Mediation may prove to be detrimental in exposing financial fraud
Over the past two years, a major focus of the financial services industry has been the fact that industry regulators, and companies, have embarked on a major cost cutting programme. Different to austerity measures, cost cutting measures aim to improve the performance of companies and to make the financial services industry accessible to a greater sector of the population.
While this will undoubtedly benefit the industry, there is the possibility that cost cutting measures may also become detrimental.
Legal eagles may be forced to fly a bit lower
Legal costs are one of the highest costs that a company has to come to terms with and facing a protracted legal battle will not only damage a company financially, but may also do significant damage to a company's reputation, which may never be recovered.
This however may be a thing of the past as the Magistrates Court has announced that mediation will be introduced as a preferred alternative to litigation from 1 August this year, when amendments to the rules regulating the conduct of proceedings of South African Magistrates' Courts come into effect.
Yvonne Wakefield, Founder of Caveat Legal, says the introduction of court-annexed mediation into the South African legal system will hopefully lead to quicker and more cost effective dispute resolution in matters that fall under the jurisdiction of the Magistrates' Courts.
"In terms of the new rules, a Magistrate or the parties themselves may refer a dispute for mediation prior to the commencement of litigation or where litigation has already started, but before judgment has been passed and provided all parties agree. The new rules set out the procedures that must be followed once a dispute has been referred to mediation,” says Wakefield.
Wakefield says the amended rules make mention of two very powerful reasons for encouraging mediation over litigation. Mediation helps preserve relationships between litigants or potential litigants, which may become strained or destroyed by the adversarial nature of litigation, and mediation facilitates an expeditious and cost-effective resolution of a dispute between litigants or potential litigants.
According to Wakefield, notwithstanding the broadened jurisdiction of Magistrates' Courts as from 1 June this year, regional Magistrates' Courts will be able to hear matters involving amounts of up to R400000, most commercial disputes far exceed the jurisdiction limits and are usually resolved in the High Court with litigation costs running into hundreds of thousands, even millions of Rands.
Two sides of the same coin can paint a very different picture
This could prove to be a good move for the financial services sector. One of the perennial problems that companies and industry regulators face in South Africa is the fact that the public is not educated when it comes to the financial service industry. And the fact that courts are taking a hard line on companies by refusing to accept ignorance as a valid excuse for innocence, places companies between a rock and a hard place. Mediation is more of a consultative process than litigation and lends itself more to the fact that the process can be used as a means to educate certain members of the public in certain situations. This achieves the dual purpose of education and correctly apportioning the guilt between the two parties in a dispute.
This would certainly have been the case in the Craig Keshwar case which we profiled last year. While Reginald De Ghee was undoubtedly guilty according to the Financial Services and Intermediaries Act, questions over Keshwar's ignorance and FNB's blatant disregard for the fraudulent business which was being done at one of their branches under the guise of De Ghee being a representative of FNB, would surely have been addressed properly during a mediation process.
There is however the other side of mediation that may damage the industry. The harshness of the rulings of the Ombudsman in some of the determinations we have profiled indicate that a no nonsense approach is being taken in order to clean up the reputation of the industry. While some argue that this is a draconian approach, others say that publically naming and shaming unscrupulous individuals is the only way in which this will be achieved.
If mediation becomes the preferred method to settle disputes, these cases will largely be done behind closed doors where companies who realise that they are wrong will settle out of court where the complainant will receive a significantly smaller pay out than if the full legal proceeding – in this case mediation process – was followed.
How then will this corruption be exposed? How will the public get wind of the De Ghees and James Sterns of the world? Although the amount involved in the Ronald Bobroff case far exceeds that of the Magistrates Court, some reports estimate that Bobroff could be facing a multi-million Rand lawsuit. Imagine if this case went straight to mediation? The public doesn't know about the fraud these individuals commit, which leaves the door open for more fraud to occur.
Road signs on the road to mediation
"Parties to a dispute generally opt for mediation for three reasons: they want to maintain their business association with each other, they want resolution as quickly as possible, and they want to prevent exorbitant legal fees. Since mediation is not about an adjudicator choosing between a winner and a loser, but rather about the parties resolving a dispute for the benefit of both of them, relationships are far more likely to survive a mediation process than litigation,” says Wakefield.
While this is completely understandable, one needs to strike a balance on how the mediation is conducted. The role that the FAIS Ombud, the Short-term Ombud and the Pension Fund Adjudicator plays when handling determinations and complaints is a mediation process. However, if a case has been handled in such a manner, and the complaint is upheld, then the complainant should be encouraged to pursue further restitution in the court where full legal proceedings should be held. The educational element of the complaint must then be dealt with during the complaint stage by the relevant industry body. Perhaps as opposed to just calling for documents and then handing down a ruling, representatives from the Ombud can engage with parties during a few meetings.
This would fulfil the often looked over role of the justice system and industry bodies who have a duty to expose fraud and corruption.
Editor's Thoughts:
While mediation is becoming a preferred method of legal resolution, one has to approach each case asking if mediation will best serves the industry and the individual in that specific case. Not all cases deserve to be resolved behind closed doors. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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