Long Term Debt Markets in South Africa: A case study (Part-II)

By Rajeswari Sengupta, IFMR B-School & Vaibhav Anand, IFMR Capital

The evolution of South African debt market can be divided in four phases. Debt market reforms under phase 1 and 2 were covered in the earlier post as part of our series on Long Term Debt Markets (LTDM). In this post, we shall cover phase 3 and 4 reforms.

Phase 3: This phase began in 1996 when Bond Market Association (BMA) received the exchange license. BMA was soon transformed to Bond Exchange of South Africa (BESA), a self-regulated organization (SRO), that would operate within the rules and directives set by Financial Services Board (FSB) . The establishment of a formal bond exchange was one of the recommendations of the Jacobs committee. BESA adopted the G-30 recommendations on clearing and settlement and established UNEXcor as a recognized clearing house . During the same period, South Africa decided to follow the widely accepted regular auctions practice as a method of selling primary issues of the government securities. In 1998, South African Reserve Bank (SARB) was made responsible for conducting auctions of benchmark bonds on behalf of the National Treasury. A formal system of market making was put in place and primary dealers were appointed to quote bid-ask prices and to provide liquidity in the secondary market for government bonds.

During the early 1990s, the South African economy was grappling with high fiscal deficit (4-7% of GDP), soaring government debt (around 45% of GDP) and high interest rates (16-18%). In 1996, the government decided to review its entire debt management policy. The following initiatives constituted some of the most important components of economic reforms in South Africa.

A framework for managing government debt, cash and risk was put in place. The framework identified certain gaps in the debt management and monetary policy of the government. Some of the identified areas of concern were the incoherent funding activities among state owned enterprises and the lack of coordination between the national treasury’s liability management and SARB’s monetary operations. In order to address the latter, a detailed work plan was developed for the public debt management committee . The reform initiatives also resulted in the Public Finance Management Act (PFMA) of 1999 and the Municipal Finance Management Act (MFMA) of 2003.

Phase 4: This phase began in 2001 and witnessed a remarkable increase in the issuance of corporate bonds. In 2000, the outstanding nominal corporate debt was less than R25 billion. By 2007, there were more than 800 outstanding corporate debt issues resulting in a nominal outstanding amount of R265 billion, which accounted for 34% of the total outstanding listed debt in South Africa. The period was characterized by lower interest rates, underleveraged corporatesv, reduction in fiscal deficit resulting in low supply of new government debt, and implementation of BASEL-II norms leading to migration of corporate loans from bank balance sheets to capital markets as a result of pressure on banks to price corporate loans correctly.

India & South Africa: Post reforms

The economic and debt market reforms in South Africa, which were initiated in 1996 and lasted for nearly two decades, resulted in significant improvements in various economic and market indicators. In particular, the diverging trends of fiscal deficit-to-GDP and government debt-to-GDP ratios in South Africa and India provide strong evidence of the efficacy of reform measures adopted by South Africa.

During 2000-2008, South African economy grew at an average rate of 4 to 5% , fiscal deficit as a percenatge of GDP declined from 5% in 1997 to less than 0% in 2007 , consumer price inflation remained less than 9% and interest rates declined from 22% in 1998 to 12% in 2005. During the same period, Indian economy displayed significant growth (6 to 8%), inflation remained low and varied in the range of 4 to 6%, and interest rates declined from 14% in 1997 to less than 12% in 2006. However, fiscal deficit in Indian economy remained high in the range of 3 to 5% of GDP throughout the period.

Moreover, during 2000-08, as a result of prudent public debt management, South Africa witnessed a decline in government debt-to-GDP ratio from nearly 50% in late 1990s to less than 30% in 2008. In India however, the debt-to-GDP ratio rose sharply during the late 1990s from less than 30% to around 45% during 2000-08.

Capital markets in both economies achieved greater depths during 2000s till the 2007 crisis. The market capitalisation of listed companies as percentage of GDP reached close to 300% in South Africa and 140% in India by 2007 from 150% and 50% respectively in 2000. Domestic credit provided by banking sector as a share of GDP witnessed a growth of 30% and 50% in South Africa and India respectively during 2000-07.

