A contractual agreement cannot lawfully bind a financial services provider not to initiate debarment proceedings when such proceedings are required by the FAIS Act, according to a judgment handed down last week by the High Court in Cape Town.
The applicant, Giles Maynard, wanted the High Court to terminate the debarment proceedings initiated against him by his former employer, Carrick Wealth (Pty) Ltd. He sought final orders declaring the initiation of the debarment proceedings to be unlawful and setting aside the debarment proceedings and interdicting Carrick Wealth from continuing with them.
In December last year, the High Court granted urgent interim relief temporarily interdicting Carrick Wealth from proceeding with the debarment, pending the final determination.
From April 2023, a dispute arose between Maynard, a private wealth manager, and Carrick over his terms of employment and the terms of a settlement agreement. Maynard gave his notice at the end of September last year. He subsequently secured employment with a competitor.
On 7 November 2023, the parties concluded a new settlement agreement that was intended to resolve all their disputes, particularly concerning the applicability of a restraint of trade provision and Maynard’s confidentiality obligations.
One day after the settlement agreement was concluded, Carrick served Maynard with a notice of intention to debar. The main ground for the debarment was Maynard’s alleged breach of paragraph 3(3) of the General Code of Conduct, which prohibits representatives from disclosing confidential client information without prior written consent or unless mandated by law or public interest.
In response, Maynard’s attorneys argued that:
- The settlement agreement precluded Carrick from initiating debarment proceedings, making the notice a breach of the agreement.
- The notice was a retaliatory measure, motivated by Carrick’s inability to enforce a restraint of trade clause, aimed at preventing Maynard from competing with it.
Carrick asserted that:
- It was under a statutory obligation to initiate debarment proceedings if it identified potential non-compliance with the FAIS Act. Failure to act on such matters could expose it to regulatory sanctions.
- The debarment proceedings under section 14 of the Act could not be waived or “settled” through civil agreements or contracts, including the settlement agreement.
Is there a duty to initiate debarment proceedings?
The court noted that section 14(1) of the FAIS Act is explicit in imposing a duty on FSPs to debar representatives who fail to meet the regulatory standards.
However, the question was whether a similar duty or obligation exists to commence or initiate debarment proceedings, and if so, when that obligation arises. Section 14(1) is silent on these issues, although the Act does oblige an FSP to take certain procedural steps before debarring.
Acting Judge Michael Janisch took the view that by “necessary inference” flowing from (i) the existence of a duty to debar and (ii) a duty to follow due process before doing so, there must also be a duty to initiate debarment proceedings in appropriate circumstances.
“If that were not the case, an FSP could avoid having to debar a representative in the public interest, and avoid criminal sanction for non-compliance with section 14(1), simply by not initiating such proceedings in the first place. That would be inimical to the public interest purpose of section 14(1).”
Janisch AJ drew parallels with Viking Pony Africa Pumps (Pty) Ltd v Hidro-Tech Systems (Pty) Ltd, where the Constitutional Court held that the duty to “act against” a party arose when credible information suggesting misconduct was detected, even if conclusive proof was not yet established.
In Viking Pony, the duty was triggered when the authority became aware of information that, if verified through investigation, could substantiate allegations of misconduct. Similarly, in the FAIS context, the duty to initiate debarment proceedings arises when an FSP becomes aware of information that may warrant debarment if verified.
The court emphasised that the mere existence of a suspicion or unsubstantiated allegations would not be sufficient to trigger the duty to initiate proceedings.
Section 14(3)(a) requires that notices include the grounds or reasons for the intended debarment. This presupposes that the FSP has already conducted a preliminary assessment and has a reasonable degree of conviction that the information may justify debarment.
The appropriateness of initiating debarment proceedings depends on the facts of each case. FSPs must evaluate the available information before proceeding, to ensure compliance with procedural fairness and legal standards.
Can an FSP waive its obligation?
The court considered the first declaratory order sought by Maynard, who asserted that Carrick had “compromised whatever right it might have had to initiate debarment proceedings” under section 14(3)(a) of the Act. The applicant’s argument was twofold:
- It is legally possible for an FSP to agree not to initiate debarment proceedings where it otherwise has a statutory duty to do so.
