A financial services provider was entitled to deviate from its internal debarment policy when it debarred an adviser because an employer-employee relationship did not exist between the parties.
This was one of the findings by the Financial Services Tribunal (FST) when, this month, it upheld a debarment by PSG Wealth Financial Planning (Pty) Ltd.
The debarment was challenged on procedural and substantive grounds.
Regarding the procedural aspects, the FST’s decision clarifies that it is the nature of the activities performed by an employee that determines whether he or she is a “representative” under the Financial Advisory and Intermediary Services Act. Furthermore, although the FSP’s internal procedure when debarring a representative must align with the statutory requirements, there is room for flexibility when no employment relationship exists.
Addressing the substantive issues, the FST found that the FAIS Act establishes an objective test for whether “advice” is rendered – and this test disregards the nature of the relationship between the parties or the intention for the communication.
PSG debarred André de Ridder in December last year, saying he no longer met the FAIS Act’s fit and proper requirements for competence and integrity.
De Ridder and PSG entered an association agreement in 2016. PSG terminated the agreement in November last year.
He was restricted to providing advice under PSG’s licence and was explicitly excluded from advising on deposits and shares.
De Ridder is also a director of Christopher Discounting Solutions (CDS), which provides advances to claimants who are waiting for their Road Accident Fund claims to be paid out.
The FST decision states that PSG representatives visited De Ridder’s office in Paarl in October 2024 and expressed concerns about his involvement with CDS. This encounter initiated an internal investigation into De Ridder’s conduct as a representative.
The findings of the investigation formed the basis of PSG’s case against De Ridder, which was as follows:
- In an email to a family member, De Ridder recommended that a trust sell its shares worth R2.5 million and invest the proceeds at a rate of prime plus 5% to generate a monthly income. He provided a detailed financial plan for the investment. PSG said this was unauthorised advice per the exclusions on his licence.
- He urged clients to lend money to CDS, which also exceeded his authorisation.
- PSG said De Ridder’s dual roles as a director of CDS and an accredited PSG representative created an irreconcilable conflict of interest because he was promoting a product (the loans) from which he stood to benefit personally.
- He advised clients to make changes to their financial portfolios without conducting a proper needs analysis, as required by the General Code of Conduct.
In defence of his actions, De Ridder stated:
- He did not provide formal “advice” on a “financial product” as legally defined. The email was merely a “suggestion” given to a family friend. The trust had already decided to sell the shares, and his role was to provide clarity on the potential earnings from a loan to his company.
- De Ridder supported this contention in his reconsideration application by attaching affidavits from the clients involved. The clients stated they approached De Ridder as a trusted friend or family member, not as an adviser, to enquire about the possibility of investing in CDS.
- The loans made to CDS were private transactions between individuals and an entity and were not regulated financial products.
- He fully disclosed his involvement in CDS to PSG when he signed the association agreement. PSG was aware of his interest in CDS and never raised any concerns about it for years.
- In his reconsideration application, De Ridder contended that these concerns arose only because of a separate dispute regarding PSG’s termination of his association agreement. The implication was that his debarment was motived by an attempt to gain an advantage in the commercial dispute rather than legitimate regulatory action.
‘Advice’ is objectively defined
The Tribunal dismissed De Ridder’s substantive challenges to his debarment.
The FST found that De Ridder stepped outside the bounds of his authorisation by providing advice in respect of the share transaction and by encouraging clients to lend money to CDS – the latter effectively constituted promoting an unregulated financial product.
It also accepted PSG’s contention that De Ridder failed to conduct a financial needs analysis when advising clients to alter their portfolios. It said this was not a minor mistake, but conclusive evidence of a failure to comply with a required core competency.
Addressing De Ridder’s defence that his email was merely a “suggestion”, the Tribunal applied an objective test to determine whether his communication constituted “advice” under the FAIS Act. The Act defines “advice” as any “recommendation, guidance, or proposal of a financial nature”. The Tribunal said the emphasis is on the content and nature of the communication and not the sender’s intent or the personal relationship between the parties.
“PSG argues that the comprehensive, detailed financial plan provided by De Ridder, listing expected returns, capital movements, and market commentary, objectively meets the statutory definition of advice. Therefore, De Ridder’s actions cannot be excused as informal chitchat, as his status as a regulated representative and the nature of the transaction demand compliance with objective regulatory standards,” the FST said.
Procedural challenge
De Ridder contended the debarment process was unlawful, unreasonable, and procedurally unfair. Specifically, he argued that PSG failed to adhere to its debarment policy by not conducting a proper investigation and formal disciplinary hearing as required in clause 2.3 of the policy.
Furthermore, he stated that his association agreement was terminated, and debarment proceedings were initiated, without allowing him an opportunity to address the alleged breaches, as outlined in the association agreement.
