FAIS Act (37 of 2002) – Debarring representatives

Author: Gary Moore

Date: 4 August 2017

The Financial Advisory and Intermediary Services Act, 2002[1] stipulates a person may not act as representative of a financial-services provider by rendering intermediary services or advice on the latter’s behalf to its clients[2] unless the person meets the “fit and proper” requirements for representatives determined[3] by the registrar of financial-services providers.[4]

The fit-and-proper requirements include standards of personal honesty and integrity, competence,[5] operational ability, financial soundness and continuous learning.[6]

A financial-services provider must always be satisfied that its representatives comply with the fit-and-proper requirements when they render financial services on its behalf.[7] The financial services provider’s compliance officer must monitor their compliance.[8]

The Act obliges a financial-services provider to ensure that any of its representatives who no longer complies with the fit-and-proper requirements[9] is prohibited by the provider from rendering any new financial service, by withdrawing authority to act on the provider’s behalf.[10] The provider must inform the registrar of the debarment and reasons for it.[11]

The Supreme Court of Appeal has held that such a debarment by an employer of a representative who no longer complies with fit-and-proper requirements precludes the representative from rendering financial services to the public, not just on behalf of the employer responsible for debarring him but for any financial-services provider.[12]

The Court noted that the Act requires a financial-services provider to oversee the initial and continuing fitness of its chosen representatives. The Court reasoned that the provider, having itself gone through a vetting process,[13] is “eminently suited to subject its representatives to a similar initial vetting and thereafter to exercise oversight in respect of them”.[14]

The Court observed that the debarment is evidence the employer no longer regards the representative as having the fitness and propriety or the competency requirements. The Court stated that such a person ought not to be unleashed on the public, and “it must therefore follow” that a representative debarred by his employer in this way “must perforce be debarred on an industry-wide basis” from rendering financial services to the investing public.[15]

With due deference to the Court (which did not consider the point now following), this statutory responsibility of financial-service providers to expel defaulting representatives from the industry is probably exercised very unevenly, in breach of the Rule of Law:

This power and duty imposed on employers[16] by the Act to preclude errant representative from rendering financial services throughout the industry is a far-reaching and highly unusual function to vest in private entities:

Employers are probably not all carrying out the function in the same, uniform, consistent manner.[17]

The inevitably uneven application by employers of this statutory function of debarring from the industry representatives who are no longer fit and proper[18] violates the Rule of Law:

It is a requirement of the Rule of Law that the laws of the land should apply equally to all.[19] The legislature in a free society under the Rule of Law should not discriminate in its laws in respect of individuals for reasons not affording a proper basis for making a distinction.[20]

Employers’ power[21] to debar representatives who cease to be fit and proper is effectively penal: First, a representative debarred by his employer is debarred on an industry-wide basis.[22]

Second, the Act states a debarred person may not[23] act as a representative, unless she—

Meets the fit and proper requirements;[24] and

complies with requirements for reappointment determined[25] by the Registrar.[26]

The Registrar has determined[27] that, to reappoint a debarred representative—

At least twelve months must elapse since her debarment;[28]

The debarred person’s unconcluded business must be properly concluded;[29] and

Any client complaints or legal proceedings,[30] and any[31] procedures[32] arising out of anything[33] the debarred person was involved in,[34] are[35] resolved and she complies with any decision.[36]

These requirements[37] are punitive in prohibiting a debarred representative from pursuing her occupation for twelve months and possibly longer, depending when[38] unconcluded business and legal proceedings are finalised, both of which are out of her control.[39]

These punitive consequences of debarment mean that vesting[40] the power to debar a representative in the financial-services provider who engaged her[41] violates the Rule of Law principle that decisions with penal[42] consequences should be entrusted to independent adjudicators unbiased by personal interest.[43]

These penal consequences[44] of debarment effectively discourage a person from being a representative and limit her freedom to choose the occupation. Citizens[45] have a fundamental right[46] to choose their occupation[47] freely.[48] Though practice of an occupation[49] may be regulated by law,[50] right to choose an occupation includes right to practise it,[51] and a law regulating practice of an occupation that also limits choice of occupation is impermissible unless reasonable and justifiable[52] (under the[53] Constitution’s proportionality test[54]).[55]

A requirement that a debarred representative is prohibited from pursuing her occupation for a year or more pending the finalisation of matters out of her control[56] is not reasonable or justifiable.[57] The requirement thus breaches the Rule of Law principle that laws must adequately protect fundamental human rights.[58]

No appeal lies[59] against a financial-services provider’s decision to debar a representative. (The Financial Sector Regulation Bill, 2015[60] proposes amending the Act to grant an aggrieved person a right to apply for reconsideration of such a decision, to a new Financial Services Tribunal.[61] Yet a right to apply to that tribunal[62] for reconsideration of a decision to debar a representative will not remedy the uneven application of providers’ statutory duty to debar representatives who cease to be fit and proper, where they fail to carry out the duty.[63])

[1] Financial Advisory and Intermediary Services Act 37 of 2002 (referred to in the text as “the Act”).