Key lessons for India

During 1980-90s South African debt market was facing issues which were not much different from what the Indian debt market is facing today. These include large fiscal deficit, a debt market dominated by government bonds, high interest rates and restrictive investment mandates imposed on financial institutions. The market and policy level reforms adopted by South Africa addressed these issues and resulted in the emergence of an efficient debt market.

Against this background, the following are a few potential lessons that may be relevant to the Indian context:

  • Regulatory and policy level reforms may prove to be more effective when designed and implemented in coordination with market participants. Further, self-regulation by market players may be more effective than any enforced control.
  • Restrictive investment mandates tend to limit participation of financial institutions in primary as well as secondary debt market. Further, such norms may result in long term holding of government debt in skewed proportions, illiquidity as well as lack of pricing information. Relevance of such investment mandates may need to be revisited from time to time.
  • Issues such as crowding of debt markets by government securities cannot be addressed by market participants and regulators alone-better management of public debt and cash could result in a reduction in the debt requirements of the government, which in turn would provide more market space and create greater demand for corporate debt securities.
  • High fiscal deficit and high interest rates may keep corporate borrowers away from debt markets. Better coordination of public debt management and monetary operations is essential to deal with these issues. Further, an effective legal framework ought to be in place to ensure proper public debt and cash management.

Long Term Debt Markets in South Africa: A Case Study (Part-I)

This is the third post in our blog series on Long Term Debt Markets (LTDM) in the Indian context. In this post (and the next one) we discuss the evolution of LTDM in South Africa and identify key lessons for the Indian debt markets.

By Rajeswari Sengupta, IFMR B-School & Vaibhav Anand, IFMR Capital

Large fiscal deficit, high interest rates, inadequate market infrastructure, lack of transparency, excessive regulatory restrictions on the investment mandate of financial institutions, and distortionary tax and stamp duty regime are some of the key issues that may potentially hamper the development of a well-functioning corporate debt market in an emerging economy. Not all of these concerns can be addressed by regulators and market participants alone. Some of these issues also need the political will to bring about legislative, regulatory and fiscal reforms. In order to gain insight into the required reforms, it may be useful to look at an economy that implemented not only the regulatory but also the policy level reforms in debt markets.

South Africa is one such economy where the long term debt market (LTDM) reforms lasted nearly two decades starting from early 1980s. In this post, and the following one, we shall briefly discuss the evolution of LTDM in South Africa so as to draw some key lessons for the corresponding Indian scenario.

India and South Africa- A quick comparison

During the 1980s and leading up to the 1990s, the South African economy (SA) witnessed low GDP growth (-2% during 1991-92)i , high fiscal deficit (4-7% of GDP during 1991-94)ii , high inflation (13-15% during 1991-92), and high lending interest rates (16-18% during 1991-93). During the same period, the Indian economy also experienced low growth rates (3-4%), reasonably high fiscal deficit (3-4% of GDP), high inflation (11-13%), and high interest rates (15-18%), as seen in the charts below.

During early 1990s, both countries had outstanding government debt-to-GDP ratio of around 35-40%iii and almost had no market for corporate bonds.

However, SA has traditionally had more depth in its capital market. The market capitalization of listed companies (as % of GDP) in SA was nearly 150% even during the early 1990s as compared to less than 50% in India. Also, the domestic credit provided by banking sector was close to 150% of GDP in SA as compared to 50% in India during this period.

Throughout 1990s both economies had a long term debt market dominated by government securities. Corporate debt market was insignificant in both countries during 1990s. The first corporate debt in SA was issued by South African Breweries in 1992. In 1996, the corporate debt issuance in India was only 0.56% of GDP.

The early 1990s’ liberalization and privatization reforms in India coincided with a major economic transformation in SA. The policy reforms that began in early 1980s in SA and continued till late 1990s resulted in a remarkable improvement in the overall macroeconomic environment thereby providing a strong fillip to the emergence of a well-developed corporate LTDM.