PSG submitted that its debarment policy did not apply to De Ridder because he was an associate, not an employee. However, it said the debarment process still met the legal standard of procedural fairness as outlined in the FAIS Act.
The determination of whether the debarment was procedurally fair turned on two issues:
- First, whether PSG’s debarment policy applied to De Ridder, given his status as an associate and not a direct employee.
- Second, whether PSG complied with the procedural steps in its policy before effecting the debarment.
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Did the debarment policy apply?
The Tribunal examined the debarment policy’s language, the definitions in the FAIS Act, and the terms of the association agreement.
Clause 1.1 of the policy stated that PSG “must have procedures in place to ensure that it can debar any representative”. The Tribunal said the reference to “any representative” should be afforded a wider meaning and not limited solely to employees (FST’s emphasis).
The Tribunal cited the FAIS Act’s definition of a “representative” as someone “rendering a financial service to a client for or on behalf of an authorised FSP”. De Ridder was undoubtedly subject to the debarment policy because his role placed him squarely within the broad regulatory definition of “any representative” in clause 1.1, which overrode his status as a non-employee of PSG.
The Tribunal supported this finding by referring to the terms of the association agreement.
Clause 2.12 defined a “designated employee” as any person employed by the associate who conducts the business”. Clause 2.3 further defined “business” as “that business referred by the associate to PSG and such services being rendered, investments being made, a policy of insurance being issued by an insurance company or financial institution to the proposer and/or any other business conducted by the associate and/or PSG from time to time”.
Clause 2.30 defined “services” as “financial and other advisory and intermediary services rendered by PSG”.
In essence, the Tribunal reasoned that “services” captured the regulated financial advice and brokerage activities PSG was authorised to perform. This broad scope effectively subjected almost all the financial activities undertaken by the associate and its employees, including De Ridder, to the contractual and regulatory oversight of PSG.
Clause 11.1.2 authorised designated employees to use and promote services under PSG’s name, style, and brand. This delegation meant the associate and its staff, including De Ridder, were representatives who operated under PSG’s licence. The Tribunal reasoned that this reinforced the hierarchy of accountability to PSG, subjecting De Ridder to the same standards as direct representatives. This functional delegation was key to the Tribunal’s conclusion that De Ridder’s role extended beyond mere association, embedding him within PSG’s regulatory framework and thus the debarment policy.
The FST also highlighted clause 10, which mandated that designated employees must act with integrity, be adequately qualified and experienced, and comply with all relevant laws, regulations, and rules, as well as PSG’s and the industry’s ethical or other codes of conduct. Additionally, clause 10.1.21 required adherence to the PSG compliance manual.
Synthesizing the above, the Tribunal concluded that the combination of performing regulated financial services and being contractually bound to all FAIS compliance and fit and proper requirements confirmed that De Ridder was legally encompassed by the term “any representative” under clause 1.1 of the debarment policy.
The FST said PSG’s claim that the policy did not apply to De Ridder because he was not an employee was factually and legally incorrect. “There is a clear connection between De Ridder’s contractual responsibilities, the policy, and the FAIS Act.”
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Did PSG comply with the debarment policy?
Having concluded that the policy applied to De Ridder, the Tribunal considered whether PSG complied with the procedural steps outlined in that policy before effecting the debarment.
The FST said the terms of the association agreement made it clear that no employment relationship existed between De Ridder and PSG.
“Therefore, there was no obligation on PSG to conduct an internal disciplinary action and to wait for the recommendations of the chairperson of the disciplinary inquiry before it could proceed with De Ridder’s debarment.”
De Ridder argued that PSG failed to adhere to clause 2.3 of the debarment policy by not conducting a proper investigation and formal disciplinary hearing. However, the Tribunal said the wording of the clause indicated that the internal disciplinary steps were recommended rather than mandatory for every case.
Clause 2.3 stated: “For this reason, the following procedural steps are recommended, and unless a deviation from the procedural steps is warranted by the facts, these procedural steps should be followed at all times prior to a decision to debar…”
The Tribunal said the circumstances of the case justified the deviation from the procedural steps for the following reasons:
- As an associate, De Ridder was not an employee entitled to a disciplinary hearing governed by the Labour Relations Act. PSG was justified in concluding that the formal steps outlined in clause 2.3 were inapplicable because of the absence of an employer-employee relationship.
- PSG had investigated and collected evidence to substantiate the allegations related to significant violations of the FAIS Act.
- Importantly, PSG satisfied all the mandatory procedural requirements outlined in the Act and clause 3.1 of its policy. These included providing adequate written notice of the grounds for debarment, sharing the debarment policy, and allowing De Ridder a reasonable opportunity to respond.
The Tribunal concluded that because PSG met the essential requirements for procedural fairness as dictated by the FAIS Act and its policy, De Ridder’s procedural challenge must fail.