[2] Financial Advisory and Intermediary Services Act s 1(1) svv “representative”, “financial service” and “financial services provider”.

[3] By notice in the Gazette.

[4] Financial Advisory and Intermediary Services Act s 13(1)(b)(iA) read with s 1(1) sv “fit and proper requirements” and s 6A(1)(a)(iii)(bb) and (b).

Different requirements may be determined for natural persons and corporate bodies. Act s 6A(3).

The registrar may amend the fit-and-proper requirements from time to time, and a representative must comply in a period determined by the registrar. Act s 6A(4).

A representative of a financial-services provider and the former’s key individuals must continue to comply with the requirements. Act s 8A(a).

[5] Including experience, qualifications, and knowledge tested by examinations determined by the registrar.

[6] Financial Advisory and Intermediary Services Act s 6A(2)(a), (b)(i)–(iii), (c), (d) and (e).

[7] Financial Advisory and Intermediary Services Act s 13(2)(a)(i).

The financial-services provider must maintain and regularly update a register of its representatives and their key individuals, which must be available to the registrar for reference or inspection. Act s 13(3).

The register must contain all the representatives’ and their key individuals’ names and business addresses, state whether the representative acts for the provider as employee or mandatory, and specify the categories in which the representatives are competent to render financial services. Act s 13(4).

The registrar may require this information from the financial-services provider, to enable the registrar to maintain a central register of all representatives and key individuals. Act s 13(5).

[8] Financial Advisory and Intermediary Services Act s 17(1)(a) read with s 1(1) svv “this Act”.

[9] Or has contravened or failed to comply with any provision of the Act in a material manner.

[10] And that the representative’s name and the names of the representative’s key individuals are removed from the financial-services provider’s register of representatives. Act s 14(1) read with s 13(3).

For purposes of imposing such a prohibition, the financial-services provider must have regard to information about the representative’s conduct provided by the registrar, the Ombud for Financial Services Providers or any other interested person. Act s 14(2).

[11] Financial Advisory and Intermediary Services Act s 14(3)(a). The registrar may make known such a debarment and the reasons on its website or in the media. Act s 14(3)(b).

[12] Financial Services Board v Barthram and another [2015] 3 All SA 665 (SCA).

[13] At the hands of the registrar.

[14] Financial Services Board v Barthram and ano supra para [15].

[15] Financial Services Board v Barthram and ano supra para [16].

[16] And financial-service providers whose representatives are engaged under mandates other than contracts of employment. Financial Advisory and Intermediary Services Act s 13(1)(b)(i)(aa) and s 1(1) sv “representative.”

[17] On the one hand, some employers might fail to identify their representatives’ infringements.  Small employers will not all have the resources to carry out the procedure. Some employers might regard the fit-and-proper requirements as unduly oppressive. Many an employer might well just terminate its delinquent representative’s employment in the ordinary way, without treating it as formal debarment from the industry, and leave the representative free to seek employment as representative of another financial-services provider. Some employers might merely warn a delinquent representative.

On the other hand, some employers might debar their representatives for vindictive reasons. A sexually predatory employer might debar a representative who has resisted his sexual advances.

An aggrieved employer might debar a representative who had left to work for another employer. Moonstone “Debarment and TCF,” 24 Jul 2017, P Kruger.

An employer might, wrongfully, debar a representative without fair process, i.e. without first notifying him of its intention to do so and giving him an opportunity to be heard. Reynecke v Odinfin (Pty) Ltd [2016] ZAGPPHC 486 pars [16]–[21].

[18] It is true the Registrar can withdraw a provider’s licence and compliance officer’s approved status, if satisfied they haven’t carried out their obligations regarding monitoring and debarring representatives who are not compliant. Financial Advisory and Intermediary Services Act ss 9(1)(c) and 17(2)(b)(i).

But this indirect supervision, where the Registrar monitors financial-service providers who in turn monitor and debar their representatives, can in practice only be imperfect.

[19] Save insofar as objective differences justify differentiation. Lord Bingham (then Senior Law Lord), “The Rule of Law” (Sixth Sir David Williams Lecture 2006, Centre for Public Law, Univ of Cambridge), third sub-rule.

[20] Declaration of Delhi, 1959: International Commission of Jurists. The Rule of Law in a Free Society (report on international congress of jurists held in New Delhi on 5–10 January 1959). Conclusions. Rpt of Ctte I, ‘The Legislative and the Rule of Law’ cl III(iii)(a) (p 5).

