The Financial Sector Conduct Authority may impose fines on foreign entities or individuals without having to serve a notification physically while they are in South Africa. This is the consequence of the High Court’s acceding to a request by the FSCA to develop the common law to eliminate the need for in-person service on foreign nationals (peregrini).
In a judgment delivered last week, the High Court in Pretoria declared that the FSCA can deliver penalty notifications by any means, including electronically, on peregrini in respect of misconduct with “a sufficiently close connection” to South Africa.
The declarator resulted in the court’s setting aside the majority decision by the Financial Services Tribunal (FST) to uphold a reconsideration application brought by Viceroy Research. The court ordered the Tribunal (the first respondent) to reconsider the matter afresh in light of its declarator.
Responding to the judgment, Viceroy said it is ready to reaffirm its case in South Africa and stands by its statements and research in respect of Capitec Bank.
In January 2018, Viceroy published a scathing report on Capitec, titled “Capitec: A Wolf in Sheep’s Clothing”, alleging accounting irregularities, an overstated loan book quality, and systemic risks, which precipitated a massive sell-off of Capitec’s shares.
The FSCA investigated and, in September 2021, imposed a R50-million administrative penalty on Viceroy and its principals for publishing “false, misleading, or deceptive statements, promises, or forecasts regarding material facts about Capitec, which they ought reasonably to have known were not true”. This was a contravention of section 81 of the Financial Markets Act.
Viceroy Partnership LLC (the fifth respondent) is registered in Delaware in the United States. Viceroy’s founder, Fraser Perring (sixth respondent) is a British national. The other authors of the report named by the FSCA were Aiden Lau (seventh respondent), who lives in France, and Gabriel Bernarde (eighth respondent), who lives in Australia.
Viceroy challenged the fine before the FST, arguing that the FSCA lacked jurisdiction over foreign entities whose reports were produced and distributed from outside South Africa.
In a majority ruling delivered in November 2022, the Tribunal upheld the application for reconsideration and set aside the fine.
Two members (Judge Louis Harms and Jay Pema) of the three-person panel found that the FSCA did have jurisdiction over the respondents’ conduct, even though the Viceroy report was not compiled in South Africa. But they said the Authority did not have jurisdiction over their persons because they were foreign litigants not domiciled within the jurisdiction of South Africa’s courts.
The majority decision was that penalties imposed on peregrini – foreign entities or individuals – require adherence to two common law conditions established by the Supreme Court of Appeal (SCA) in Bid Industrial Holdings (Pty) Ltd v Strang and Others (Strang). These are: (1) “there is sufficient connection between the suit and the area of jurisdiction of the court concerned so that disposal of the case by that court is appropriate and convenient”, and (2) “the summons is served on the defendant while in South Africa”.
The Authority imposed penalties on Perring, Lau, and Bernarde without serving them the notice of intention to penalise or the penalty notice while they were physically in South Africa. Instead, the FSCA sent the documents by email to South African attorneys appointed by them to represent them in their dealings with the Authority. The Tribunal determined this method failed to meet the common law service requirement in Strang.
Advocate Michelle le Roux disagreed with the majority finding on the requirements for establishing personal jurisdiction.
Read: Tribunal rules on Viceroy’s application against R50m penalty for Capitec report
High Court rejects FSCA’s primary grounds for the review
In 2023, the FSCA brought an application for the High Court to review and set aside the Tribunal’s decision.
The Authority advanced three primary grounds to argue that the FST misdirected itself in finding it did not have jurisdiction over Perring, Lau, and Bernarde.
- The common law requirements for personal jurisdiction do not apply to the FSCA’s imposition of an administrative penalty, because it is a regulatory action, not a court-based monetary debt recovery.
- If the common law requirements apply, the respondents consented to the FSCA’s jurisdiction through their actions.
- Even if consent was not established, the common law requirements for personal jurisdiction were satisfied in this case.
In its decision handed down last week, the High Court found against the FSCA’s primary grounds.
Judge Nicoline Janse van Nieuwenhuizen ordered the FSCA to pay Perring, Lau, and Bernarde’s costs, saying they were “substantially successful” in opposing the review application.
Additionally, the FSCA proposed that if the Tribunal’s finding was correct, the High Court should develop the common law to eliminate the need for in-person service for regulatory bodies such as the FSCA.
Judge Janse van Nieuwenhuizen granted the FSCA’s prayer to develop the common law per section 173 of the Constitution, which grants courts inherent power to develop the common law in the interest of justice.
Reasoning on developing the common law
The FSCA argued that the common law’s requirement for in-person service in South Africa hinders its ability to regulate peregrini whose actions target South Africa’s financial markets, causing substantial harm.
The Authority contended that the development it sought was incremental, building on the precedent set in Strang, which had abolished the arrest requirement for jurisdiction.
The development was aimed at remedying a defect in the existing law, which effectively precludes the imposition of an administrative penalty on a peregrinus with no presence in South Africa – based on “an arbitrary requirement” of service while in South Africa.