- Such an agreement was entered in this case.
The central question was whether an FSP could, in principle, lawfully agree not to initiate debarment proceedings despite the statutory duty to debar representatives in certain circumstances.
The court cited established legal principles, emphasising that:
- Statutory obligations cannot be waived or compromised through agreements, because doing so would contravene the public interest or thwart the objectives of the relevant legislation.
- An agreement that results in the FSP failing to fulfil its statutory duty would amount to sanctioning unlawful conduct and undermining the purpose of the FAIS Act, which aims to protect the public.
“An agreement not to debar a person, or not to commence a debarment process, contrary to a duty that otherwise arises under section 14, could leave the representative free to provide services to the public at large where a proper process may have led to a debarment. For that reason, I am of the view that it is not competent in law for an FSP and a representative to agree that the FSP will not comply with its duty under section 14. To uphold such an agreement would be to sanction unlawful conduct and indirectly to achieve a result that the legislation seeks to prevent. I see no indication in the language, context or purpose of the FAIS Act that warrants a different interpretation,” Janisch AJ said.
The court reviewed decisions by the Financial Services Tribunal, but it found no support for the argument that an FSP could lawfully agree not to initiate debarment proceedings when the statutory duty to do so exists.
The implication of the judgment is that the duty to initiate debarment when warranted cannot be subordinated to private agreements, particularly when the protection of the public and the integrity of the financial sector are at stake.
The FSP’s ‘discretion’
Maynard argued there is a necessary area of discretion within which an FSP may legitimately decide not to commence debarment proceedings. If this were not so, the “merest hint” of a reason for debarment would oblige the FSP to commence debarment proceedings.
Janisch AJ said this argument conflated two different issues. Not every hint of information that may lead to a possible debarment triggers the duty to commence debarment proceedings; every case will turn on its own facts. The circumstances in which the duty arises may not always be easy to define, and the FSP may be faced with a difficult decision as to whether it must proceed, on pain of possible criminal sanction if it does not.
“But the fact that a FSP may not in every case have a duty to commence debarment steps does not mean that it can validly be held to an agreement not to do so where otherwise the duty exists.”
The court held that, without prejudging the outcome of the dispute between Maynard and Carrick, the FSP had sufficient grounds to at least initiate the debarment process.
Can alleged ulterior motives ‘block’ debarment proceedings?
Maynard contended that the initiation of the debarment proceedings was unlawful because it was driven by an ulterior purpose. It was implied that the proceedings were aimed at preventing Maynard from competing with Carrick and obstructing him from rendering financial services to clients, rather than addressing genuine concerns about honesty or integrity.
Maynard submitted the timing of the debarment notice – issued a day after the settlement agreement – supported the inference that Carrick acted to suppress competition and bypass its contractual obligations.
Case law supported his contention that actions taken for collateral or improper purposes are unlawful, and the FSCA’s Guidance Notice 1 of 2019 emphasises that debarment proceedings must not be abused to resolve contractual disputes or for ulterior purposes.
The court once again underscored the public interest purpose of section 14 of the FAIS Act. Therefore, debarment proceedings should not be prematurely blocked on the basis of alleged ulterior motives unless there is clear and convincing evidence of abuse.
The court recognised Maynard’s concerns about the timing of the debarment notice and the potential competitive advantages for Carrick. However, it also considered Carrick’s justification – that it acted to comply with legal duties rather than to quell competition – as reasonable and plausible under the circumstances.
Janisch AJ said the contention that Carrick was motivated by ulterior purposes of self-interest rather than a bona fide concern that a debarring offence had occurred could and should be fully ventilated during the debarment process.
Carrick’s undertaking to appoint an independent third party to make the decision should provide some comfort that the issue will be properly considered. Moreover, if there was a debarment, the question could be referred to the Tribunal for reconsideration, where the issue could again be tested.
Janisch AJ concluded that Maynard had not established a clear right to the final relief sought and dismissed the application.
