Facts of a disciplinary enquiry may be taken into account when debarring a representative under FAIS Act

​​​In a recent decision*, the Supreme Court of Appeal (SCA) considered the interplay between disciplinary inquiries convened under the Labour Relations Act 66 of 1995 (LRA) and debarments of representatives under the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act). The SCA also considered how to deal with institutional bias of debarment decision makers. Prior to this judgment, it was not clear whether a disciplinary hearing convened in terms of the LRA is sufficient to satisfy the procedural fairness requirements in relation to PAJA and the FAIS Act.

In this matter, the SCA confirmed that a separate debarment factual inquiry​ is not necessary where an employing FSP convenes a disciplinary inquiry (under the LRA) and the charges levelled against the employee / representative are so serious and if the employee / representative is found guilty thereof, it would negatively impact on the employee / representative's ability to comply with the fit and proper requirements.

However, despite not being required to hold a further debarment factual inquiry, a Financial Service Provider (FSP) should still:

  • Provide the employee / representative with a notice detailing the contemplated decision to debar;
  • Afford the employee / representative with the opportunity to make representations in relation to the contemplated decision to debar; and
  • Provide the employee / representative with the outcome of the decision.
Legislative framework
​​

For an individual to render financial services to the public, he or she must be registered as a representative of a FSP which, in turn, must be licenced as such by the Regulator. Accordingly, representatives are subject to close supervision by the FSP to ensure that representatives meet the fit and proper requirements under the FAIS Act. There is also a positive duty placed on a FSP to debar a representative who does not meet the fit and proper requirements.

The debarment of a representative constitutes administrative action. It is therefore reviewable under the Promotion of Administrative Justice Act 3 of 2000 (PAJA). PAJA allows for a court to set aside administrative action which was 'procedurally unfair' or if the administrator who took the decision 'was biased or reasonably suspected of bias'. A debarring FSP must ensure that it gives the representative an opportunity to be heard.

Background facts

In this matter, the representative was licenced as such and a Key Individual of two companies (an asset management company and a FSP) (the debarring FSPs). During 2016 there was a fall out between the representative and his fellow directors of the debarring FSPs which resulted in a negotiation of the representative's exit from the debarring FSPs. Subsequent to these negotiations failing, evidence of gross misconduct was brought to the attention of the Managing Director of the debarring FSPs. The representative was suspended from his employment pending an investigation into the alleged misconduct. The allegations resulted in a disciplinary inquiry being convened in terms of the LRA where the representative was charged with misconduct.

The representative instituted proceedings in the High Court alleging oppressive and unfair conduct by the other directors. He sought an order directing the purchase of his shares in the quasi-partnership at a fair value. His alleged that his fellow directors conduct in laying the misconduct charges, were founded by their desire to devalue his shares so that they may acquire them for a less than fair value. The application was referred to private arbitration and is separate to this matter.

The disciplinary inquiry proceeded and the representative was found guilty of five of the charges. The chairperson was of the view that each individual transgression was serious enough to warrant a dismissal. It is important to note that the charges he had been found guilty of would impact on his ability to comply with the fit and proper requirements. After receiving and considering the chairperson's outcome the debarring FSPs sought guidance from their compliance officer who in turn advised the debarring FSPs that it had "little choice other than to debar".

The debarring FSPs sent notices of directors' meetings to the representative. These notices included proposed resolutions to be considered for the contemplated debarment of the representative as a result of the findings in the disciplinary inquiry. The notices informed the representative that he could make representations in the meeting before the resolutions were put to a vote.

The representative made written representations highlighting that he did not accept the results of the disciplinary proceedings as there were material shortcomings in the findings- including a disregard of the directors' ulterior motives in pursuing the charges which included the desire to acquire his shares at a low value.

The board meetings proceeded and after considering the representations made by the representative, the proposed resolutions were all passed and the representative was informed of the results of the board meetings. The decisions were implemented and the representative was debarred.

