In the last few months, we have seen an increase in the number of debarment cases, several of which were referred to the Financial Services Tribunal (FST), who often sets aside the debarment for a lack of adherence to procedural requirements, despite having substantial grounds to have brought that action against a representative.
The FAIS Act requires that before effecting a debarment, an FSP must ensure that the debarment process is lawful, reasonable, and procedurally fair. However, in practice, the procedural steps are often not followed as prescribed, as was again seen in a recent reconsideration of debarment decision, Tawuya Dzinopana Rogers Nhongo and Brough Capital Proprietary Limited, where the FST noted that the debarment process followed was procedurally irregular and unfair, and that both parties lacked a basic understanding of the statutory provisions relating to the debarment of a representative.
The FSP instituted debarment proceedings against its representative for breaching his duties as director of the FSP. The FSP sent two letters to the representative. The first letter provided that the FSP was contemplating an intention to bring a debarment action against the representative whilst the second letter set out the representative’s alleged breach of duties. The letter was concluded by the FSP stating that it was obliged to report the representative’s conduct to the FSCA and CIPC. Both letters had failed to address material procedural aspects of the debarment process as prescribed by section 14 of the FAIS Act.
The FSPs request for the matter to be referred back to it, should the application for reconsideration be upheld, was subsequently dismissed by the FST. The FST found that the FSP’s poor understanding of its rights and duties, did not instil the necessary confidence that it would be able to deal with the debarment matter in a procedurally fair and correct manner. The FST noted that there was some merit in the representative’s argument that the FSP had conflated contractual and company law issues with FAIS Act issues. As a result, the FST set aside the debarment of the representative.
What are the Debarment requirements in terms of Section 14 of FAIS and how do they apply to your FSP?
When to debar?
Section 14 of the FAIS Act provides that an FSP must debar a representative or key individual of a juristic representative from rendering financial services in instances where they do not meet (or no longer comply with) the fit and proper requirements or have contravened or failed to comply with the FAIS Act in a material manner. The reasons for the debarment must have occurred and become known to the FSP while the person was a representative of the provider. This requirement was reiterated in the FST decision of Pierre Hugo and Nedbank Insurance. In cases where a person is no longer a representative of the FSP, the FSP must commence the debarment proceedings within 6 months from the date that the person ceased to be a representative of the FSP.
What are the Procedural steps to a debarment process – before debarring a person?
Step 1- Notice
The FSP must give adequate notice, in writing, to the person notifying him/her of :
- its intention to debar
- the grounds and reasons for the debarment procedure being instituted, include evidence and supporting information. This will enable the representative to formulate a proper response,
- any terms attached to the debarment, including in relation to unconcluded business any measures stipulated for the protection of the interests of clients.
- provide the person with a copy of the FSP’s written policies and procedures governing the debarment process. This should include their rights, duties and obligations in terms of the debarment process.
- give the person a reasonable opportunity to make a submission in response. This can be done by stating a time period eg. 30 days.
Step 2 – The Consideration
The FSP must consider any responses made by the person which the FSP intends to debar. The FSP must also consider all available facts and information and where applicable, also consider information regarding the conduct of the person that is furnished by the FSCA, the Ombud or any other interested person. In addition, the FSP should refer to previous FSCA enforcement actions, debarment decisions, matters from the FAIS Ombud, and appeal matters from the FST to establish their approach and to inform a decision on that particular matter of non-compliance.
What if a representative does not submit a response?
Where a representative does not make use of the opportunity to make submissions in response to the grounds and reasons forming the basis of the FSP’s intention to debar him or her, this does not prevent the FSP from considering the matter and taking a decision concerning the debarment of that person. Despite not receiving a response, the FSP must continue to communicate with the representative through usual business and/or personal correspondence channels to keep the representative informed during the process.
Step 3 – Communicating the decision reached to the Representative
After consideration of all relevant factors and information, the FSP must take a decision whether or not to debar the person. Once the debarment decision is reached, the FSP must immediately notify the person in writing of:
- the FSP’s decision
- the person’s rights to request reasons for the decision and to have the decision reconsidered by the FST; and
- any formal requirements in respect of proceedings for the reconsideration of the decision by the FST.
What are the FSP’s duties after debarment
Where debarment decision has been reached, the FSP must:
- ensure that the person is prohibited from rendering any new financial service by immediately withdrawing their authority to act on behalf of the FSP.
- remove the name of the debarred person from the Register of Representatives
- immediately take steps to ensure that the debarment does not prejudice the interests of clients of the debarred person.
- notify the FSCA within 5 days of the debarment in the form and manner prescribed by the FSCA.
- provide the FSCA with the grounds and reasons for the debarment within 15 days of the debarment in the format as may be required by the FSCA.
It is imperative that an FSP adheres to and correctly follows the above procedural steps during every debarment process to ensure that the debarment is both procedurally and substantively fair.
Importantly, the FSP must adhere to its own debarment policy in line with the FAIS Act when following the debarment process, taking particular care in following prescribed timelines, providing clear information and affording the person with their rights and protections with the aim of reaching a fair and justifiable debarment decision, which is supported by a fair and procedurally sound debarment process.