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Tribunal reduces METCI penalty by 70% – Finds that fund did not act recklessly

The Financial Services Tribunal has just handed down its decision on an application by MET Collective Investments (Pty) Ltd (METCI) for a reconsideration of an order made by the Financial Sector Conduct Authority (FSCA) in September 2019. Originally the FSCA imposed a penalty of R100 million for contraventions of the Collective Investment Schemes Control Act and certain Board Notices. Although the fine has now been reduced to R30m, it remains one of the highest penalties ever imposed by the regulator.

Background

From 2014 to 2016, METCI was the “manager” of a collective investment scheme in securities, the “Third Circle MET Target Return Fund”.
On 1 March 2016 METCI informed the Registrar of Collective Investment Schemes that the Fund had lost 66% of its value during what it called volatile market conditions during December 2015.
The loss in asset value took place during the period 7 to 10 December 2015. A significant event causing volatility took place on 9 December after the markets had closed – the Minister of Finance, Mr Nene, was unexpectedly replaced by then President Zuma.
The investment loss between close of business on 9 and 11 December was calculated to be 68.3%.
On 12 September 2019, an administrative penalty of R100 million was imposed on METCI, because it was found that METCI had contravened different provisions of financial sector laws.

The application for reconsideration and the Tribunal’s response

According to the Tribunal notes, METCI’s heads of argument submitted that the original decision had to be set aside because of the flawed process, the true nature and extent of the transgressions, and the misapplication of section 167 of the FSR Act.

The Tribunal found that “it was and remains unclear what METCI wished to make of the alleged administrative flaws in the process.”

The counsel for METCI further agreed that both paragraph 15(1) and para 3(8)(c) of BN90 had been contravened. “Para 3(8)(c) also provides that the manager “must ensure” that the financial instruments “are covered at all times”. The fact that para 15(1) was breached necessarily implies that the detailed cover requirements of para 16(1) were also breached.” As a result it was originally correct to find that METCI had breached its obligation to ensure that the financial instruments were covered at all times and that there were not nearly enough assets in liquid form to cover all the positions (positive net return).

Furthermore, the Tribunal pointed out that there was a failure to administer the scheme with skill, care and diligence, and in the interest of investors and the collective investment scheme industry as per section 2(1) and 4(4) of the Control Act.

Other contraventions that the Tribunal agreed with includes Section 106(a) of the Control Act that provides that “no person may make a statement or disseminate information which he or she … ought reasonably to know, is false or misleading” – ignoring for present purposes the alternative of “or is likely or intended to induce other persons to purchase or deal in a participatory interest”.

The technical arguments were therefore all dismissed by the Tribunal and they found that METCI’s transgressions were material.

But was METCI reckless?

It is clear from section 167 that “the extent to which the conduct was deliberate or reckless” is a factor that “may” be considered in determining a penalty.

In the original findings of the Commissioner of the FSCA recklessness was the determining factor.

“The Commissioner based his finding of recklessness on the fact that, for an extended period, METCI allowed the Fund to continue to invest in securities for which, in its own view at the time, it did not have reliable deltas in respect of interest rate and currency option to determine on a daily basis the Fund’s effective exposure and therefore could not determine whether it was in breach of BN90. Assuming that section 167 used “recklessness” in the wide sense, and not something between gross negligence and intentional, we do not believe that the Commissioner was correct in his conclusion, and that METCI did not overstep the boundary,” the Tribunal empahised.

Although the Tribunal agrees with the Commissioner that section 167 calls for substantial penalties, it found that FSCA had made a mistake in finding METCI’s behaviour reckless.

Considering the Harmony and Steinhoff cases as well as the facts of this case, the Tribunal concluded that an appropriate administrative penalty would be R30 million, of one third has already been remitted.

Click here to download the Tribunal case.

Click here to read the FSCA’s media release.

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