South Africa: Debt market reforms

The evolution of SA debt market can be divided in four phases. Debt market reforms under phase 1 and 2 are covered in the current post. We shall discuss phase 3 and 4 reforms in the next post.

Phase 1: This phase started at the end of 1970s and continued till 1989. The SA government started issuing bonds at a discount on an open-ended tap basis after the Electricity and Supply Commission’s (ESKOM) first discounted bond issue in 1981iv. South African Reserve Bank (SARB) acted as the principal underwriter and the major issuers were the National Treasury, the Landbank, and public utilitiesv.

During 1980s the government also appointed various committees and commissions (the De Kock Commission, the Stals committee, and the Jacobs committee) to provide recommendations for SA capital market reforms. The Jocobs Committee in 1988 suggested that the requirement for holding prescribed assets should be abolished and highlighted the need for market makers in government bondsvi. As per the Prescribed Assets Act, created in 1958 to generate funds for semi-government organizations and the development of South African homelands, the pension funds and the insurance companies were obliged to keep part of their assets as prescribed assets in public sector debtsvii. Until 1989, the pension funds had to invest 53% of their book value assets and long term insurers had to invest 33% of their liabilities in government debt. By late 1980s, the Prescribed Asset act was repealed. The SA government also took the initiative to consolidate smaller issues to create benchmark in different maturitiesviii. As a result a nascent secondary market in government bond started developing.

Phase 2: This phase covered the period from 1989 to 1996. The formation of Bond Market Association or BMA (with no exchange license) comprising bond issuers, intermediaries, banks, brokers, and investors marked the beginning of this phase. The aim of BMA was to formalize the market structure, achieve greater depth and increase transparencyv. The BMA started paper-script based trading through open outcry on Johannesburg Stock Exchange (JSE). Around the same time, SARB started acting as a market maker for government securities and public utilities started quoting bid and ask prices in their bonds.

In 1989 the major clearing and bond settlement banks, along with SARB, created Universal Exchange Corporation Ltd (UNEXCor) in order to develop an electronic settlement system using a central securities depository. In 1994, UNEXCor was appointed as the clearing house for the SA bond market. The secondary market in government and state owned entities was also developed during this period. The first corporate bond was issued in 1992 by South African Breweriesix.

i – Source: World Bank databank, 2012
ii – Source: www.tradingeconomics.com
iii – Source: www.reinhartandrogoff.com
iv – Source: Guidelines for public debt management, 2003 by IMF & The World Bank
v – Source: The challenges facing the South African bond market, 2007 by X P Guma
vi – Source: A South African Corporate Bond market, 1992. Investment Analyst Journal
vii – Source: Guidelines for public debt management, 2003 by IMF & The World Bank
viii – Source: Bond market development in emerging economies: A case study of the BESA, 2008 by Tagara Hove
ix – Source: Credit Indices Guide, 2007. Standard Bank and BESA


‘Treating Customers Fairly’ Policy in South Africa

By Darshana Rajendran, IFMR Finance Foundation

As part of our series of posts on Consumer Protection, this post looks at the ‘Treating Customers Fairly’ (TCF) initiative which is being implemented in South Africa to ensure stronger market conduct regulation.

Issues concerning the fair treatment of customers arise out of the problem of asymmetric information between the financial services providers and the consumers. The ‘Treating Customers Fairly’ programme is a regulatory initiative (first implemented by the FSA in the UK) aimed at helping customers fully understand the features, benefits, risks and costs of the financial products they buy and minimising the sale of unsuitable products by encouraging best practice before, during and after a sale.

South Africa sees the ‘Treating Customers Fairly’ initiative as a framework to ensure tougher market conduct oversight and is on route to implementing it, based on the UK version, for the financial services industry. This will apply to all financial services that fall under the regulatory ambit of the Financial Services Board (FSB), which will soon be the market conduct regulator for both banking and non-banking services in line with the proposed twin peaks regulatory model.

