Secondary

FSB-Building

Enforcement under Twin Peaks

A fairer dispensation for all?

The second issue of the FSB’s Twin Peaks newsletter contains four sections, one of which discusses the issue of enforcement, where we experienced problems in the past, in understanding particularly how some of the administrative penalties were arrived at.

In the past, critics complained that regulators were unable to adequately reign in or punish law breakers. In cases where they did, the process took too long.

“To date, the FSB has followed a hybrid internal/ external enforcement model. In instances where the FSB finds that a penalty is the appropriate sanction, it refers the decisions to the Enforcement Committee. Although this Committee is made up of external, objective experts, it is still “inside” the FSB, in the sense that it reports to the Board of the FSB, and so has no independent legal personality.”

“The Twin Peaks model will follow a similar hybrid approach, while introducing new instruments to give regulators more room to apprehend transgressors.”

My learned friend and Moonstone associate, Alan Holton, highlighted a number of provisions in the FSR Act which may be considered as grounds for appeal in the event that someone wants to challenge administrative actions. We will discuss this in more detail on Thursday.

Did I hear a collective sigh out there that the focus will shift from the low hanging fruit, who had to bear the brunt of enforcement, to the major instigators of the unfair outcomes for clients?

Financial Services Tribunal

Although the Financial Sector Conduct Authority (FSCA) follows an internal enforcement model, it has also established the Financial Services Tribunal, which fulfils the role of independent arbiter to challenge administrative actions (i.e. actions that are taken internally by the authorities in terms of the legislation, regulations and rules).

While the authorities are entitled to take administrative actions on its own, all administrative actions can be appealed to the Tribunal and reviewed by the courts.

If the future Prudential Authority or FSCA detects a breach of a financial sector law – including breaches of a prudential or conduct standard – it faces a range of decisions.

The authority can impose administrative penalties, or institute criminal prosecutions in relation to the offences in terms of the Financial Sector Regulation (FSR) Act or a financial sector law.

Alternatively, the authority can choose to remedy the situation, either by issuing directives, declaring practices as undesirable, applying to the court for appropriate orders, or entering into Enforceable Undertakings. The aim of this remediation is to rectify the breach and ensure it does not recur.

An Enforceable Undertaking provides the authority with broad remedial powers under an agreement with those who break the law. Enforceable Undertakings typically involve a number of detailed steps, which the transgressor contractually commits to follow to correct a flaw in a process or system used by the financial institution, and/or pay compensation to affected customers.

Debarment Orders

This highly contentious action will also undergo substantial change.

Authorities can use Debarment Orders when they wish to protect certain groups; or financial customers generally, from certain individuals. The authority must first determine that a person has:

  • Contravened a financial sector law, a regulator’s directive or an Enforceable Undertaking;
  • Attempted, conspired with or aided, abetted, induced, incited, instigated, instructed or commanded, counselled or procured another person to contravene a financial sector law;
  • Contravened or failed to comply with a law of a foreign country that corresponds to a financial sector law.

The authority may then make an order debarring the person for a specified period from:

  • Providing financial products or services, providing a specified category or sub-category of financial product or service, or providing a financial product or service to a specified category or sub-category of financial customer;
  • Acting as a key person or representative of a financial institution;
  • Being involved in managing a financial product or service provider;
  • Being involved in providing a specified financial product or service.

If the authority is satisfied that a person has contravened, or has failed to comply with, a provision of a financial sector law, the authority may impose an administrative penalty in respect of the contravention.

Those who used the current debarment process for nefarious purposes need to realise that those days are over. In fact, you could face serious repercussions if you are found out.

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