The FSCA further submitted that requiring personal service on a peregrinus in South Africa makes little, if any practical sense and does little more than hamper and frustrate the effective regulation of financial activity that takes place extra-territorially and digitally.
The court recognised the obsolescence of personal service in a digital world. It cited Rule 4A of the Uniform Rules of Court, which allows electronic service for documents subsequent to a summons as evidence of legislative acknowledgment of technological advances.
Judge Janse van Nieuwenhuizen observed: “Although Rule 4A pertains to procedure and not substantive law, the necessity to develop practices and procedures to meet modern exigencies clearly exist. Modern society lives in a global world where the necessity to be present in person has diminished over time.” Examples included virtual court hearings and remote work, illustrating reduced reliance on physical presence.
The court noted the importance of financial market regulation, stating: “If one has regard to the purpose and object of the regulation of financial markets, its importance far outweighs the necessity to serve any documents that initiate the enforcement of financial regulation on a peregrinus personally in order to find jurisdiction.”
The importance of effective regulation was borne out by the facts in this matter.
“The misinformation that was widely distributed and publicised in South Africa by the respondents had a disastrous effect on one of South Africa’s prominent financial institutions. To absolve the respondents from being liable for their conduct merely because they will at no stage be physically present in South Africa is not in the interest of justice,” said Judge Janse van Nieuwenhuizen.
She added that the R50m fine will undoubtedly be welcomed amid “the dire economic circumstances prevailing in South Africa and the ever-shrinking fiscus”.
Concluding that development of the common law was warranted, the court decided to adopt the framework proposed in the FSCA’s notice of motion.
It declared that the Authority may impose an administrative penalty in terms of section 167 of the Financial Sector Regulation Act (FSRA) on a peregrinus in circumstances “where the requirements of section 167 are satisfied and where the applicant has jurisdiction over the person of the peregrinus on the basis that notice of the applicant’s intention to impose an administrative penalty was delivered to the peregrinus by any means (including electronic means) and the connection between the conduct of the peregrinus and South Africa is sufficiently close to make it appropriate and convenient for the regulatory power to be exercised”.
Court’s findings on the primary grounds
The court’s findings in respect of the three primary grounds were as follows:
- Common law requirements do apply
The Tribunal held that the FSRA is silent on jurisdiction, meaning the FSCA’s authority to impose penalties depends on whether a superior court would have jurisdiction under common law. The FSCA argued this was erroneous, asserting that common law requirements for personal jurisdiction are irrelevant when exercising regulatory powers, because it was not recovering a monetary debt in court.
The court examined section 170 of the FSRA, which governs penalty enforcement. Section 170(1) requires the FSCA to file a certified penalty order with a competent court’s registrar, and section 170(2) states, “such an order… has the effect of a civil judgment and may be enforced as if lawfully given in a court”.
The court defined “court” as a Superior Court under the Superior Courts Act and concluded that to enforce a penalty as a civil judgment, the FSCA must have common law jurisdiction over the person. Therefore, the court upheld the Tribunal’s finding that the common law jurisdictional requirements apply to the Act.
- No consent to jurisdiction
The FSCA contended that the respondents consented to its jurisdiction, either expressly or through conduct.
The FSCA pointed to interactions between the respondents’ attorneys, Snaid & Edworthy, and the Authority. In March 2021, the United States Securities and Exchange Commission enquired whether the attorneys could accept the FSCA’s investigation report. On 25 March 2021, the attorneys confirmed representation, requested the report, and reserved all rights. On 27 June 2021, they denied wrongdoing, affirmed the respondents’ intent to defend, and again reserved all rights.
The court found that requesting and reviewing the report did not constitute consent, because the respondents consistently reserved their right to challenge jurisdiction.
The FSCA also argued that the respondents’ application for reconsideration implied consent, but the Tribunal rejected this, stating: “The jurisdiction of the Tribunal depends on the decision-maker… the applicants were obliged to apply for reconsideration of the decision on the ground of lack of jurisdiction.”
The court concurred, finding it illogical that challenging jurisdiction would confer it.
- Common law requirements were not met
The FSCA argued that because no summons is issued for an administrative penalty, only the “sufficient connection” requirement from Strang applied. It noted that it provided a notice of intention to the respondents, informing them of the allegations and offering a response opportunity, akin to a summons.
The court held that this notice constitutes a “summons” under the Act and must be served in South Africa to establish jurisdiction, which did not occur.
The FSCA cited Competition Commission of South Africa v Bank of America Merrill Lynch International Ltd (Bank of America), where the Competition Appeal Court allowed service via fax or email. The Tribunal distinguished this as procedural, not substantive, law, adhering to Strang’s requirement for in-country service.
The court rejected the FSCA’s claim that Bank of America was binding, citing American Natural Soda Ash Corporation v Competition Commission of South Africa, which established the SCA’s overriding authority.
The court concluded that the common law requirements were not met because of the absence of service in South Africa.