TCF is a regulatory approach that seeks to ensure that specific, clearly articulated fairness outcomes for financial services customers are demonstrably delivered by regulated financial institutions. The TCF fairness outcomes, positioned from the perspective of the customer, are the following:

Outcome 1: Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture.
Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
Outcome 3: Customers are given clear information and are kept appropriately informed before, during and after the time of contracting.
Outcome 4: Where customers receive advice, the advice is suitable and takes account of their circumstances.
Outcome 5: Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
Outcome 6: Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

These outcomes are to be demonstrably delivered at every organisational level and at every stage of the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling. The primary responsibility of firms in implementing TCF will be to demonstrate that the first outcome (fair treatment of customers is central to the firm’s culture) is achieved. The other outcomes are seen as a consequence to achieving the first outcome. The following points are recommended in order to help firms foster a good TCF culture framework:

– Right Leadership
– Right Strategies
– Right Decision Making
– Right Controls
– Right Recruitment, Training & Competence
– Right Rewards and Recognition

Firms will be required to provide evidence that they are treating customers fairly and have embedded TCF in their organisational culture. This will require Management Information (MI) mechanisms designed to monitor and measure the firm’s performance in delivering the six outcomes and the elements of the TCF culture mentioned above. This may require both quantitative as well as qualitative management information. Firms will also be required to use their MI mechanisms to assess their own success and failures in delivering the outcomes. A self-audit checklist is also available which could form part of the firms TCF MI. This checklist helps to identify gaps in the following areas:

• Staff training/awareness of TCF
• Sales and marketing material
• Product understanding
• Advice and sales process
• Fact find and flow of information to the client (including after-sales)
• Complaint handling
• Remuneration/incentives
• Risk assessment of TCF non-compliance
• Record keeping and Management Information

With regard to reporting, The FSB suggests that it would like to have both non-public reporting (e.g. regulatory returns, compliance reports) and public reporting (e.g. claims statistics, complaints volumes and investment performance against benchmarks).In terms of enforcement, The FSB would first negotiate any corrective action by engaging with the firm’s senior management. Where this fails or where the FSB considers that there is a serious risk to consumers or unacceptable conduct on behalf of the firm, it would take formal action against the firm. The FSB’s current enforcement powers include:

• Administrative fines and penalties
• Declaration of business practices to be undesirable, with associated powers to order cessation or amendment of the practices concerned
• Suspension or withdrawal of regulatory licenses
• Termination or withdrawal of the approval of certain individuals to act in certain capacities
• Damages and compensation awards (including punitive damages)
• Referral of certain matters to the High Court
• Referral to the National Prosecuting Authority for criminal prosecution of individual wrongdoers, where a statutory or common law criminal offence is committed

South Africa’s TCF policy is expected to be fully implemented by 2014 and it is hoped that the initiative will lead to more optimal outcomes from the perspective of the regulators, consumers and ultimately, firms.

Discussion paper


Regulating consumer credit intermediation

By Deepti George & Darshana Rajendran, IFMR Finance Foundation

This post is a continuation of our Consumer Protection blog series. The next two posts would look at the Evolution of Consumer Protection Laws in India.

Australia and South Africa have introduced separate regulatory regimes for consumer credit, which has consumer protection aspects at the heart of it. These form examples of function-based regulation, which is fundamentally different from institution-based regulation prevalent in India.

Consumer Credit Protection in Australia

The Council of Australian governments (COAG) agreed on 3rd July 2008 that the Australian Government would assume responsibility for regulating consumer credit. The National Consumer Credit Reform Package marks Phase-one of Australia’s attempt to regulate consumer credit and comprises the National Consumer Credit Protection Act 2009 (NCCP Act) as the central piece of legislation. While the legislations for Phase-two are being put in place, phase one comprises of the following:

• Licensing regime for all consumer credit providers and credit assistance providers
• Responsible lending conduct obligations and disclosure obligations
• Enhanced enforcement powers to ASIC to administer the NCCP Act
• Expanded redressal mechanisms
• National Credit Code to replace the state-wise Uniform Consumer Credit Codes

Licensing regime

The goal of this is to promote consumer confidence in using credit, and to promote the undertaking of efficient, honest and fair credit activities by all licensees and their representatives. The National Credit Code applies to only credit1 that is provided to a person or a strata corporation, and for personal, domestic or household purposes, and for refinancing of such credit. It can also be for the purchase, renovation or improvement of residential property for investment purposes. This definition encompasses2 all credit providers such as banks, credit unions, finance companies and other lenders; and all credit assistance providers, such as credit advisers and mortgage and credit brokers.

