statutory one. Specific comment is requested on
6. ENFORCING THE RULING OF OMBUDSMEN
scheme proposed in the previous paragraph has the associated difficulty of
ensuring compliance with rulings, as opposed to the voluntary scheme where
compliance is required. In relation to its enforcement the following is proposed
participation in an ombudsman
scheme is compulsory for the institution;
rulings by an ombudsman are
non-binding to avoid the problems referred to in 2.4; but
institutions are encouraged to
voluntarily submit to his rulings.
Since the rulings by the ombudsman will not be legally binding, the
question arises as to why any institution subjected to this system would comply
with the rulings made. The reasons for complying are that if -
the stature of the persons
appointed to act as ombudsmen is such that the parties perceive a fair and
informed ruling (e.g. if retired judges or senior practitioners are used);
the procedure employed by the
ombudsmen to settle disputes is substantively fair; and
the process is fast and cheap to
alternative option of court action with its costs and delays becomes very
unattractive, to both parties. This is particularly so as the product supplier
is compelled to participate fully in the ombudsmanís process which will force
it to consider the outcome seriously.
It was proposed that ombudsmen in the statutory scheme should be
compelled to publicly name product suppliers which do not comply with their
rulings, as a way to encourage compliance. This met with criticism and support
in the previous limited consultation and specific comment is required.
It is proposed that ombudsmen be established by statute on a basis that
will confer limited jurisdiction within each sector of the financial sector.
However, the ultimate objective must be that the entire spectrum of the
financial sector should offer the services of an ombudsman as an alternative
form of dispute resolution to consumers. It is therefore envisaged that whether
by statute or voluntary arrangement:
Ombudsmen should be separately
established for each of the industries such as long-term insurance, short-term
insurance, unit trusts and the like. It is not proposed that a single ombudsman
should have jurisdiction across too wide a number of the industries involved.
A separate ombudsman should be
established for financial advisers, where the complaint is against the financial
If a complaint is made against a
product supplier and a financial adviser on the same facts, the ombudsman for
the product supplier will hear the complaint against them jointly. If the
product supplier is subject to a voluntary scheme to which a financial adviser
is not a party and does not want to submit to, then the statutory ombudsman and
the voluntary ombudsman shall jointly hear the matter.
The preceding approach will enable -
focused activity and specialised
knowledge to develop in the various offices;
funding of the offices on a
"user pays" basis without cross subsidisation by other industries; and
a clearer definition as to
specific and unique aspects of jurisdiction that may be required in respect of
the various industries.
The unit trust industry argues that it should not form part of either a
statutory or voluntary scheme, as their products are relatively unsophisticated
they have a low level of complaints, international precedent is against an
ombudsman scheme and they would prefer a system where complaints are referred to
compliance officers and management companies first. Comment is specifically
requested in relation to this suggestion.
Jurisdiction in relation to the nature of the dispute that may be
considered by an ombudsman should also be limited. In this regard it is proposed
that only issues concerning the liability of a product supplier in relation to
its products should be subject to the jurisdiction of an ombudsman. Where such a
product was sold through the intermediation or on the advice of a financial
adviser, issues surrounding the liability of the financial adviser arising from
his intermediation or the advice given, should also be subject to the
jurisdiction of the ombudsman concerned.
Although the ombudsman will thus not be entitled to issue findings in
relation to the propriety or suitability of a particular product provider or
financial adviser, the ombudsman will be expected to inform both the regulatory
body of that industry, as well as any professional association to which the
financial adviser may belong, of any wrongdoing or unprofessional conduct which
may appear from the facts of a matter in which he is adjudicating. Disciplining
the financial advisor will be the responsibility of these parties, not of the
8. INDEPENDENCE OF THE OMBUDSMANíS
The present system where ombudsmen are appointed and funded by
particular industries creates a perception, wrongly at present, that the
ombudsman is beholden to the industry. It is nevertheless necessary that
this perception be corrected and avoided in future, simply to avoid the negative
It is therefore proposed that the independence of the ombudsmanís
office in the case of statutory schemes be achieved by the following means:
the establishment of the office by
making participation in the
ombudsmanís scheme compulsory for product providers and advisers;
the appointment of the ombudsman
by an independent statutory body such as the FSB;
the appointment takes place in
consultation with the institutions, which should be able to veto an appointment
(specific comment is requested on this point as it may affect the perceived
impartiality of the ombudsman);
the ombudsman must satisfy in predetermined criteria, which may be
prescribed in law;
the funding of the ombudsman takes
place within the framework of the enabling statute and with the assistance of
the independent statutory body (see paragraph 10);
rendering the ombudsman
accountable to the independent body for his activities; and generally dealing
with all ancillary matters through the office of the independent statutory body.
