Can the High Court land a knockout punch on the FAIS Ombud?

The Best of FAnews.co.za is a new magazine feature in which we highlight a popular newsletter published online in the past 60 days. We rehash the core argument presented in the newsletter before considering some of the views raised via our reader comments.

This month’s favourite was titled Goliath versus Goliath: Can the High Court pin the FAIS Ombud, published 8 August 2012. It reports on recent Ombud determinations and the ensuing High Court action following the collapse of the Sharemax property syndication.

The Ombud had ordered Deeb Raymond Risk of D Risk Insurance Consultants CC to compensate five of his clients to the tune of R3 million, with three more complaints pending. Risk, backed by his professional indemnity (PI) insurer Stalker, Hutchinson and Admiral (SHA), took on the FAIS Ombud in the High Court.

Risk wanted the Ombud determinations set aside because he felt he was denied his constitutional right to a fair hearing. It was implied that the Ombud was not "procedurally fair” – an allegation frequently levelled at the institution… He also proposed that all property syndication matters be heard in court.

FAnews.co.za would hate to have to take a broker (supported by a professional indemnity insurer) or large financial institution to court. On the flipside we cannot allow the Ombud to steamroller advisers with scant regard for due processes of law. Many of our readers share this view.

"The FSB are guilty of ‘operational ability’ failure not to mention total internal inefficiency,” said Anthony. He ranted that it was not brokers who failed the Fit & Proper test, but rather the overrated regulator. He was one of many who perceived the regulator as arrogant.

Other readers focused on the long-term consequences of the court action. "Any call to PI insurers to compensate Sharemax investors – or pay out for other institutional losses – makes them the de facto insurer of last resort,” wrote Gavin. He said that SHA was correct to defend the matter. And he warned that PI underwriters would be forced to rethink the covers they offered to financial advisers!

Under the nom de plume, Thoughts, another reader questioned the regulator’s ability to issue licenses. Many respondents were unhappy that intermediaries had to carry the "can” due to shortcomings at both regulator and product provider. Advisers have to apply "perfect process” or pay up as the last line of defence for consumers. "If your process is not perfect you are toast,” wrote Thoughts.

The High Court has since dismissed Risk’s application with costs. As we went to press the industry was anxiously awaiting SHA’s next step… Will they appeal through the courts? Or will Risk avail of the FSB appeals mechanism? More importantly – does Risk have a winnable case?

The constitution demands that the same law applies whether you go to court or use alternative dispute resolution (ADR) mechanisms. "Ombudsmen are part an ADR process and cannot apply alternative law,” wrote Peter. "They cannot be held up as a place for consumers to arbitrage their complaints because they believe they will get a favourable result”.

"It would be easier [and more appropriate] for disgruntled Sharemax investors to sue either the FSB or DTI… Both were negligent and both are in a better position to pay compensation than the broker,” wrote Paul. Perhaps disgruntled investors will heed his call and implement a class action!

The consensus is that we should move away from scenarios where the adviser is held up as the villain. Otherwise John’s conclusion will hold and "clients [will continue to] treat advisers with misplaced suspicion as regulators and sectors of the media make ghosts where there are none”.