Responsible lending conduct obligations3

These are intended for the following4 and are meant for both credit providers and credit assistance providers.

(a) Introduce standards of conduct to encourage prudent lending and leasing and impose sanctions in relation to irresponsible lending and leasing, and
(b) Curtail undesirable market practices, particularly where intermediaries are involved in lending.

The licensee is obligated to conduct an assessment5 that the credit contract or lease is not ‘unsuitable’ for the consumer. In doing so, the licensee must make reasonable enquiries about the consumer’s requirements, objectives, and financial situation and take reasonable steps to verify the consumer’s financial situation. The contract is considered unsuitable if it does not meet the consumer’s requirements and objectives or if the consumer will be unable to meet the repayments, either at all, or only with substantial hardship. In such a case, the licensee must not suggest, assist or enter into a credit contract with the customer.

Reasonable inquiries about customer’s financial situation

These could include the following, depending on the circumstances:
1. The consumer’s current amount and source of income or benefits, and assets, including their nature (such as whether they produce income) and value
2. The extent of the consumer’s fixed expenses (such as rent, repayment of existing debts, child support and insurance)
3. The consumer’s variable expenses (and drivers of variable expenses such as dependents and any particular or unusual circumstances)
4. The extent to which any existing debts are to be repaid from the credit advanced
5. The consumer’s credit history
6. Any significant changes to the consumer’s financial circumstances that are reasonably foreseeable
7. Geographical factors, such as remoteness, which may require consideration of specific issues
8. Indirect income sources (such as income from a spouse) where that income is reasonably available to the consumer

Reasonable inquiries about customer’s requirements and objectives

These could include the following, depending on the circumstances:
1. Amount of credit needed or the maximum amount of credit sought
2. Timeframe for which the credit is required
3. Purpose for which the credit is sought and the benefit to the consumer
4. Whether the consumer seeks particular product features or flexibility, and understands the costs of these features and any additional risks

Verifying customer’s financial situation

This obligation differs between credit providers and credit assistance providers. ASIC acknowledges that the latter would not have access to information that the credit provider has, such as credit reports, bank account and credit card information, reports from other lenders (subject to Privacy Act 1988) and so on. However, credit assistance providers are expected to gather information from payslips, income tax returns, statements from the customer’s accountant, business activity statements and so on. This is applicable to credit providers too.

Substantial hardship as a reason for ‘unsuitability’

The NCCP Act 2009 does not define what ‘substantial hardship’ is. ASIC will however take the following factors6 into account when considering whether a transaction is likely to result in financial hardship:

1. The money the consumer is likely to have remaining after their living expenses have been deducted from their after-tax income
2. How consistent and reliable the consumer’s income is and the size of the loan relative to their income level
3. Whether the consumer’s expenses are likely to be significantly higher than average
4. The consumer’s other debt repayment obligations and similar commitments
5. How much of a buffer there is between the consumer’s disposable income and the repayments, and how vulnerable they are to an increase in interest rates, and other product features
6. Whether the consumer is likely to have to sell their assets, such as a car, to repay the loan

ASIC expects the licensees to develop appropriate systems, processes and benchmarks to assess whether the credit contract would cause financial hardship to the customer.

Compensation and insurance arrangements

All credit licensees must have in place arrangements for compensating customers for loss or damage suffered due to breaches of the NCCP Act 2009 by the licensee or its credit representatives. These arrangements are to be in the form of professional indemnity (PI) insurance that meets the requirements in the Act7 . This is aimed at reducing the risk that losses sustained by customers cannot be compensated by a credit licensee due to a lack of available financial resources.

