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Essential procedural considerations when debarring an errant representative

By Joani van Vuuren, Siya Ngcamu and Ilyaas Mayet of Webber Wentzel

From the plethora of cases successfully referred to the Financial Services Tribunal for reconsideration of a decision to debar, it is apparent that there exists a general lack of understanding of i) the debarment process and ii) the requirements which must be met before Financial Service Providers (FSPs) can take a decision to debar an alleged errant representative.

We set out below the procedural considerations which must be born in mind before taking the decision to debar.

Procedural requirements

FSPs are often confused by the two debarment processes available, those being:

the process under section 14 of the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) (FAIS debarment) and
the process envisaged by section 153 of the Financial Sector Regulation Act, 2017 (FSR) (FSR debarment).

The former process is initiated and run by the FSP and the latter process by the Regulator.

Before effecting a FAIS debarment, the debarring FSP must ensure that the debarment process is lawful, reasonable and procedurally fair. FAIS debarments are most often found to be unfair due to a lack of procedural fairness. In this regard, the FAIS Act provides guidance on how the debarment process must be effected. Specifically, section 14(3) of the FAIS Act provides that before debarring a representative, a FSP must:

give adequate notice in writing to the representative stating its intention to debar the person, the grounds and reasons for the debarment and any terms and conditions attached to the debarment;
the representative must be provided with a copy of the FSP’s policies and procedures which govern the debarment process;
the representative must be given a reasonable opportunity to make a representations; and
the FSP must consider any response given by the representative.

In deciding whether or not to institute debarment proceedings, FSPs are further guided by the Guidance Note 1 of 2019 on the debarment process in terms of section 14 of the FAIS Act which further provides that the reason for the proposed debarment must have occurred or have become known to the FSP while the alleged errant representative was still a representative of the FSP.

The FSP may not debar a representative if the reason for debarment occurred or only became known after the representative had ceased to be a representative of the FSP. In such case, the matter must be referred to the Financial Services Authority and a decision can be made as to whether a FSR debarment process should commence.

The FAIS debarment process must commence no longer than 6 months from the date the representative ceases to be a representative of the FSP (i.e. the date on which the relationship is terminated either by, inter alia, resignation or dismissal). It is not a requirement for the FSP to proceed with the debarment process, that the representative still be a representative of the FSP.

Recent developments

As recently as 3 August 2020 (CL Basson v C Luck and Liberty Group Limited), the Tribunal reiterated the procedure to be followed by FSPs before taking a decision to debar. The Tribunal reiterated the procedure set out in the FAIS Act and the Guidance Note. In addition, the Tribunal confirmed the following principles:

What constitutes reasonable notice and reasonable opportunity will depend on the circumstances of each case.
All the available facts and information must be considered, including the response received from the representative as well as information regarding the conduct of that representative.
The decision to debar or not to debar a representative must be communicated in writing and reasons must be furnished. The representative must also be advised of their right to have the decision reconsidered by the Tribunal.
A debarment may form part of the disciplinary enquiry embarked on by the employer (i.e. the FSP) against the representative as an employee, provided that in addition to any labour law requirements the procedural requirements set out in section 14(3) of the FAIS Act are followed.

On Thursday, in Part 2 of this article, we discuss 5 specific examples to provide further clarity on what is clearly murky waters for many in the industry.

From the plethora of cases successfully referred to the Financial Services Tribunal for reconsideration of a decision to debar, it is apparent that there exists a general lack of understanding of i) the debarment process and ii) the requirements which must be met before Financial Service Providers (FSPs) can take a decision to debar an alleged errant representative.

We set out below the procedural considerations which must be born in mind before taking the decision to debar.

Procedural requirements

FSPs are often confused by the two debarment processes available, those being:

the process under section 14 of the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) (FAIS debarment) and
the process envisaged by section 153 of the Financial Sector Regulation Act, 2017 (FSR) (FSR debarment).

The former process is initiated and run by the FSP and the latter process by the Regulator.

Before effecting a FAIS debarment, the debarring FSP must ensure that the debarment process is lawful, reasonable and procedurally fair. FAIS debarments are most often found to be unfair due to a lack of procedural fairness. In this regard, the FAIS Act provides guidance on how the debarment process must be effected. Specifically, section 14(3) of the FAIS Act provides that before debarring a representative, a FSP must:

give adequate notice in writing to the representative stating its intention to debar the person, the grounds and reasons for the debarment and any terms and conditions attached to the debarment;
the representative must be provided with a copy of the FSP’s policies and procedures which govern the debarment process;
the representative must be given a reasonable opportunity to make a representations; and
the FSP must consider any response given by the representative.

