High Court dismisses constitutional challenge to sections of the Financial Sector Regulation Act

The Gauteng High Court has dismissed, with costs, an application by Fusion Guarantees and its directors to declare sections 154, 167 and 231 of the Financial Sector Regulation Act (FSRA) unconstitutional and invalid.

The application was brought against the FSCA, the Minister of Finance and the National Credit Regulator. The case was heard in September last year.

The court found that the applicants’ challenge to the constitutionality of the sections was not well founded and “speculative in the extreme”.

The judgment, which was handed down in January, can be downloaded here.

Fusion is registered as a credit provider in terms of the National Credit Act.

Fusion and directors Ilse and Eugene Bekker contended that:

  • The conduct of the FSCA in making a debarment order and/or imposing an administrative penalty does not amount to just administrative action as guaranteed in section 33 of the Constitution.
  • Their constitutional rights under sections 34 (the right of access to the courts) and 22 (the right to freedom of trade, occupation and profession) have been violated, because the FSCA is vested with the power to debar.
  • Section 167 of the FSRA, like section 154, does not afford applicants the right to have a dispute regarding the imposition of an administrative penalty and/or the amount thereof resolved in a fair public hearing before an independent and impartial tribunal or forum.
  • Their right to choose a profession or practise a profession or occupation (section 22 of the Constitution) was limited, because section 231 of the FSRA does not automatically undo or suspend a debarment order.

Background to the case

The then-Financial Services Board investigated Fusion in 2010. The investigation found that Fusion conducted an unregistered insurance business by issuing guarantee policies in contravention of section 7(1) of the Short-term Insurance Act (STIA). This resulted in the FSB debarring Ilse Becker for five years.

Although the FSB Appeal Board ordered the FSB to reconsider the debarment order, it upheld the finding that Fusion had violated the STIA.

The High Court dismissed an application by Fusion to have the finding reviewed. An application for leave to appeal to the Supreme Court of Appeal was also dismissed.

In February 2020, the registrar of short-term insurance directed Bekker and Fusion not to issue guarantee policies without being registered as a short-term insurer. The applicants have responded to the FSCA’s notice, and the matter has yet to resolved.

Fusion contends that it does not have to register as an insurer, because the guarantees/deeds of surety it issues do not constitute “any kind of short-term insurance business” as contemplated in section 7 of the STIA.

The recent High Court case was not concerned with resolving the dispute between the applicants and the FSCA.

“The question is whether the applicants would have remedies at their disposal to challenge any debarment order or any administrative penalty if and when those decisions are made, and if so, whether the applicable remedies meet constitutional muster,” the judgment said.

The High Court did not accept the arguments put forward by the applicants. Some of the court’s reasons for dismissing the application were:

State can regulate a trade

The court’s reasons for dismissing the challenge to section 154 of the FSRA Act included:

  • Section 22 of the Constitution only protects a citizen’s freedom of choice; it does not protect the manner in which a trade is practised. The state may freely regulate the practice of a trade as long as it does not prohibit the trade altogether or exclude citizens from it.
  • Only a citizen may claim the benefit of the first sentence of section 22. Since Fusion is not a citizen, it cannot claim that benefit.
  • It is section 153 of the FSRA that empowers the FSCA to debar persons, but the applicants did not challenge the constitutionality of this section. Section 154 merely specifies the process that must be followed before a debarment order is made.

Principle of subsidiarity

The court said it was common cause that the requirements of section 33 of the Constitution have found expression in the Promotion of Administrative Justice Act (PAJA).

The applicants’ counsel asserted that this was irrelevant for the purposes of the applicants’ case. Counsel confined the applicants’ case strictly to the provisions of section 33 of the Constitution that section 154 of the FSRA allegedly violated.

The court said this contention was not sustainable because of the principle of constitutional subsidiarity. This means that if legislation gives effect to the Constitution and the legislation is alleged to fall short of the constitutional standards, it is the legislation that must be challenged as being unconstitutional, and recourse cannot be had directly to the constitutional right.

Section 3(3) of PAJA provides that, in order to give effect to the right to a procedurally fair administrative action, an administrator such as the FSCA may, in its discretion, give an affected person an opportunity to:

  • Obtain assistance and, in serious or complex cases, legal representation;
  • Present and dispute information in argument; and
  • Appear in person.

The court said the FSRA does not remove the discretion provided for in section 3(3) of PAJA. Section 91 of the FSRA makes it clear that section 3(3) of PAJA applies to any administrative action contemplated by the FSCA.

Hearing before an impartial forum

The applicants argued that section 154 of the FSRA is unconstitutional to the extent that it does not provide for a hearing before an impartial forum before a decision or sanction is imposed.

The court said this proposition elided the distinction between sections 33 and 34 of the Constitution. It said there is nothing in the language of section 33 that refers to a hearing before an “independent and impartial forum”. That was in section 34, but section 34 was not concerned with administrative action.

It said the applicants’ contention that only impartial and independent adjudicators or courts can determine whether a law has been contravened could not correct. If it were, it would mean that almost all administrative actions would be unconstitutional, because “countless such decisions are taken by decision makers that do not operate as independent tribunals”.

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