Credit Regulation in South Africa

Similar to the case of Australia above, the National Credit Act 2005 of South Africa regulates the granting of consumer credit by all credit providers. It applies to credit agreements with all consumers and to entities such as companies, partnerships and trusts whose asset value or annual turnover is below a prescribed threshold8. It applies to most credit products where payment is deferred and a charge, interest or fee is payable on the outstanding balance. The National Credit Act also establishes the National Credit Regulator (NCR) to promote the development of an accessible credit market, particularly, to address the needs of historically disadvantaged persons, low income persons, and remote, isolated or low density communities. It is tasked with carrying out registration of credit providers, credit bureaus and debt counsellors, investigation of complaints, education, research, policy development, and ensuring enforcement of the Act. Some of the key consumer protection features of the Act are given below:

Fundamental Consumer Rights

These include:

• Right to be given dominant reason for credit being refused or discontinued (reason/s to be given in writing on request of the consumer)
• Right to information in plain and understandable language in terms of which guidelines may be published
• Right to have access to and to challenge credit records and information held by credit bureaux, to have incorrect records of debt adjustments expunged and, to be given notification before negative information is reported to the credit bureaux

Protection from Over-Indebtedness

The credit provider must conduct a proper assessment of each consumer’s ability to meet obligations, taking reasonable steps to investigate and evaluate the consumer’s:

• Understanding and appreciation of the risks, costs and obligations of the proposed agreement
• Ability to meet those obligations in a timely manner in terms of the consumer’s existing financial means and debt repayment history

A credit agreement will be reckless if the credit provider fails to conduct the required assessment, or having conducted it, enters into an agreement with a consumer despite the fact that the consumer did not appreciate the nature of the risks, costs and obligations, or could not afford them.

The Act allows for over-indebted customers to apply for assistance from a debt counsellor. Debt counsellors then conduct independent enquiries into consumers’ financial circumstances and make recommendations to the courts concerning debt restructuring and suspension of reckless credit agreements.

Protection from Aggressive Advertising

• Prohibition of negative option marketing. (This occurs when goods or services are offered to you with the assertion that if you do not return the products or refuse the service within a certain time period, you have ‘purchased’ them)
• Marketing of credit at the consumer’s home or workplace is prohibited unless the visit is prearranged or the consumer invites the credit provider to visit for that purpose
• The credit provider must give the consumer the option (and must not act contrary to the option selected), to:

a) Decline the option of pre-approved annual credit limit increases,
b) Be excluded from any telemarketing campaign, marketing or customer list that may be sold or distributed, or any mass distribution of email or SMS messages (The credit provider must maintain a register of options selected).

The Act also sets up The National Consumer Tribunal that hears cases on non-compliance with the Act, issues fines and provides redress to consumers.

1 – ASIC Regulatory Guide 203, Appendix 1,2
2 – Debt collectors, pawn brokers and margin lenders are exempt from Phase 1
3 – ASIC Regulatory Guide 209
4 – According to the Explanatory memorandum of the NCCP Bill 2009
5 – Consumer can obtain copy of preliminary assessment upon request
6 – ASIC Regulatory Guide 209
7 – ASIC Regulatory Guide 210
8 – Currently R1 million


FAIS Act and the Ombudsman System in South Africa

By Darshana Rajendran, IFMR Finance Foundation

Continuing our series of posts on Consumer Protection, this post studies an important South African legislation aimed at consumer protection and also looks at the overall landscape for consumer recourse in the South African Financial Services sector.

Financial Advisory and Intermediary Services (FAIS) Act

One of the important legislations regulating the financial services industry in South Africa is the Financial Advisory and Intermediary Services Act. This Act seeks to regulate the provision of financial services and advice. The FAIS Act can be summarised to have three distinct components: One is the licensing conditions that a financial services provider must adhere to, second is the codes of conduct which lay out best practices for the industry and the third is the appointment of the Ombudsman for Financial Services Providers.

