Secondary

debarment

A debarment should not be about settling scores

A recent determination by the Financial Sector Tribunal contains this very interesting paragraph:

A debarment may not be used to satisfy a provider’s contractual or other grievances against a representative, unrelated to fitness or competency requirements. A debarment must be effected for the purpose it was intended. It is important that providers understand that they can terminate an agreement with a representative without debarring him/her. Debarment must relate to noncompliance by the representative with the competence and integrity requirements as set out in the FAIS Act, read with the Code of Conduct.

Background

The applicant was employed with the respondent. During 2019, he registered an FSP under the name of AJV Brokers with the intention of starting out on his own. The respondent and the applicant agreed that he would be allowed to buy over certain clients from the respondent when he exits his employment.

The deal did however not go through as the respondent was not satisfied with the security tendered by the applicant. The applicant was then re-employed with the respondent and entered a new employment contract which included a restraint of trade clause namely that the applicant would not have any interest in any other FSP during his employment with the respondent or have his own FSP.

When the new employment contract was concluded during July 2020, AJV Brokers’s licence was not cancelled. The respondent was aware of this but was informed by the applicant that he is in the process of cancelling that licence. It was the failure of the applicant in not notifying the Registrar to cancel or cause the license to lapse that resulted in dispute between the parties.

Tribunal View

The applicant had not informed the Registrar in terms of section 11(1)(c) of the FAIS Act. Moreover, from the correspondence with a client, it became apparent that the applicant did not intend cancelling the licence of AJV Brokers.

However, this matter extends beyond contractual grievances. The applicant had, in addition, conducted business dealings with other FSPs. The evidence shows that he in fact received administration fees in the name of AJV Brokers and this was whilst he was in the employment of the respondent. The applicant however alleged that it was referral fees.

One of the grounds of debarment was the applicant’s non-disclosure as to who he was representing when he interacted with clients. In essence, the respondent submitted that the applicant kept the clients in the dark as to who they were dealing with, that he was colluding with more than one FSP without being licensed with any of them, and that he shared client information of the respondent which he was not entitled to do with the other FSPs.

It may be that he could refer clients to other FSPs, but in these circumstances, however, we must bear in mind that there was a restriction in terms of the contract where he was not allowed to do work for any other FSP, includes referring clients to other FSPs. The applicant claims at all relevant times that he never furnished any financial advice to the respective clients but merely referred them to the other FSPs. However, from the transcripts the clients confirm that they had only dealt with the applicant and no one else.

Assessing the degree of nonconformance

An independent assessment in respect of the applicant’s honesty and integrity would assist in determining whether his conduct was sufficiently serious to impugn the honesty and integrity of the representative. The test is therefore both subjective and objective, which requires firstly an FSP considering debarment:

  • One must first ask whether the act of the representative is one in which an ordinary reasonable person considers to be dishonest (this is an objective test).
  • Secondly, whether the representative should have realised what he was doing by those standards to be dishonest (this is a subjective test).

Tribunal finding

The applicant’s conduct over a period demonstrates that he has not acted with the level of integrity that is required of a representative. He was not transparent in his dealings with respective clients in that they were under the impression that he was acting on behalf of the respondent.

The applicant was further dishonest to his employer by doing business with other FSPs when he was restricted from doing so in terms of the employment contract.

Of grave consequences is the applicant’s disclosure to the Regulator. In his fit and proper declaration (Annexure “L”), the applicant disclosed that he did not represent or write business for any other FSP besides the respondent, and neither had he engaged in any other business activities other than what he was doing for the respondent.

His disclosure was dishonest, particularly if consideration is given to the date when he signed the questionnaire and the correspondence from one of the other FSPs confirming the fees that he earned. The questionnaire was signed on 9 April 2020 and the correspondence is dated 30 March 2020.

The Tribunal found that the motive behind the referrals to other FSPs was to enable the applicant to build his business network since he intended to eventually venture out on his own. On these grounds, the application for reconsideration of the respondent’s decision to debar him, was dismissed.

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