Moonstone: Super Ombud on the cards again

Two articles in Saturday’s Personal Finance make it clear that the current system of handling complaints is not cast in stone. The gist of the articles is summarised as follows on the Personal Finance website:

A breakdown in relations between the former Ombudsman for Short-term Insurance and the insurance industry seems to be behind the decision by the board of the ombudsman’s office to appoint a new ombudsman late last year. But the board will not be drawn on the reasons for its decision, which may even be invalid. The controversy has attracted the attention of the National Treasury, which is investigating both the board’s decision and the viability of creating a single consumer complaints resolution office for the financial services industry.

The contract of the previous Short-term Ombud was not renewed when it expired on 31 December 2011, and a retired attorney, Dennis Jooste, was appointed in his place. The article, as well as an insert containing the opinion of Brian Martin, the previous incumbent, seems to indicate that his contract was not renewed as he refused to “…toe the line.”

The fact that the Short-term Ombud is industry funded has always been a bone of contention, and is often used by detractors of Industry Ombuds to cast doubt on their impartiality. This incident could add fuel to the fire of those who propagate this theory.

This same reasoning is used by those in favour of a Super Ombud, whose function would be to oversee a “…single consumer complaints resolution office for the financial services industry.” In effect, it could, in the long run, mean the end of the Long-term, Short-term and other industry appointed Ombuds after a period of having both systems running concurrently.

A number of industry opinions were gauged for the article. The view expressed by Peter Dempsey of ASISA is, in my view, the most balanced one.

“The outcomes that we would want are that the ombud system (multiple or single) should meet the following broad goals: namely, it must be accessible to all consumers, cost-effective and efficient in terms of processes, able to provide speedy resolution of issues, have a sound base for rulings and be credible in the eyes of all stakeholders.”

I would like to discuss two of the arguments raised as possible challenges for such an office.

Expertise:

Cas Coovadia, MD of the banking Association expresses his concern thus:

“A single statutory ombud would also not have the sort of expertise in particular sectors that the current voluntary ombuds have. This would, in our view, dilute such an office from being as effective as a voluntary ombud for a specific sector.”

Despite input from the industry when formulating legislation, the biggest challenge for any regulator is to apply the law in a practical manner.

I have often stated that, in my personal view, the FAIS Act came into being largely as a result of problems experienced by investors. While other disciplines were also in need of a clear set of rules governing advice and intermediary services, such controls should be sector specific. We are of the view that there should be legislation aimed at addressing the specific needs of each sector of the industry, rather than to follow a one-size-fits-all approach.

This very same problem would hamper the ability of the Super Ombud to regulate legislation in a practical manner. The article points out that the Super Ombud’s office is likely to contain sub-divisions which will deal with the different sectors of the industry. My problem lies with the understanding and experience of the industry by the people staffing these divisions.

Where the Long-term Ombud, for instance, concerns himself essentially with one piece of legislation, the Super Ombud would have to take into account additional regulations such as FAIS and the Consumer Protection Act. Add to this some of the regulations still being considered (Treating Customers Fairly comes to mind), and it becomes a huge challenge to dispense justice fairly.

A further complication arises when one weighs up the practical world of the industry against the legal theory that guides the actions of regulators. While this applies to any new legislation, one only needs to look at the impact of the new Companies Act on business to understand just how wide the gap between the real world and the ideal world, envisaged by legislators, really is.

The inability of the lawmakers to understand the practical impact of their intentions is perhaps best illustrated by the woes of the Promotion of Access to information Act. This piece of legislation was promulgated 10 years ago, and the final implementation was again postponed for another 36 or 48 months, depending on which section of the Board Notice you read.

This, coupled with prejudice against the industry, often blown out of proportion by the media, could be a huge challenge to dispense justice fairly.

Cost:

Cas Coovadia, MD of the Banking Association is quoted as follows:

“The voluntary ombuds are also funded by the sectors, while a statutory single ombud would have to be funded from the fiscus, which, given the performance of the voluntary ombuds, would be a waste of taxpayers’ money.”

Many smaller FSPs might welcome the news that tax payers’ money might fund the Ombud in future.

The system of levies has been a bone of contention since implementation, with many FSPs asking why they should pay for their own “policing”. Their feeling is that the cost should be borne by the consumer as the ultimate beneficiary of the service, or by the state as part of its constitutional duty to its citizens.

I have yet to hear a convincing counter argument to this.

The rate at which industry regulation is increasing points to one outcome only: financial advice and intermediary services will become totally unaffordable to all but the very rich. This is exactly the opposite of what all the legislation wants to achieve in the first place.

A burgeoning bureaucracy, coupled with a shrinking FSP base to levy, will make financial advice extremely expensive. On top of this, there is the investigation into doing away with commission.

Unless sanity prevails, we are heading for tough times. Growth in advisor numbers is a “long and winding road”. The continued existence of personal financial advice depends on national treasury seeing the light before it is dimmed.