High Court review proceedings

The representative sought to review and set aside the decision by the debarring FSPs to debar him on two grounds:

  • First, that he was not afforded a reasonable opportunity to make representations and to call witnesses before a debarment decision was made. Thus, the debarment recommendation was tainted by procedural unfairness; and
  • Second, the majority directors that passed the resolutions had prejudged the issues - the decision had been tainted by ulterior motives and they had acted as judges in their own case as they had given evidence at the disciplinary hearing.

The High Court set aside the debarment and found that because the disciplinary inquiry was regulated by the LRA, the outcome of the disciplinary inquiry could not inform the debarment proceedings as those fell under the FAIS Act. According to the High Court, a separate debarment enquiry should have been held in terms of section 14(1) of the FAIS Act to determine whether the first respondent complied with the fit and proper requirement as contemplated in section 13 of the FIAS Act.

SCA proceedings

The Debarring FSPs took issue with the finding that the disciplinary process and the debarment processes are separate and distinct processes, and that the disciplinary process could not inform the debarment process. The debarring FSPs argued that upon finding that the representative lacked integrity and was dishonest, a duty rested upon them to debar him.

It was not in dispute that the debarment amounted to an administrative action and was reviewable in terms of PAJA. Key to the right to procedural fairness requirement is, giving the person adequate notice of the nature and purpose of the proposed administrative action; a reasonable opportunity to make representations; and a clear statement of the administrative action. In this case section 14(2) of the FAIS Act amplifies the procedural fairness requirement.

Interplay between disciplinary inquiries convened under the auspices of the LRA and debarments of representatives under the FAIS Act.

The SCA rejected the representative's contention that he was not given an opportunity to make representations for three reasons:

  • The notices of board meetings were an express invitation to him to attend the board meetings and to make representations in relation to the proposed resolutions;
  • He was drawn to the findings of the disciplinary enquiry and the effect they had on his position as a financial service provider; and
  • The notice referred to specific portions of the chairperson's findings and warned that the representative no longer complied with the fit and proper requirements.​

The SCA expressed that he could not complain of procedural fairness when he was given an opportunity to address the resolutions (which he chose not to).

The SCA accepted that the representative was not required to address the issues of his honesty and integrity or whether or not he was a fit and proper person in the disciplinary hearing. The court stated that the disciplinary enquiry did afford him an opportunity to respond to the transgressions which implicated his honesty and integrity. The court ultimately rejected the High Court's finding that a separate debarment factual inquiry should have been held in order to comply with procedural fairness.

On this score, the SCA accepted that the factual basis of the board meetings and the proposed resolutions was the outcome of the disciplinary hearing as the facts established at the disciplinary enquiry impacted directly on the first respondents honesty and integrity, thus raising the issue of whether he complied with the fit and proper requirements.

The SCA held as follows:

"[a]ny 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. To insist on a further inquiry in these circumstances would be to place form over substance"

Accordingly, the SCA accepted that the facts on which the debarment was based were established after a full disciplinary inquiry which the representative participated in. It was unlikely that that a separate debarment factual inquiry would change the view on his honesty and integrity which were impacted by the serious allegations levelled against him in the disciplinary enquiry.

Alleged institutional bias of debarment decision makers

In relation to the question of whether the debarment decision was free of bias, the SCA held that:

"[t]here can be no doubt that there was a strong rational connection between the facts that were found to have been established in the disciplinary enquiry and the decision to debar…"

Once the chairperson made the findings which impacted on the representative's honesty and integrity, the debarring FSPs were mandated by the FAIS Act to take action. In response to the representative's contention that the fellow directors were bias as they had given evidence in the disciplinary inquiry, the SCA held that:

"…the FAIS Act vests the power to debar in persons who inevitably would have a history to speak to - and be aware of the misdeeds of- what may be described as an errant representative. This method of regulation thus accepts that some institutional bias may be present and will be tolerated…"

* Associated Portfolio Solutions (Pty) Ltd & Another v Basson & Others (554/2019) [2020] ZASCA 64 (12 June 2020)