The Financial Services Tribunal recently dismissed an application by a Key Individual (KI) to reconsider the FSCA’s decision of a R500 000 administrative penalty and debarment for a period of 5 years. The sanctions followed from an investigation by the FSCA after it received a complaint alleging that the FSP traded client funds without authorisation and failed to reimburse clients’ losses caused by the company.
This case concerns the lack of continuous operational ability on the part of the KI. A Key Individual must be able to adequately and appropriately manage or oversee the activities of the FSP ‘relating to the rendering of financial services’, i.e., must have the necessary operational ability for it.
The FSP was authorised as a discretionary financial service provider with Cat I and II licence and was authorised to provide advice and render intermediary services in respect of derivative instruments, shares, warrants, certificates and other instruments and bonds. Members of the public invested funds in the FSP and these funds were deposited into the FSP’s business bank account. The FSP used some of the funds to invest in a product on a platform other than that authorised by its licence. Fraudulent representations were made to clients by the FSP that the money they invested in the FSP was used by the FSP to trade in the financial instruments they were licensed to trade in, whilst in truth, part of the funds were used to invest for unlicensed trading purposes, but then also in the name of the FSP and not in the name of those clients.
In 2016, the KI realised that some statements issued by the FSP were questionable and that trading by the FSP occurred deliberately without his knowledge. Despite these issues, the KI merely relied on the assurances of another executive director and CEO, without improving the operational processes at the FSP. The CEO ceased presenting financial statements to board members and the KI had no oversight of the financial affairs of the FSP, but the KI turned a blind eye to this.
In the application to reconsider the debarment and administrative penalty that was imposed, the Tribunal found that the KI was not able to show that the FSCA’s reasons and decisions failed to bring an unbiased judgement to bear on the issue, nor that it acted without substantial reasons or exercised its discretion capriciously or upon the wrong principle.
The Tribunal noted that there was no indication that the KI appreciated the seriousness of his failures. The KI, as director of the FSP, conceded in an interview on 14 January 2021 that he was not actively involved in the business or financial affairs of the FSP. One of the aggravating factors the FSCA considered prior to the decision to fine and debar the KI was the submission by that he joined the FSP with the purpose to secure a FAIS license, whereafter his only role was to oversee platform training.
This case highlights the importance of the continued operational ability of the KI of the FSP and the potentially dire consequences should the KI lack the required operational ability. It is critical for KI’s to understand their roles and responsibilities in terms of regulation and to ensure that they have appropriate access to the FSP’s business information to oversee and monitor the activities of the FSP.