Quasi-‘courts’ and the insurance industry

In recent years, South Africa has witnessed the creation of a whole host of institutions which can be called ‘quasi-courts’. These have largely displaced the judiciary. These institutions appear, multiply and grow. These institutions have become, what I have called, unitary states within states. They do not operate within the framework of the separation of powers or any of the well-established constitutional procedures or principles. They do not operate in terms of the law and hence the rule of law. The law per se plays little if any part in the way they operate, they are a law unto themselves; examples of these institutions are the growing host of ombudsmen, adjudicators, various tribunals, such as the competition tribunal, and so on.

That they have virtually replaced the judiciary becomes clear when the short-term ombudsman is considered. This institution has jurisdiction over personal lines claims up to R1m. For all practical purposes, this jurisdiction covers virtually all personal lines claims. From the industry’s point of view (insurance companies, brokers, advisors), the courts have no jurisdiction. Disputes are not resolved by a court of law, which is a clear constitutional right. Take the competition tribunal which imposed a penalty of R1,5bn, an amount which is of such a magnitude that it is inconceivable that this award could ever be made, let alone completely outside of the judicial system. The fact that this happened makes a mockery of the constitutional principle that ‘no man shall be deprived of his life, liberty or property without the due process of the law’, so much for the constitution.

Another example is the consumer protection regime, which recently dealt with a R65m claim. One would have thought that this belongs squarely within the purview of the courts of law. The courts resolve these disputes in terms of well-established procedures, including appeal and review procedures. The court procedures incorporate, as a matter of course, well-established constitutional principles of natural justice. This is by no means true of the new host of quasi-courts.

This new host of institutions is becoming what I call the ‘10 percent brigade’. They are all obtaining the power to impose penalties of ten percent of firms’ group turnover with the clear understanding, by the brigade itself if no-one else, that the 10% bears no relation at all to any alleged harm caused by the firm or misdemeanour by the firm. It is an arbitrary 10%.

These changes have taken place very rapidly. Commerce has been transformed; just a short while ago, commerce was conducted exclusively in terms of the law and thus rule of law. Everyone could be confident that they faced no obligations towards anyone else other than in terms of the well-known principle laid down millennia ago by the Gaius, the Roman jurist, that obligations arise from either contract or delict, to which today we can add statute. Outside of this, there were no obligations. No obligations existed other than in terms of clear law. In commercial transactions, for all practical purposes, contract was the only basis of obligations. If a dispute arose, it would be resolved by the ordinary courts of the land staffed by ordinary judges in terms of the ancient due process of law.

A characteristic of these new institutions is the absence of law. Obligations are now imposed, but not in terms of the law, nor the general in terms of constitutional principles, the so-called spirit of the constitution. In the March edition of COVER, I discussed the facilitation by the FAIS Ombud which resulted in a broker paying the cost of the average of an insured who was under-insured. I could find no legal basis in law for this obligation which was imposed on the broker. The obligation did not exist in contract, delict nor statute. The obligation could not even be found in the amorphous modern case ‘law’. Indeed, I found that the Ombud did not even attempt to find any basis in law. The closest one can say that the Ombud got to a legal basis was the Code of Conduct promulgated by the FSB itself. This illustrates the aforementioned point about these new institutions becoming unitary states within states. The FSB makes its own laws and has its own ‘courts’, the Ombud. The FSB is a state within a state; it is a one-stop shop.

There is interesting legal aspect of fact that no obligations could be found in contract. As indicated, not too long ago virtually all obligations, in commerce, were founded in contract. Individuals arranged their own affairs through enforceable contracts which was economically efficient. Contract, as this facilitation indicates, has for all practical purposes disappeared. Contract has died. This is interesting since the death of contract was predicted by Grant Gilmore in his 1975 book entitled The Death of Contract . At the time, his view was greeted with shock, scepticism, outright disbelief and a great deal of anger. If the broker’s liability to pay the insured’s cost of average is examined, then it is clear no such obligation can be found in contract. It was imposed externally by a government official, the FAIS Ombud. Contract is indeed dead.

The underlying foundation on which these new institutions rest should be identified. It is widely stated today that the South African consumer is the best protected in the world. It also said that South Africa has the best constitution in the world. There is, of course, a common thread in these two statements: consumer protection and the constitution. In the light of these claims, it seems fair to say that these new institutions see themselves as champions of the consumer; advocates of consumer rights. Certainly, when it is said that the South African constitution is the best in the world, no-one has the age old constitutional purpose to protection life, liberty and property in mind. The SA Constitution is remarkably badly drafted when it come to protection life, liberty and property. What the admirers of the constitution have in mind are the so-called socio-economic rights,the entitlement rights: free education, free health care, free water, free electricity, free housing, and so on.

There is, of course, no free lunch at all. All lunches are paid for by someone. Consumer rights, like socio-economic rights are not free at all. They are paid for by someone. In the entitlement system, there are two sides: the entitlement side and the paying side. It will be noted that the advocates of entitlements never discuss the paying side. That is not surprising. Those who pay do not do too well. There has always been a funny view of those who pay, that is, that they have limitless ability to pay. Their ability to pay is simply assumed. This assumption is necessary because, without it, there are no entitlements. Probably the most tragic example of this is Stalin’s confiscation of food in the Ukraine in the 1930s. He thought the peasants were hiding food which he wanted. In Stalin’s mind, he was entitled to their food. So he sent the soldiers to take their food. Stalin became the entitled. What about those who paid – the peasants? It is estimated that 11 million died of starvation. In the entitlement age, it is important to be on the entitlement, not the paying, side. In the consumer protection dispensation in which the industry finds itself, unfortunately, the industry is on the paying side. Many of those paying, like the Russian peasants, are not in any position at all to pay.

Take the example a few years ago where at a braai someone asked an investment consultant if she knew of a scheme being offered which promised superior returns. Being in the loop and being a small town, she did know and passed on the information. The budding investor then sought out the parties involved and invested and lost his money. He sucessfully sued the advisor who answered his questions about the scheme. The advisor was not a large company capable of bearing the loss. She was merely the local minister’s wife, far less able to bear the loss than the imprudent investor. The imprudent investor was, however, on the entitlement side of the equation. In another example, the Sharemax collapse (one of the many property syndications to collapse), the late investigative journalist, Deon Basson had spent many years investigating and reporting on and expressing concern about Sharemax. He fought a brave, lonely battle on this front which, no doubt, contributed to his early death. He was eventually sued by Sharemax for defamation (Sharemax v Basson 2006), which incidentally, also, bought all the rights to the book he was writing covering Sharemax from his estate. The concerns about Sharemax were well-known long, long before its collapse. If Sharemax was indeed a matter of concern, the regulator had more than enough warning to take steps to safeguard the public. It did not. It is therefore now somewhat strange so see the Fais Ombud holding investment advisors liable for the losses sustained by the public when the regulator was aware of the problems.

The industry, its individual members, brokers and advisors, in their personal capacities, are unfortunately on the paying side of consumer entitlement. It is difficult to find a legal basis for the obligations they are increasingly facing. Clearly, the constitution only benefits the entitlement side of the system, not the paying side. The constitution does not appear to offer any protection to the industry or individuals in the industry. I do not believe these new institutions can survive in their current form; they need to be returned to the rule of law.

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