Debarment for being paid a referral fee by a competitor not justified, says FST

The Financial Services Tribunal (FST) has set aside the debarment of an insurance broker who was dismissed for being paid commission by a competitor FSP to which she referred her employer’s clients.

The applicant, “BD”, was a sales representative of PBA Financial Services, the respondent.

According to the tribunal’s decision, when BD handed in her laptop, in June 2022, for a software and hardware upgrade, PBA asked the IT service provider to inspect the email communication from BD’s account to the account of a certain “MW”, who was the key individual and director of a competing company.

The investigation found “numerous” emails between BD and MW. The emails were not in her Office 365 mailbox, which indicated they had been deleted.

According to PBA, the emails indicated that:

• BD referred PBA’s clients to MW;
• Pursuant to the referrals, MW and/or BD were meeting the clients; and
• MW paid BD commission for the referrals, into her personal bank account.

According to the FST’s decision, although BD was licensed to sell long-term and short-term policies, she did not sell short-term policies while employed by PBA. It appears that the referrals to MW were for short-term business.

PBA dismissed BD on 1 July 2022 following a disciplinary inquiry that found her guilty of gross misconduct and/or gross dishonest conduct because she was:

• Moonlighting and/or performing work for outside interests during company time;
• Competing against the company;
• Acting against the company and not disclosing outside interests to the company; and
• Soliciting her own business interests in breach of the contractual agreement.

BD was found not guilty on a charge of gross dishonest conduct and/or gross negligence in that she distributed private and/or confidential client information and/or documents to a third party without the prior authorisation of the client.

BD was subsequently served with a notice of intention to debar, and she was debarred on 18 July. BD lodged her reconsideration application the following month.

Both parties applied to the FST for the admission of further evidence.

The tribunal said neither party had provided a reasonably sufficient explanation as to why the new evidence had not been led in the debarment proceedings. In addition, there were no exceptional circumstances that justified the admission of further evidence.

Problem with the notice of intention

In addressing the merits of the application, the FST referred to PBA’s notice of intention to debar. In its view, nine of the 10 reasons listed in the notice pertained to BD’s breach of her employment contract. The exception was the last reason, which alleged that she “potentially materially” contravened the FAIS Act in representing another FSP “by visiting a client with them in lieu of setting up business”.

However, the tribunal said, PBA had relied on sections 14(1) and 13(2) of the FAIS Act, read with the Fit and Proper Requirements, when it decided to debar BD. But this was not apparent from the reasons for the debarment communicated to DB.

Which FAIS provision was breached?

The FST said the matter for determination was whether DB’s failure to disclose the referrals to PBA’s compliance officer, as required by her employment contract, and that she earned a referral commission for the referrals, was dishonest in terms of the FAIS Act.

“This very same question was posed to the respondent during the hearing. The respondent could not point to a single provision in the FAIS Act, or other legislation, that prohibits the applicant from referring clients to another FSP and earning a referral commission for doing so. Reference was only made to the prohibitions as contained in the applicant’s employment contract,” it said.

Despite this, PBA’s debarment decision relied on the following, as provided for in Board Notice 194 of 2017:

• • Sub-section 9(1)(a)(ii): The person has been found guilty (and that conviction has not been expunged) in any criminal proceedings or liable in any civil proceedings by a court under any law in any jurisdiction of theft, fraud, forgery, uttering a forged document, perjury or an offence involving dishonesty, breach of fiduciary duty, dishonourable or unprofessional conduct.
  • Sub-section 9(3): The Registrar must, in assessing whether a person meets the requirements in section 8(1) have due regard to:
    1. The seriousness of a person’s conduct, whether by commission or omission, or behaviour, and surrounding circumstances to that conduct or behaviour that has or could potentially have a negative impact on a person’s compliance with section 8(1);
    2. The relevance of such conduct or behaviour that has or could potentially have a negative impact on the person’s compliance with section 8(1), to the duties that are or are to be performed and the responsibilities that are or are to be assumed by that person; and
    3. The passage of time since the occurrence of the conduct or behaviour that had a negative impact on the person’s compliance with section 8(1).
  • Section 10: An FSP and key individual must disclose to the Registrar, and a representative must disclose to its FSP, promptly and on own initiative, fully and accurately, all information, not limited to information in relation to matters referred to in section 9, which may be relevant in determining whether that person complies or continues to comply with the requirements relating to honesty, integrity, and good standing.

The FST commented as follows:

• Section 9(1)(a)(ii) did not apply because it contemplates a finding of dishonesty in civil or criminal proceedings;
• Section 9(3) is reserved for the Registrar and therefore also does not apply to debarment proceedings; and
• Section 10 “clearly contemplates disclosures in relation to the rendering of financial services”.

Apart from DB’s employment contract, PBA was unable to point to “a single regulatory provision” that required her to disclose the referral arrangement, the tribunal said.

The reasons for debarment proffered against DB mostly related to “her breach of contract”, “working contrary to company policy”, or “breaching clauses of her employment”.

This is a contractual issue

The FST said the evidence did prove that DB acted in breach of her employment contract in so far as receiving a referral commission. Her commission structure precluded her from receiving commission, be it a referral fee or a referral commission, for her short-term insurance clients. However, a dismissal cannot automatically lead to the debarment of a representative.

The tribunal was not satisfied that DB’s debarment was justified.

“The guidelines on debarments clearly stipulate that debarment should not be used by FSPs to satisfy contractual or other grievances against a representative, unrelated to fitness or competency requirements. Debarment proceedings should not be abused for ulterior purposes.”

The FST granted the application for reconsideration and set aside the debarment.

Click here to download the tribunal’s decision.