Fais Ombud now able to take on crypto asset complaints

The Office of the Financial Services Providers (Fais) Ombud has committed to resolving complaints about cryptocurrencies in a procedurally fair, informal, economical and expeditious manner.

This follows the cryptocurrency market floundering last year as risk appetite diminished and various crypto firms collapsed, including the FTX cryptocurrency exchange and the Mirror Trading International (MTI) scam, which left investors with significant losses and regulators calling for more consumer protection.

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The Financial Sector Conduct Authority (FSCA) tightened up the regulation of crypto assets in October last year by officially declaring that crypto assets are now classified as financial products in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 (Fais Act).

Read: Regulations mean cryptos ‘can now go mainstream’

Prior to this declaration, the Office of the Fais Ombud was unable to investigate any complaints related to crypto assets, which forced the office to dismiss these complaints because cryptocurrencies were not classified as a financial product and fell outside the ombud’s jurisdiction.

The classification of crypto assets as financial products follows the publication of a paper in June 2021 by the Intergovernmental Fintech Working Group (IFWG) on crypto assets, which provided a framework on how these assets will be regulated in future and made 25 recommendations on how to bring crypto assets into the South African regulatory universe.

The Office of the Fais Ombud has been warning the public about the danger of cryptocurrency schemes and investments since at least 2019.

Former acting Fais Ombud Advocate Nonku Tshombe said during a briefing on the release of the office’s 2020/21 annual report there had been a significant increase in the number of complaints received about investments made into cryptocurrencies during that financial year.

However, Tshombe said despite her office recognising the high-risk nature of investing in crypto assets and the concerns about the suitability of crypto assets as an asset class, it was unable to assist complainants who submitted complaints because crypto assets were not regulated in terms of any financial sector law in South Africa.

The latest Fais Ombud annual report reveals that it received 17 crypto complaints in the year to end-March 2022, which accounted for only 0.14% of the total 11 827 complaints it received during the year.

Attempts to obtain comment from the Office of the Fais Ombud about the total number of cryptocurrency complaints it received in the 2022 calendar year, if it has issued any crypto asset complain determinations and if previously dismissed crypto asset complaints can be resubmitted to for reconsideration were unsuccessful.

This article will be updated once a response is received.

The ombud said in a statement issued on Monday that it can now investigate complaints against existing registered financial service providers who offer advice on crypto.

These providers need to comply with all the requirements of the Code of Conduct, such as material disclosures, conducting a needs analysis and recommending a product that is appropriate to one’s needs and circumstances.

The ombud said crypto asset providers have a temporary exemption until 30 November 2023 to apply for a licence with the FSCA and will until then be bound by Section 2 of the General Code of Conduct for Authorised Financial Service Providers (FSPs) and representatives as if they are a licensed FSP.

The allure of ‘easy money’

The latest Fais Ombud annual report highlighted that the economic and social environment in South Africa may encourage South Africans to invest in crypto assets.

It said South Africa was rated as the most economically unequal country in the world in 2019 and continued high levels of unemployment, low economic confidence, high levels of indebtedness and low levels of government guaranteed investments, such as bonds, have resulted in a decrease in investment activity.

“We anticipate that this may encourage people to be attracted to investment or investment vehicles with so called ‘high’ or unrealistic rates of return in a bid to address the unfavourable economic situation,” it said.

The ombud said the shrinking economy – due to the downgrading of South Africa’s sovereign credit rating to junk status by several rating agencies and the Covid-19 lockdown – will have a devastating effect on businesses and unemployment and place significant pressure on the financial services industry.

These circumstances may encourage people to pursue the emerging specialised financial products, such as cryptocurrencies, as an alternative to the financial products available in the traditional and predictable financial markets.

Read: Moneyweb reader embarrassed to have fallen for crypto scam

“Together with the inadequate deterrents to prevent or limit the influx of unscrupulous financial services providers, this points to the likelihood that there will be an increase in the number of complaints received by this office,” it said.

The ombud noted that levels of financial and consumer literacy also come into play.

“If consumers do not know how the financial sector is regulated, it is unlikely that they would know where to go if they had an issue with a financial product or with the manner in which it was sold to them.

“Secondly, consumer illiteracy of the regulated environment may impact on the preparedness of the majority of the South African public to engage in formal investment activities given that people tend to be less willing to participate in an activity they do not understand and instead turn to activities in the informal sector which are more prone to result in a reproachful treating of consumers, thus increasing the risk of the complaints that may be lodged with this office.

“All of this results in the continued financial illiteracy in the population and vulnerability to pyramid, Ponzi schemes and products that still require regulatory investigation, such as cryptocurrency.”