Secondary

FSB Feedback on Debarment of Representatives Part I

“To debar or not to debar”, that is the title of a very informative article written by Advocate Matome Thulare, Head of Enforcement at the FSB. In view of the interest articles on this topic drew in the past, and the length of the article, we will cover the contents in two separate articles.

“The decision whether to debar or not to debar a representative of an authorised financial services provider (“FSP”) appears at face value to be a simple matter. In reality however, the matter is rather complex and can become convoluted due to legal uncertainties and interpretation problems pertaining to the applicable provisions. Often times the dilemma is palpable for the FSPs: Damned if they do and damned if they don’t.”

After providing some historical perspective, the article states:

“The FAIS regulatory structure is to subject individuals or entities who wish to act as principals in the rendering of financial services to a rigorous test of fitness and propriety. In turn, these individuals and entities are made responsible for the initial and continuing fitness and competence of their representatives.”

The Requirement to follow due process

In particular, section 14(1) of the FAIS Act empowers the FSPs to take action against representatives who are considered to be unfit or incompetent to render financial service. The FSPs are not permitted to exercise discretion whether to debar or not to debar a representative who is deemed unfit or incompetent. The wording of the empowering provision is pre-emptory and thus makes it compulsory for the FSPs to take action. That said, it does not mean that the FSPs must debar a representative without following due process.

Often times, the FSPs do not comply with the requirement to afford the representative an opportunity to be heard. The fact that there are allegations of wrongdoing against a representative does not on its own constitute evidence and reason to debar. The difficulty appears to be the timing of when to take action against a representative as required by the FAIS Act.

The fact that the representative is also engaged by the FSP in terms of the contract of employment means that there is a Labour Relations Act (LRA) matter to dispose of.

In compliance with the LRA the FSP as the employer of the representative must convene a disciplinary enquiry to determine the guilt or otherwise of the employee under the LRA. The outcome of the disciplinary enquiry may provide the basis to consider the application of the FAIS legislation. In my view, it does not necessarily follow that a guilty finding made under the LRA would also trigger a debarment process under the FAIS Act.

An independent assessment would be necessary to determine whether the misconduct is sufficiently serious to impugn the honesty and integrity of the representative. The FSB Appeal Board provided some guidelines to ascertain whether a person has honesty and integrity and stated that:

  • The dictionary meaning of integrity is soundness of moral principle; the character of uncorrupted virtue, especially in relation to truth and fair dealing; uprightness, honesty, sincerity.
  • A person’s character is what he in fact is, whereas his reputation is what other people think he is.
  • The determination of whether a person is of sound character involves a moral judgment. In arriving at that judgment it is necessary to consider the person’s manner of conduct, not only in respect of his private life but also in business dealings. For purposes of the FAIS Act the emphasis will be on the latter.
  • The quality of a person must be judged by the person’s acts and motives, meaning behaviour and the mental and emotional situations accompanying the behaviour.
  • Character cannot always be estimated by one act or one class of act. As much about a person as is known will form the evidence from which the inference of good or bad character is drawn.

In practice however, the FSPs grapples with the determination whether it is appropriate to debar or not to debar a representative in particular circumstances. In the opinion of the Appeal Tribunal, an act of dishonesty, negligence, incompetence or mismanagement does not per se constitute prima facie evidence of absence of honesty and integrity. The Appeal Tribunal took the view that the dishonesty, negligence, incompetence or mismanagement must be sufficiently serious to impugn the honesty and integrity of person concerned.

The FSP, confronted with a determination whether to debar or not to debar, is required to make a judgment call in light of the facts of each case. The decision of the FSP to take a particular course of action cannot be second-guessed per se but it must be rational. The FSP cannot ignore compelling information of wrongdoing against a representative. In most instances, the representatives are debarred for acts of honesty and integrity. In developing the test for dishonesty, it was found that the test for dishonesty must be both subjective and objective. In practice it means that the FSP considering a debarment must ask itself the following questions;

  • Was the act of a representative such that an ordinary decent person would consider it to be dishonest (the objective test)? If so:
  • Should the representative have realised that what he was doing was, by those standards, dishonest (the subjective test)?

It has also been established that in applying this test, it is not essential for a person to admit that they acted in a way that they knew to be dishonest; it is probably enough that they knew others would think their behaviour was dishonest, or that they thought that what they were doing was wrong.

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