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A clear matter of jurisdiction

29 June 2006 Angelo Coppola

Speaking exclusively to FA News, Charles Pillai, the Ombud for Financial Services Providers, has called for a compensation fund to be established to assist consumers who have suffered financially as a result of poor advice from registered financial advisors.

This call came in the light of his office's most recent ruling where an advisor was fined over R200 000 for acting negligently and recommending that a client invest funds in a 'scam'.

While Pillai pilloried the advisor he didn't have kind words for the country's insolvency laws, suggesting that the law allowed people to declare themselves insolvent, and simply close the business and re-open around the corner, and continue trading, leaving the creditors penniless.

The claimant in the most recent ruling welcomed the FAIS Ombud's ruling, although he didn't hold out much hope for getting any of his money back.

Pillai said that the establishment of a compensation fund would go a long way to re-establishing the consumer's faith in the financial services sector, which has been battered by rulings from his office and that of the PFA.

In the UK for example consumers generally received a proportionate amount in compensation once an intermediary's activities had been ruled against.

Locally the normal rules of execution of a judgment can be frustrating to say the least. The due process involves a rite, a sheriff, the services of an attorney, and then the identification of immovable, moveable or executables assets.

He touched on professional indemnity insurance as an option, suggesting that intermediaries have this in place for those times when negligence results in a loss. The tricky issue is when that negligence boarders on recklessness, and whether the PI insurer will cover it.

Ultimately as it currently stands, if there is a dispute between the intermediary and the insurer the consumer is going to suffer. There is also the question of whether a ruling by the FAIS ombud makes any PI insurance claim null and void. The matter gets a little more complicated if the FSB steps in rules that an advisor is not fit and proper and bans that person from operating.

In terms of the process that the FAIS ombud follows, Pillai made a couple of points. Firstly his office can't have an intermediary 'struck from the role'.

Essentially the ruling will be published by the FAIS ombud, and sent to the FSB. This has to automatically happen as it is provided for in the legislation. The FSB will conduct its own investigation and determine whether any further action will be taken against the intermediary, in terms of its fit and proper requirements.

When it came to the question of jurisdiction of his office over brokers operating in the medical schemes environment he says that the line is and law is very clear. It's all about the definition of a financial product and whether advice has been offered.

A medical scheme and membership is a financial product. The only exception is when an intermediary operates as a medical scheme administrator. Issues around the administration of a scheme are generally dealt with by the Council for Medical Schemes (CMS).

For those brokers operating in this environment Pillai says that he will investigate consumer complaints and make recommendations to the CMS. They would generally follow the recommendations of the FAIS ombud, as a thorough investigation would have been undertaken.

The CMS can have a broker removed from the role, while the FSB can do the same in terms of the FAIS legislation.

Pillai also reminded intermediaries that he reacts on consumers complaints that relate to the activities of intermediaries. He recounted one case where an intermediary became aware of certain scam-like activities, and began his own investigation, submitting the information to the FAIS ombud.

The ombud's office approached the affected consumers and indicated that they would be investigating the intermediary, upon which the complaint was withdrawn.

Pillai indicated that while his office was aimed at assisting consumers he has on several occasions ruled against a consumer. The message to consumers is just as clear. Pillai says his office shouldn't be considered a lotto shop. Consumers also have to take some responsibility and there is a duty of care here too.

Turning back to his office Pillai confirmed that he is continuously looking for suitably qualified staff. There is a small pool of CFPs in the country and Pillai has four of them working in the office.

There is also talk that the office will soon be getting a deputy Ombud to allow Pillai to focus on his eventual goal the creation of a single point of entry for consumers with complaints about financial services intermediaries a overarching financial services ombud.

Editor's thoughts:
* The compensation fund is a sound idea. Funding could come from a variety of places, including perhaps a portion of which the FSB collects for registration, in much the same was as the fuel price is split up to take care of a range of government responsibilities.

* Added to which perhaps the financial services providers in the country could contribute a percentage of their total sales to the fund. In this way they would be gently reminded to develop products that cant be mis-sold, or churned, and also showing their commitment to providing a safety net for consumers.

* The interview highlighted one important point there is a serious lack of financial literacy in the country, and not just in the under-educated sector of the country. Most of the victims of scams are educated but greedy people. I'm not talking about marketing material, or the initiatives being driven by the LOA and the FSB. The providers could do a whole lot more to educate consumers, without trying to sell them something.

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