In deciding whether or not to institute debarment proceedings, FSPs are further guided by the Guidance Note 1 of 2019 on the debarment process in terms of section 14 of the FAIS Act which further provides that the reason for the proposed debarment must have occurred or have become known to the FSP while the alleged errant representative was still a representative of the FSP.

The FSP may not debar a representative if the reason for debarment occurred or only became known after the representative had ceased to be a representative of the FSP. In such case, the matter must be referred to the Financial Services Authority and a decision can be made as to whether a FSR debarment process should commence.

The FAIS debarment process must commence no longer than 6 months from the date the representative ceases to be a representative of the FSP (i.e. the date on which the relationship is terminated either by, inter alia, resignation or dismissal). It is not a requirement for the FSP to proceed with the debarment process, that the representative still be a representative of the FSP.

Recent developments

As recently as 3 August 2020 (CL Basson v C Luck and Liberty Group Limited), the Tribunal reiterated the procedure to be followed by FSPs before taking a decision to debar. The Tribunal reiterated the procedure set out in the FAIS Act and the Guidance Note. In addition, the Tribunal confirmed the following principles:

What constitutes reasonable notice and reasonable opportunity will depend on the circumstances of each case.
All the available facts and information must be considered, including the response received from the representative as well as information regarding the conduct of that representative.
The decision to debar or not to debar a representative must be communicated in writing and reasons must be furnished. The representative must also be advised of their right to have the decision reconsidered by the Tribunal.
A debarment may form part of the disciplinary enquiry embarked on by the employer (i.e. the FSP) against the representative as an employee, provided that in addition to any labour law requirements the procedural requirements set out in section 14(3) of the FAIS Act are followed.

 

The Tribunal has recently delivered the following rulings which have confirmed the procedural requirements that need to be followed by an FSP prior to the debarment of a representative:

In Siemans v Outsurance Insurance Company Limited, the Tribunal was tasked with reconsidering the debarment of a representative who had resigned before disciplinary proceedings had been instituted. The FSP informed the representative that it would continue with the debarment proceedings despite the fact that the representative was no longer an employee. The FSP notified the representative of this intention in the termination agreement and invited the employee to make representations. The Tribunal found that the termination agreement did not constitute adequate notice of the intention to debar the Applicant as it did not provide adequate grounds for the intended debarment. After the termination agreement was concluded, the Respondent should have given the Applicant sufficient notice of its intention to debar him in compliance with section 14 of the FAIS Act. Accordingly, the debarment was set aside.
In van der Berg v Eastvaal Financial Services, the debarment of the representative was declared procedurally unfair because the FSP had not provided the representative with an opportunity to make representations as to why she should not be debarred. The representative, who was an employee of the FSP, had been found guilty and given a written warning for dishonesty and was debarred thereafter.
In Loubser v Discovery Life and Others the Tribunal confirmed that where a FSP has a policy that sets out a fair process for debarment, the FSP is bound to follow the fair process set out in its policy (provided that it complies with the FAIS Act).
In Smith v Santam Ltd the Tribunal found that the fact that a representative is found guilty at a disciplinary hearing may, but does not necessarily, mean that that the representative does not meet, or no longer complies with, the fit and proper requirements set out in section 13(2)(a) of the FAIS Act; or has contravened or failed to comply with any provision of the FAIS Act in a material manner. The Tribunal also reiterated that while a notice to attend a disciplinary hearing is not a notice of intention to debar under section 14(3) of the FAIS Act, the two notices may be combined where the disciplinary and debarment hearing will run concurrently.
In Tebogo Molomo v Old Mutual Life Assurance Company (SA) Ltd, the Tribunal held that the debarment process was not reasonable or fair because the FSP had not provided the representative with the grounds or reasons, or clear statement of the allegations, to enable the representative to make representations on why they should not be debarred.

Conclusion

The recent developments in the various Tribunal decisions have confirmed that a FSP must follow a fair procedure prior to the debarment of a representative. Failure to do so may render the debarment unlawful, unreasonable and unfair which are grounds for it to be overturned. It appears that the Tribunal is taking a zero-tolerance approach to lack of procedural fairness in FAIS debarment processes.

It is worth noting that, in most of the instances discussed above, the FSPs were rather large concerns, with access to internal legal expertise, yet they failed to follow due process. Having to redo the whole “divorce” process is unpleasant for all concerned, and unnecessary, if we learn from the lessons contained in this article.

 

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