South Africa: Is A Separate Debarment Enquiry In Terms Of FAIS Necessary?

The debarment of representatives and key individuals of Financial Service Providers ("FSPs") is regulated by the Financial Advisory and Intermediary Services Act, 2002 ("FAIS Act"). The FAIS Act requires close supervision by FSPs over their representatives.

Background

Pieter Willem Basson was debarred by Associated Portfolio Solutions (Pty) Limited ("APS") and Pentagon Financial Solutions (Pretoria) (Pty) Limited ("Pentagon") under the FAIS Act. Mr Basson was suspended from his employment by APS and Pentagon pending an investigation into the allegations of misconduct that had been levelled against him. The investigation culminated in a disciplinary enquiry which ultimately found Mr Basson guilty of misconduct and recommended that he be dismissed.

Following the ruling in the disciplinary enquiry, APS and Pentagon sought advice from their compliance officer as to how it should proceed. APS and Pentagon were advised that they had "very little choice other than to debar Mr Basson as a representative based thereon that he had contravened the FAIS Act in a material manner and did not exhibit the characteristics of honesty and integrity". Consequently, Mr Basson was notified that APS and Pentagon proposed passing resolutions regarding his debarment.

Neither Mr Basson nor his representatives attended APS' and Pentagon's meetings but made representations to APS and Pentagon in a letter. The letter recorded that Mr Basson did not accept the findings of the disciplinary proceedings and suggested that the chairperson of the disciplinary enquiry disregarded the ulterior motives of the directors pursuing the charges, which was to acquire his shares cheaply.

The resolutions were passed by APS and Pentagon. The Registrar of the Financial Services Board was requested to debar Mr Basson for material contravention of the FAIS act and non-compliance with fit and proper requirements. Accordingly, the Financial Services Board debarred him and its registers were updated.

Review proceedings with Western Cape High Court

Mr Basson launched review proceedings in the Western Cape High Court seeking to set aside the decision to debar him taken by APS and Pentagon. The grounds for the review were:

• The debarment decision was tainted by procedural unfairness because Mr Basson was not afforded a reasonable opportunity to make representatives and to call witnesses before the debarment decision was taken. Further, APS and Pentagon's compliance officer recommended that Mr Basson be debarred without having any involvement in the investigations and disciplinary proceedings; and
• The directors of APS and Pentagon who passed the resolutions to debar Mr Basson pre-judged the issues. In doing so, the decision was tainted by an ulterior motive and they acted as a judge in their own case because they had given evidence at the disciplinary hearing.

The court a quo set aside Mr Basson's debarment and found that the disciplinary proceedings were regulated by provisions of the Labour Relations Act, 1995 and the finding thereof could not inform the debarment proceedings under the FAIS Act. The court a quo was of the view that a separate debarment inquiry should have been held under section 14(1) of the FAIS Act. 

SCA ruling

The Supreme Court of Appeal overturned the Western Cape High Court's findings that a separate debarment inquiry was necessary. It was accepted by the SCA that APS and Pentagon exercised their authority under section 14(1) of the FAIS Act to debar Mr Basson. In doing so, they exercised a public power and the debarment of Mr Basson was administrative action. It was reviewable in terms of the Promotion of Administrative Justice Act, 2000.

It is trite law that administrative action that materially and adversely affects the rights and legitimate expectations of any person must be procedurally fair. The SCA reiterated the principal that what is fair in specific circumstances is dependent on the context of each case. 

The SCA did not agree with Mr Basson's contention that he was not given an opportunity to make representations in circumstances where he was expressly invited to do so in response to the proposed resolutions. Mr Basson chose not to address the core issues, being his possible debarment. 

The SCA accepted that the disciplinary enquiry was not directly concerned with whether Mr Basson was a fit and proper person. The disciplinary enquiry, however, afforded him the opportunity to respond to the transgressions under consideration, the nature of which pertinently implicated his honesty and integrity. It appears that Mr Basson overlooked the fact that he was dismissed after an in-depth disciplinary enquiry. During this disciplinary enquiry, Mr Basson had the opportunity to contest the allegations levelled against him. By the end of the disciplinary enquiry, there were serious allegations that impacted on his honesty and integrity that were either common cause or undisputed. Even if a further enquiry was held, those facts could not have subsequently changed.

The SCA held that the argument that a factual enquiry into his debarment should have been held, is unsustainable. In doing so, the SCA held:

"Any further inquiry would have been absurd and unnecessary, particularly as it could hardly be accepted that whilst not a fit and proper person qua employee, he could nonetheless be a fit and proper person qua representative." 

The SCA was of the view that having a further enquiry would be to place form above substance.

Mr Basson also attempted arguing that the decision to debar him rested with the registrar of FSPs and it was therefore improper for directors of APS and Pentagon to make such a decision in circumstances where there was a pending dispute regarding the valuation of shares. The SCA rejected this argument and held that the Registrar of FSPs had no power to decide on Mr Basson's debarment. The power to decide whether Mr Basson should be debarred rested with APS and Pentagon. In this regard, the SCA held that FSPs are charged with the duty to take reasonable steps to ensure that representatives comply with any applicable code of conduct and applicable laws in the conduct of business.

It is clear from this judgment that it is not necessary to hold separate disciplinary and debarment enquiries if the disciplinary enquiry could also impact on whether the FSP's representative is fit and proper in terms of the FAIS Act. 

Originally published 7 July 2020.

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