Licensing: In terms of this Act, nobody is allowed to render financial services as a regular feature of his/her business without being authorised as a financial services provider or appointed a representative of an authorised provider. In order to obtain this authorisation, the Act demands that a person or organisation seeking to provide financial services or advice must comply with, among other requirements, the ‘fit and proper’ requirements which include:

– Honesty and integrity
– Competency
– Operational ability
– Financial soundness

In addition, financial advisors have come under increased scrutiny, with the Financial Services Board (FSB) introducing examinations which test advisors on their knowledge of products and regulations governing the financial services industry.

Codes of Conduct: The FAIS Act also sanctions codes of conduct for financial services providers. The codes of conduct can be categorised into the general code of conduct which is applicable to all financial services providers and other codes of conduct, applicable to specific financial services providers rendering financial services in respect of specific financial products. These codes of conduct regulate the conduct of financial services providers and their representatives in the rendering of financial services. The codes of conduct ensure among other obligations, that the financial services providers and their representatives make the necessary and relevant disclosures to clients in order to enable the clients to make informed decisions on the financial services rendered.

Dispute Resolution: The Act makes a provision for the appointment of an Ombudsman for Financial Services Providers, or the FAIS Ombudsman to consider and dispose of complaints by clients against financial service providers in terms of the FAIS Act. The Financial Services Ombudsman Scheme Act (FSOS Act) further extended the jurisdiction of the FAIS Ombudsman through enabling the FAIS Ombudsman office to addresses cases against financial institutions where no other ombudsman has jurisdiction and to take a decision where uncertainty exists over jurisdiction. Contraventions of the Act which may be referred to the FAIS Ombudsman include providers conducting business using unauthorized persons (representatives who are not ‘fit and proper’) as well as non-compliance with Codes of Conduct and relevant Regulations.

Landscape for Consumer’s Recourse in South Africa’s Financial Services Sector

Apart from the Ombudsman for Financial Services Providers (FAIS Ombudsman), there are several other voluntary Ombudsmen created by the financial services industry who also deal with financial disputes, which makes the landscape for customer recourse confusing. We look at overall ombudsman system in South Africa in a little more detail.

Apart from the FAIS Ombudsman, another statutory scheme is that of the Pensions Fund, created in terms of the Pensions Funds Act. Apart from the statutory schemes, there are four voluntary schemes that are recognized by Financial Services Ombudsman Schemes Act (the FSOS Act), which was in fact introduced as a compromise to a super ombudsman in an attempt to simplify, standardise and co-ordinate the dispute resolution landscape in South Africa. Complaints against financial institutions that do not fall within the jurisdiction of the four voluntary schemes or where there is uncertainty over jurisdiction will fall under the jurisdiction of the FAIS Ombudsman.

The four voluntary Ombudsman schemes recognised by FSOS Act are:

• The Ombudsman for Long-term Insurance (the OLTI)
• The Ombudsman for Short-term Insurance (the OSTI);
• The Ombudsman for Banking Services (the OBS); and
• The Credit Ombudsman (the CO).

Avenues for consumer recourse in South Africa’s financial services sector

A few important features common to the voluntary schemes recognised by FSOS Act:

  • The consumer is not obliged to make use of the scheme concerned, but may instead sue the industry member in court. If the consumer does make use of the scheme he will in any event not be bound by a determination (ruling) by the ombudsman, but will still retain the right to sue the industry member in court.
  • A determination is binding and as such enforceable, however, on the industry member.
  • The ombudsman enjoys security of tenure, and may not be dismissed for being unpopular with the industry members, or because of dissatisfaction with the office’s recommendations or determinations. The ombudsman is therefore able to act independently and objectively, taking instructions from no-one.
  • The ombudsman seeks to resolve disputes by conciliation, mediation or recommendation, failing which by determination.

1. The Financial Advisory and Intermediary Services (FAIS) Act, 37 of 2002
2. Landscape for Consumer Recourse in South Africa’s Financial Services Sector, FinMark Trust, 2007