The Financial Services Tribunal (FST) has dismissed an application by the key individual (KI) of Smart Billion Investments, Renault Kay, for his five-year debarment and R500 000 fine to be reconsidered.
One of the grounds on which Kay brought his application was that non-compliance with a financial sector law that does not contain a penalty provision does not amount to a contravention.
In March 2022, the FSCA debarred and fined the executive directors of Smart Billion for contravening various financial sector laws. Chief executive Melusi Ntumba was fined R10 million and debarred for 10 years.
Read: Investors’ deposits used to pay withdrawals: chief executive fined R10m and debarred
Smart Billion was authorised as a discretionary FSP in August 2015. Smart Billion had a Category I and Category 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.
Smart Billion used some of the funds it received from members of the public to invest in a product on a platform other than that authorised by its licence. The balance of client funds was used to pay clients’ withdrawal requests.
When the scheme failed, the company was liquidated, and clients lost millions of rands.
The FSCA found that Kay contravened section 42 of the Fit and Proper Requirements (Board Notice 194 of 2017) and the related section 8A of the FAIS Act.
Findings against Kay
According to the FST’s decision, the findings against Kay included:
- He conceded that he was not actively involved in the business or financial affairs of Smart Billion.
- “Kay realised in 2016 that some statements issued by Smart Billion were questionable and that trading by Smart Billion occurred deliberately without his knowledge. Despite these issues, Kay merely relied on the assurances of Ntumba, without improving operational processes at Smart Billion. Ntumba ceased presenting financial statements to board members, and Kay had no oversight of the financial affairs of Smart Billion, but Kay turned a blind eye to this.”
- “Kay failed in his statutorily imposed responsibilities to manage and oversee the activities of Smart Billion. Kay failed in his obligations as KI and admitted that there was no oversight; his only responsibility was to source traders and manage general online trading.”
- The FSCA considered, as an aggravating factor, Kay’s submission that the only reason he joined Smart Billion was so that it could secure a FAIS licence, whereafter his only role was to oversee platform training.
The FST’s deputy chairperson, Judge Louis Harms, made some scathing remarks about Kay’s failure to fulfil his responsibilities, saying he “acted as a front, pretending to be the key individual of the company”.
Judge Harms said Kay’s “professed lack of knowledge of anything the company did is feigned, and although the Authority accepted some of his explanations, I, on reconsideration do not. His version is improbable and to the extent true, shows a reckless, if not intentional, disregard of his duties as key individual.”
Non-compliance not a contravention?
According to the FST, the crux of Kay’s case for reconsideration was:
- The jurisdictional fact for an administrative penalty and for a debarment is the contravention of a financial sector law;
- Non-compliance is not the same as contravention; and
- The failure to comply with section 42(1) of Board Notice 194 or section 8A of the FAIS Act is not a contravention, because it does not amount to the disregarding or breaking of rules or laws that are sanctioned or punishable, because they do not contain a penalty provision.
Judge Harms described the argument as “artificially attractive” but without merit. Statutes must be interpreted purposively, and the dictionary meaning of a word does not determine the meaning of the word within the context of an Act as a whole.
“If one fails to comply with a positive obligation of the law, one breaks, transgresses or contravenes the law, irrespective of whether the law imposes criminal sanctions,” he said.
Objection to ‘excessive’ sanctions
Kay also submitted that the fine and the debarment period were unreasonable and excessive.
Judge Harms said the FST has addressed the issue of penalties, including the extent to which deterrence should play a role when they are imposed, in MET Collective Investments (RF)(Pty)(Ltd) v Financial Sector Conduct Authority. (Refer to “How the FSCA decides on the size of an administrative penalty” for the principles set forth in that case.)
In addition, the ordinary rule is that a higher body is not entitled to interfere with the exercise by a lower body of its discretion unless it:
- Failed to bring an unbiased judgment to bear on the issue;
- Did not act for substantial reasons;
- Exercised its discretion capriciously; or
- Exercised its discretion upon a wrong principle.
Kay had not shown that the FSCA’s reasons and decisions failed the test.
Judge Harms said he would have taken “a more serious view” than the FSCA of Kay’s “nonchalant attitude” towards the serious statutory duty he undertook to uphold.
“There is no indication that he appreciates the seriousness of his failures. He still fails to appreciate that this case is about his failures and not those of his co-director or the company. If he, as executive director, had done the trouble over years to look once at the bank statements or ask once where the money came from and went, he would have seen a rat. The rot would have been put a stop to and the clients would not have lost their millions,” the judge said.
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