In the case of voluntary schemes, the result obtained by virtue of the
subject to which
it is established must substantially be the same as those set out in the
preceding paragraph failing which exemption will not be granted.
PROCEDURE IN DISPUTE
The ombudsman should primarily resolve disputes by way of mediation as a
first choice of methodology, failing which the parties may proceed with
Legal representation will be discouraged, but not necessarily precluded.
Rules have to be developed that will ensure fairness.
Strict rules of evidence will not apply.
The ombudsman may give due regard to considerations of equity.
It will be required that the procedures implemented and applied by
ombudsmen are substantively fair.
An informal appeal process seems necessary and could be attained by
establishing such an appeal body within the same statutory framework which
establishes the ombudsmen, mindful thereof that the findings by that appeal body
will equally be non-binding.
Since the rulings by ombudsmen will be non-binding in law, there is no
need to provide for execution of rulings made by ombudsmen in the statutory
system. In the case of voluntary schemes, provision should be made to enforce
rulings on the basis of the product providerís submission rather than by court
A consumer may elect to have a dispute referred to an ombudsman but will
not be obliged to.
Referring a dispute to an ombudsman will not have any consequence in
civil law, such as staying prescription or enabling a plea of lis pendens.
Records of proceedings and findings made by ombudsmen will not be
admissible in a Court of law, so as to enable uninhibited dispute resolution.
(This may only be the case where the enabling statute so provides in relation to
statutory Ombudsmen. In the case of voluntary schemes the rules of evidence
apply and admissibility will depend on the law of evidence).
Acceptance of an award made pursuant to an ombudsmanís ruling by a
plaintiff will finally extinguish the liability in law of the defendant to that
plaintiff on the cause of action concerned.
10. FUNDING OF OMBUDSMEN
It is proposed
that the current models for funding of ombudsmen as they apply in the case of
the long-term insurance industry and the short-term insurance industry be
extended to apply to ombudsmen in general. This entails that -
A flat fee is levied upon the
industry in terms of a statutory provision by the independent statutory body;
in addition to the flat fee, a
user charge is levied upon any particular institution or intermediary against
which a complaint is made;
which fee is
levied irrespective of whether the ruling is ultimately favourable or
it should be considered whether to
discourage frivolous or vexatious complaints by plaintiffs by means of some form
of liability for costs under a costs order.
that are exempted may make their own arrangements as to costs, except that the
arrangements should meet with the minimum criterion established to receive
exemption, for instance that complainants are not a source of income.
A product supplier shall only be obliged to make a financial contribution
to either the statutory system or to the voluntary system, but not to both.
11. PENSION FUNDS ADJUDICATOR
The Pension Funds
Adjudicatorís role is settled in law, he is able to make binding decisions and
has compulsory jurisdiction. The limited consultation in relation to this office
elicited a strong feeling that it should remain as is and not become part of an
Ombudsman scheme. This view is accepted, however, comments may still be
submitted in relation thereto.
Recommendations by the Ombudsmen
ombudsmen will be exposed to areas of conflict in the various industries in
respect of which they resolve disputes, they offer a very valuable opportunity
to identify shortcomings in the regulatory system. Accordingly the ombudsmen
will be required to recommend on defects and shortcomings in the regulatory
system, with a view to legislative adjustment by regulatory authorities.
Reporting by the Ombudsmen
obligation will be placed on the ombudsman in both the statutory and voluntary
schemes to report at regular intervals on his activities. The purpose of the
reporting is to -
give an account of his activities;
give a perspective on the state of
the industry and the disputes in that industry; and
name those institutions and
intermediaries against which findings were made but not honoured.
The question as to
where the ombudsmanís creating statute will be located raises the following
It can be located in a separate
new enactment which will exclusively regulate all matters associated with an
ombudsman, and which will also include the establishment of the statutory body
referred to before.
It can become part of the
Financial Services Board Act 1990, in which case a lot of ancillary matters are
already regulated and various supporting services have been established which
would have to be duplicated in the previous option, thereby increasing costs.