Anyone who is familiar with the provisions in the FAIS Act governing debarments knows that the reasons for a debarment must have occurred and become known to the FSP while the person was a representative of the provider (section 14(1)(b)).
The Financial Services Tribunal (FST) this month handed down a decision in which the phrase “while the person was a representative” was considered where the relationship between the representative and the FSP was regulated by two agreements: a “franchise house” agreement and a “financial adviser” agreement.
The FSP, Momentum Consult, debarred the representative for alleged material non-compliance with the FAIS Act.
The representative applied for reconsideration on three grounds, the first of which was that the reasons for his debarment were not known to Momentum Consult while he was its representative. The FST confined its decision to this ground alone.
Two agreements
The tribunal considered the provisions of the two agreements.
In terms of the franchise house agreement, Momentum Consult appointed the applicant as an independent contractor to render financial services under its FSP licence. The financial adviser agreement appointed the applicant as a registered representative of Momentum Consult (the respondent).
Both agreements could be terminated by either party by delivering 30 days’ written notice to the other party.
Termination of the franchise house agreement would result in Momentum Consult removing the franchise house from its representative register. This was also the case on termination of the financial adviser agreement.
The FST said it was common cause that when Momentum Consult became aware of the alleged transgressions, the 30 days of the applicant’s written notice of termination had not expired.
Momentum Consult pointed to the definition of a “representative” in section 1 of the FAIS Act: any person, including a person employed or mandated by an FSP, who renders a financial service to a client for or on behalf of an FSP, in terms of conditions of employment or any other mandate. Relying on this definition, it submitted that because the mandate had not yet terminated in terms of the contract, the applicant remained its representative and that it could, accordingly, validly commence debarment proceedings against him.
The applicant submitted that despite the absence of a written cancellation, Momentum Consult had accepted his oral resignation and had agreed to and assisted in selling the business of the franchise house to a third party.
Sale broke the link
In its decision, the FST drew attention to the effect of the sale of the franchise house business on the financial adviser agreement. It quoted the following clause from that agreement:
“The financial adviser will, for the duration of this agreement, be linked to a franchise house contracted to MC. In the event that the financial adviser is no longer linked to one of MC’s franchise houses, or if the financial adviser is removed from MC’s FSP register for any reason whatsoever, this agreement shall be deemed to be automatically terminated.”
This, the tribunal said, meant the adviser agreement terminated automatically on the sale of the franchise house business because the applicant was no longer linked to a Momentum Consult franchise house.
It then highlighted the following clause from the agreement governing the sale of the franchise house to the third party:
“The purchaser may agree that the seller may operate as a sub-adviser under the purchaser’s business entity. This agreement may only be effected by means of a sub-adviser agreement detailing the terms and conditions applicable thereto.”
In other words, the FST said, the applicant could only continue to act as adviser of the franchise house if a sub-adviser agreement were concluded, which was not the case, because the applicant moved to another province and entered the employment of another FSP.
The tribunal said counsel for Momentum Consult “made much” of the fact that the applicant, in his emails, represented that he was a representative of Momentum Consult and he had failed to explain why he had not changed his designation. “The misrepresentation or misinterpretation does not change the factual position,” the FST said.
The tribunal set aside the debarment.
