Breach of contract can be grounds for debarment

Breach of contract can be grounds for debarment

An FSP can institute debarment proceedings against a representative for breaches of contract as long as the contractual breaches also result in a failure to meet the Fit and Proper Requirements or are a material contravention of the FAIS Act.

This was the judgment of the Financial Services Tribunal when it dismissed an application by the chief executive of Gavanni Group Schemes, Jerry Motea, for his debarment to be reconsidered.

New Era Insurance terminated its juristic representative agreement with Gavanni in May 2021 and debarred Motea.

The tribunal quoted extensively from the report of the adjudicator who conducted the debarment hearing.

It said Motea was correct in asserting that debarment proceedings cannot be used to settle contractual issues. However, he had missed the “main point” as stated by the adjudicator:

“Neither FAIS nor the applicant’s [the present respondent] debarment policy say that contractual breaches cannot in themselves be demonstrative of a failure to comply with the Fit and Proper Requirements or constitute a material breach of FAIS. In my view, they can. Certainly, one must heed the warning in the Debarment Policy and the Guidance Notice when evaluating each of the charges to ensure that if a charge is based on a contractual breach, it must also result in a failure to meet the Fit and Proper Requirements or must constitute a material breach of FAIS.”

Charging of fees in addition to commission

The adjudicator found that Motea had breached section 12.4 of the Policyholder Protection Rules, which states:

“An insurer may not facilitate the deduction or charging of any fee payable by a policyholder to an intermediary or any other person, unless the insurer has satisfied itself that the amount and purpose of the fee have been explicitly agreed to by the policyholder in writing, and that it appears from such agreement that the fee:

  1. relates to an actual service provided to a policyholder;
  2. relates to a service other than rendering services as intermediary; and
  3. does not result in the intermediary or other person being remunerated for any service that is also remunerated by the insurer.”

In his defence, Motea told the adjudicator that New Era had not substantiated its charge against him, particularly as Gavanni was not prohibited from levying administration fees on “willing clients”.

He also said this was not a debarment issue, but a matter that could be “discussed” by him and New Era.

The adjudicator called Motea’a denial “half-hearted”. New Era had produced emails written by Motea advising the insurer’s representatives that Gavanni deducts an administration fee from clients’ premiums before paying the premiums over to New Era.

Further, it was a concern that Motea did not seem to appreciate that this conduct was wrongful and illegal.

“The respondent is not an FSP authorised to perform administrative functions and for which it can charge a fee. The respondent is a juristic representative with a mandate to perform only those functions stipulated in the mandate on behalf of the applicant and for which only commission is payable to it. Not only does this conduct breach the Policyholder Protection Rules, but it also breaches FAIS for carrying out intermediary functions without being authorised as an FSP.”

The adjudicator said these breaches were sufficiently material to give rise to debarment.

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