[21] And duty.

[22] As mentioned.

[23] Again.

[24] Financial Advisory and Intermediary Services Act s 13(1)(b)(iA).

[25] By Gazette notice.

[26] Financial Advisory and Intermediary Services Act s 13(1)(b)(ii).

[27] Board Notice 82 of 8 Aug 2003. Requirements for Reappointment of Debarred Representatives.

[28] Bd Notice 82 of 8 Aug 2003 s 2(a). Unless his debarment is consequent on his not being qualified as competent to act, and he qualifies in the 12-month period: ibid.

[29] Bd Notice 82 of 8 Aug 2003 s 2(b).

[30] Whether directed to the applicant or the debarring provider, or submitted to the Ombud or a court.

[31] Administrative or legal.

[32] In terms of the Act or any other law.

[33] I.e., any acts or omissions.

[34] Directly or indirectly, prior to debarment.

[35] Properly and lawfully.

[36] Or determination or court order in connection therewith, given or issued in respect of the applicant. Bd Notice 82 of 8 Aug 2003 s 2(c).

[37] Assuming they are valid.

[38] And indeed whether.

[39] A financial-service provider who debars a representative must immediately take steps to ensure unconcluded business of hers is properly concluded. Act s 14(1) proviso. See also Bd Notice 80 of 8 Aug 2003 as amended, General Code of Conduct for Authorised Financial Services Providers and Representatives, s 20(c).

Despite the duty to act at once, the provider may not have brought her unconcluded business to a conclusion.

The finalising of legal proceedings can be slow, and is partly in the hands of the opposing party and the courts.

[40] As the Act does.

[41] Whether under conditions of employment or other mandate.

[42] Or other adverse.

[43] Bingham, “The Rule of Law” (op cit), seventh sub-rule.

[44] Assuming they are valid (see below).

[45] In South Africa, albeit not necessarily universally. Certification of Amended Text of the 1996 Constitution, 1997 (1) BCLR 1 (CC) par [21].

[46] The Constitution declares it is adopted to establish a society based on “fundamental human rights” (albeit rights in the Bill of Rights are not expressly described as “fundamental”). Constitution of the Republic of South Africa, 1996, Preamble and Ch 2.

Rights in the Bill of Rights are commonly referred to as “fundamental.” Eg Shoprite Checkers (Pty) Ltd v Member of Exec Council for Economic Development: Eastern Cape 2015 (9) BCLR 1052 (CC) pars [61], [132].

[47] Or trade or profession.

[48] Constitution s 22 (Freedom of trade, occupation and profession).

[49] Or trade or profession.

[50] Constitution s 22.

[51] Affordable Medicines Trust and others v Minister of Health and ano 2005 (6) BCLR 529 (CC) pars [62], [63].

[52] A right in the Bill of Rights may be limited only to the extent the limitation is reasonable and justifiable in an open democratic society based on dignity, equality and freedom, taking in account all relevant factors including the nature of the right, the nature and extent of the limitation and the importance of its purpose, the relation between the limitation and its purpose, and less restrictive means to achieve the purpose. Constitution s 36(1).

[53] So-called.

[54] The more serious a law’s impact on a right, the more compelling its justification must be. A sledgehammer cannot be used to crack a nut. S v Manamela and ano (Director-General of Justice intervening) 2000 (5) BCLR 491 (CC) pars [32]–[34].

[55] Affordable Medicines Trust supra par [68].

[56] See fn 39 and text there.

[57] In an open democratic society based on dignity, equality and freedom.

[58] Bingham, “The Rule of Law” (op cit), fourth sub-rule.

[59] Currently.

[60] Financial Sector Regulation Bill 34D of 2015.

The Bill is the first of the two intended phases of the so-called Twin Peaks revision of laws governing financial institutions. KPMG “Market Conduct Regulatory Framework in South Africa,” 11 Mar 2016, F Elliot.

[61] Financial Sector Regulation Bill cl 290 read with cl 219(1) and Sched 4 svv Financial Advisory and Intermediary Services Act item 21 to substitute s 39 of Act.

[62] Albeit the tribunal would be independent and will have to be impartial. Financial Sector Regulation Bill cl 219(2)(a) and (b).

[63] See fn 17.

The Financial Sector Regulation Bill will amend the Act to require a debarment process to be procedurally fair and the giving to a representative of adequate notice of her intended debarment with reasons and a reasonable opportunity to respond before a decision: Bill ibid item 11 to substitute Act s 14(2)(a) and (3)(a)(i) and (iii).

This would codify the requirement of fair process discussed in Reynecke v Odinfin supra fn 17.

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Gary Moore

Gary Moore BA LL.B. (Witwatersrand) LL.M. (UC London) is a South African lawyer and Senior Researcher at the Free Market Foundation.

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