Great job FAIS Ombud; but what about that syndication mess?

The FAIS Ombud Annual Report 2021-22 released late November 2022 details the busiest year on record for the institution tasked with resolving consumers’ complaints against poor advice or conduct by South Africa’s financial intermediaries. During the period under review, the Office of the FAIS Ombud (Office) received a record 11 827 new complaints, growing by 10.8% over the prior year. More than two thirds of the complaints received, or 8 011 cases in total, fell within the office’s mandate for further investigation.

Property syndication complaint bottleneck

The media release to announce the 2021-22 report launch contained a healthy dose of self-congratulation for a job well done; but was mostly silent on the elephant in the room, being more than a thousand active property syndication matters that remain on the Office’s books despite having been made years ago. These complaints were made against intermediaries who advised consumers on and / or facilitated consumers’ investments into various property syndication schemes going back as far as the mid 2000s. This newsletter will revisit the topic in a paragraph or two, deferring the tough discussion till after the Office’s operational statistics are unpacked. 

The fact that more complaints were received in the latest review period, and that more of these complaints were within the Office’s mandate, was offered up as evidence that efforts to expand awareness of the Office’s services and ensure a broader understanding of its existence were bearing fruit. Of the 11 827 complaints received in the period, 4 957 were dismissed; 3 791 referred to alternative fora and 1 269 settled in favour of complainants. A total of 1 810 of complaints received in 2021-22 were pushed into the next period. At first glance, the new cases received during 2021-22 were handled at a reasonable pace, with 82% of complaints resolved within a period of three months of receipt; 88% within six months; and 94% within nine months. PS: whether or not six months or longer is acceptable for the resolution of complaints in the digital age is worth further debate! 

Clawing back another ZAR70 million, almost

Adding in complaints from prior periods, the FAIS Ombud resolved 12 089 matters over the period, with 1 823 matters settled fully or partly in favour of consumers. The overall settlement value of almost ZAR70 million was also the highest value returned to consumers recorded by the Office over one year. “The positive aspect of this achievement is that most of the settlement value was attained from informal settlements achieved via conciliation processes between financial services providers (FSPs), consumers and the Office,” wrote acting FAIS Ombud, Advocate Nonku Tshombe. These successes aside, the Financial Services Tribunal received 158 applications for reconsideration, with nine of 145 finalised applications referred back to the Office for further investigation. 

The report also highlighted one of the big developments during the 2021-22 period, being the appointment by the former Minister of Finance, Tito Mboweni, of the first Ombud Council Board and Chief Ombud for the Council, giving effect to the new financial Ombud system in terms of section 175(1) of the Financial Sector Regulation (FSR) Act. To refresh your memory, dear reader, this council has oversight powers over both the statutory and industry complaints resolution mechanisms, including the Office of the Pension Fund Adjudicator; the Office of the Ombud for Financial Services Providers or FAIS Ombud; the Office of the Credit Ombud; the Ombudsman for Long-Term Insurance; the Ombudsman for Short-Term Insurance; the Ombudsman for Banking Services; and the Johannesburg Stock Exchange Ombud. 

Consumer protections to drive financial inclusion

The broad objectives contained in South Africa’s financial services legislation are reinforced by the complaints resolution mechanisms. “The market conduct policy approach should be seen as a supporting pillar of the country’s financial inclusion policy [given that] higher standards of customer protection can drive greater inclusion,” wrote Finance Minister Enoch Godongwana, in his foreword to the report. He took the opportunity to promote the consolidated and streamlined market conduct legislation expected from the Conduct of Financial Institutions (COFI) Act for its potential to further strengthen consumer protections. 

Advocate Tshombe’s opening comment to the 2021-22 Annual Report was focused on evolving the Office’s services with the future in mind. The acting FAIS Ombud observed that COVID-19 had catapulted South African business into various digital platform-based business models, as seen in the myriad active and operational fintech firms in the country. “In the above circumstances, it is important for FSPs as well as consumers to note that while the digitised world has made it possible for financial advice and financial products to be provided via any number of platforms, such advice is still subject to regulatory requirements, as has been the case with written and verbal advice involving interaction with a human being,” she wrote. 

Expect more property syndication determinations

The Office of the FAIS Ombud has committed to ensuring that the number of active property syndication complaints is reduced by 10% by 31 March 2023, meaning they will have to finalise at least 100 of the 1 004 cases on the books. Hmm… Assuming they resolve 100 per year from 2022-23 onwards, we might still have 100 unresolved matters in the 2029-30 year! Given the datedness of most of these complaints, we expect determinations to be the order of the day… 

Two such determinations were published in the current report under the headings ‘what constitutes adequate disclosure of investment risks’ and ‘the many factors that determine the suitability of an investment’. The former matter relates to an investment into the Blue Zone property syndication scheme in February 2007, which the Office determined to be “wholly unsuitable to the complainants”. Furthermore, “the complainants did not understand the advice and were not placed in a position to make an informed decision” despite the investment representing high risk. This matter was determined in favour of the complainants and the respondent was ordered to repay the capital they invested in the syndications plus interest. 

Negligent cause of the complainant’s loss

The latter determination dealt with a combined ZAR550 000,00 investment into Highveld syndications 19 and 21, part of PIC investments, and made during 2013. Although covered in great detail in the 2021-22 Annual Report, the final determination can be summarised in a line or two: “The Office finds that, in advising complainant to invest in PIC, respondent contravened sections 2, 3(1)(a)(i), 7(1), 7(2), 8 (1) and 8(2) of the General Code of Conduct for Financial Services Providers. It is also found that this conduct was the negligent cause of complainant’s loss”. The respondent was ordered to return the capital amount invested. 

Writer’s thoughts:
I am always fascinated by the level of detail that the FAIS Ombud Annual Report contains, with some of the determinations unpacked over 10 or more pages… My guess, it would take at least two hours to complete a proper ‘reading’ of the PIC matter just mentioned… Do you follow the determinations issued by the Office of the FAIS Ombud, or do you have enough compliance issues to keep track of without making extra work? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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