A decision by the Financial Services Tribunal (FST) highlights the importance of full and frank disclosure by prospective key individuals (KIs) when entities apply for to be licensed under the Financial Advisory and Intermediary Services Act.
Past misconduct remains a valid criterion for assessing whether an individual meets the standards of honesty and integrity required in the financial services industry. Even more importantly, failing to demonstrate both remorse for past misconduct and rehabilitation will certainly lead the Authority to conclude that an applicant is not fit and proper.
According to the FST’s decision, Masodi Financial Services (Pty) Ltd submitted a licence application to the FSCA in December 2023. The application required detailed disclosures from the directors and KIs regarding their honesty, integrity, and good standing.
The prescribed application forms were completed by Diem D.L.D. Ntoyi and Nonkululeko Penelope Mkhungo.
Ntoyi was designated as Masodi’s KI, but the Authority did not accept his appointment. It regarded Mkhungo as the KI because she was the sole director and shareholder.
Ntoyi’s and Mkhungo’s disclosures came under scrutiny.
Ntoyi answered “no” to questions about whether he had previously been refused a registration, licence, or authorisation to carry on a trade or business. The FSCA subsequently established that Ntoyi’s application to be licensed as a broker had been rejected in February 2011.
Upon the FSCA’s inquiry, Ntoyi corrected his response to “yes” and provided an explanation that the Authority deemed satisfactory, resolving the issue without further consequence.
Mkhungo’s disclosures proved more problematic. She answered “no” to questions about past dishonest conduct or regulatory prohibitions. The FSCA later established that Mkhungo had been debarred in 2022.
When pressed by the FSCA, Mkhungo attributed the omission to an oversight, arguing that her reappointment as a representative negated the need for disclosure.
The FSCA investigated and found that Mkhungo had been reappointed by Ntoyi, trading as DD Ntoyi Brokers (a licensed FSP), 15 months after her debarment by Assupol in April 2022.
The debarment stemmed from serious misconduct. Assupol accused Mkhungo of fraudulently replacing a client’s policy with a new policy with a higher premium.
During the debarment hearing, Mkhungo admitted her wrongdoing. She attributed her actions to an isolated lapse, citing emotional distress following a colleague’s death as the precipitating factor. Mkhungo expressed remorse, apologised, and requested a second chance, but Assupol proceeded with the debarment.
The FSCA concluded that Mkhungo’s actions were not a spontaneous error but deliberate, because completing fraudulent forms, falsifying a signature, and processing them through the system required intentional effort over time.
Despite not being formally appointed as a KI in Masodi’s application, the FSCA noted that her position as sole shareholder would grant her significant influence over the company’s operations.
The FSCA further assessed that Mkhungo’s reappointment as a representative 15 months after her debarment did not provide sufficient time to demonstrate rehabilitation, particularly given the gravity of her offence.
Finally, it found that Mkhungo had not adequately shown how she had reformed or rehabilitated since the incident, leaving doubts about her compliance with the fit and proper requirements for honesty, integrity, and good standing.
For the above reasons, the Authority declined Masodi’s application.
Dispute over designation of the KI
In their reconsideration application to the Tribunal, Masodi and Mkhungo again contested the FSCA’s refusal to accept Ntoyi as the KI. They insisted that Ntoyi, who met the fit and proper requirements, was the FSP’s KI.
The Tribunal ruled the FSCA had correctly designated Mkhungo as the KI. The FST concluded that Mkhungo was the sole director and 100% shareholder and was therefore the KI by operation of the law.
It drew attention to section 1 of the FAIS Act, where a KI is defined as a person in a corporate body who, either alone or together with other persons, is responsible for managing or overseeing financial service activities.
‘Contradictory treatment’ of reinstatement
Masodi argued that Mkhungo’s reappointment as a representative in 2023 should have been sufficient to satisfy the fit and proper requirements, accusing the Authority of inconsistent standards by rejecting her for the FSP licence despite her reinstatement.
The Tribunal upheld the FSCA’s position that the authorisation of an FSP and the reappointment of a representative are two distinct processes with different criteria. It said the applicants had confused and conflated the two processes.
FSP authorisation requires the Authority to conduct a comprehensive reassessment of a person’s suitability to be appointed as a KI. On the other hand, the reappointment of a representative is the prerogative of an FSP. It forms part of the self-regulation of the industry, where the regulatory function is performed by the FSP, not the Authority.
For similar reasons, the Tribunal rejected Masodi’s contention that the FSCA’s reliance on Mkhungo’s debarment constituted regulatory double jeopardy. Masodi submitted that Mkhungo had already served her debarment period and penalising her again by denying the FSP licence was unjust.
The Tribunal agreed with the FSCA that past misconduct remains a valid criterion for assessing ongoing compliance with the fit and proper standards, particularly for KIs whose role impacts consumer trust and market integrity.
Lack of full and frank disclosure about the debarment
The Tribunal’s findings with respect to Mkhungo’s non-disclosure about her debarment were the cornerstone of its decision to uphold the FSCA’s rejection of the licence application.
In her supplementary grounds for reconsideration, Mkhungo provided a revised account of the events leading to her debarment, which diverged from the facts provided by Assupol in the disciplinary hearing report. She admitted that her claim of emotional distress was not entirely accurate, saying she had withheld the full truth during the debarment hearing to shield a colleague from internal sanctions.
In light of this disclosure, the FSCA argued: “She has now, in fact, confessed that she lied to Assupol during the debarment hearing. It is submitted that this is a further demonstration that Mkhungo is not rehabilitated, as she was untruthful to Assupol.”
The Tribunal said Mkhungo’s initial failure to explain her debarment and her subsequent admission that she provided a false version during the disciplinary hearing vindicated the FSCA’s decision to reject the application.
The Authority was justified in finding that Mkhungo “lacks a cognitive appreciation of the attitude involved in the conduct that informed her debarment, and she does not show any remorse and has not been rehabilitated”.
Section 9(1) of Board Notice 194 states that failing to disclose material information is prima facie evidence of non-compliance with the fit and proper requirements. Section 10, in turn, provides, inter alia, that a representative must disclose, fully and accurately, all information referred to in section 9 that may be relevant in determining whether that person complies or continues not to comply with the requirements relating to honesty, integrity and good standing.
When Mkhungo changed her answer to “yes” in section 2 of Form FSP 4B, she conceded that her fit and proper requirements regarding honesty, integrity, and good standing were questionable, the Tribunal said. She had “an opportunity to redeem herself” by disclosing all material information to assist the FSCA in considering Masodi’s licence application. But this did not happen.
The FST found there was no basis to interfere with the Authority’s decision and dismissed the reconsideration application.
