The FAIS Act became the first piece of legislation to regulate the rendering of advice and intermediary services in South Africa. It introduced “fit and proper” requirements to test the competence and fitness of principals and their representatives when rendering financial services.
Section 14(1) of the FAIS Act permits FSPs to act against representatives who are seen to be incompetent or unfit to render financial services. This part of the Act does however not allow the FSP to exercise its own discretion on deciding whether to debar such a representative as the provision makes it compulsory for FSPs to take action.
FSPs must follow the correct debarment process
The compulsory obligation on FSPs however does not exempt it from following the correct process of debarment such as giving the representative the opportunity to be heard. Both parties are to present the necessary facts and evidence in order for a fair process to be followed, as an allegation alone does not constitute an automatic debarment process.
It has come to light that FSPs struggle with the timing of a debarment process and when to take action. The representative is in the employment of the FSP and therefore the requirements of the Labour Relations Act (LRA), besides the requirements set by the FAIS Act need to be taken into account. The FSP, as employer, therefore has to follow the disciplinary hearing and enquiry process as prescribed by the LRA. The outcome of the disciplinary hearing may be used as a basis for the process under the FAIS Act, but a guilty-outcome under the LRA does not automatically lead to a guilty-outcome under FAIS. An independent assessment would have to be done to determine if the representative did in fact commit a misconduct which transgressed his honesty and integrity as a professional in the financial services industry.
Guidelines for determining honesty and integrity
The FSB Appeal Board provided guidelines which FSPs can use to determine whether a person or representative in fact holds honesty and integrity and stated that
- The dictionary meaning of integrity is soundness of moral principle; the character of uncorrupted virtue, especially in relation to truth and fair dealing; uprightness, honesty, sincerity.
- A person’s character is what he in fact is, whereas his reputation is what other people think he is.
- The determination of whether a person is of sound character involves a moral judgment. In arriving at that judgment it is necessary to consider the person’s manner of conduct, not only in respect of his private life but also in business dealings. For purposes of the FAIS Act the emphasis will be on the latter.
- The quality of a person must be judged by the person’s acts and motives, meaning behaviour and the mental and emotional situations accompanying the behaviour.
- Character cannot always be estimated by one act or one class of act. As much about a person is known will form the evidence from which the inference of good or bad character is drawn.
An FSP confronted with the decision to debar has to determine each case on its own facts and merits. There is not one rule that applies to all circumstances but the decision of the FSP must be rational. The test to determine acts of dishonesty, negligence, incompetence under the LRA is distinct and different to the test under the FAIS provisions irrespective of their interaction. The LRA focuses on a system of progressive discipline that punishes an employee’s misconduct, whereas the FAIS Act focuses on protecting clients, to ensure and maintain the qualities of honesty, integrity, professionalism and trustworthiness.
The FSB set out a helpful test for dishonesty in the newsletter which includes both an objective and a subjective component. It will be helpful for FSPs who are faced with a difficult decision about the honesty of its Representatives to ask themselves:
1. Was the act of the representative one that an ordinary decent person would consider to be dishonest (the objective test)? If this is the case, then:
2. Must the representative have realised that what he was doing was, by those standards, dishonest (the subjective test)?
Concerns of FSPs
The concern that FSPs have is what happens when the accused representative resigns or absconds during the process of the disciplinary hearing under the LRA. The response of most of the FSPs has been to discontinue the process and refer the matter to the FSB. In response, the FSB has cautioned FSPs that they are expected to continue and determine the issue under the FAIS Act. The counter-response of FSPs is that there is no jurisdiction to take any action under the FAIS Act after the employee has left the employ of the employer and the mandate is then automatically terminated.
This situation was seen in the Pietermaritzburg High Court case where two former Nedbank financial advisors were debarred by the Bank. The reason for the debarment given by the Bank is that they “stole high net worth clients by sending information to their wives’ private emails prior to resigning and starting their own business.”
In an urgent application to the High Court, the advisors requested that their debarment be lifted in order for them to continue working, whereby the ban was initially lifted. However, after three senior advocates were appointed to probe the matter the ban was reinstated at the end of June 2015.
When is a debarment valid?
The position of the FSB is that if a provider had no mandate or contractual relationship with a representative at the time when the reason for the debarment occurred, it cannot effect a valid debarment. But, if the reason for the debarment existed, but only came to the notice of the provider later, the process of debarment may still be embarked upon, as with the case of the two debarred advisors.
If you are faced with a difficult decision with regards to the activities of a Representative, contact your Masthead Compliance Officer who will guide you through the process for debarment.